The post can be viewed on Investopedia here.
Question Headline:
What are some strategies to minimize the impact of taxes for high earners in a high-tax state?
Question Body:
My wife and I make $900,000 combined. We live in California, and pay a lot of taxes. Most of our income comes from our salaries and bonuses. We’d like to minimize the impact of taxes. What might be some good choices for us to consider? Tax-exempt bonds won’t work, and tax-loss harvest has a marginal impact on our net income. Is real estate investing a good idea? What ideas should we consider?
Answer:
You and your wife pay a lot in taxes because you are high earners. This is a good problem to have, but it doesn’t make the problem any more painful. There are a number of things you should be doing to lessen the burden of taxes while also investing and accumulating wealth.
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Maxing Out Employer Retirement Plans: If you and your wife have an employer retirement plan such as a 401k through work, you each need to be maxing your contributions out.
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Maxing out Health Savings Account (HSA)/Flexible Spending Account (FSA)
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Maxing out Non-deductible IRA contributions, and possible converting into a Roth IRA annually: If you and your wife do not have pre-tax (traditional) IRAs you could each make maximum non-deductible contributions to an IRA and convert the account into a Roth every year. If you do have pre-tax IRAs consider conversations and still open another separate IRA to make non-deductible IRA contribuitons.
You all should certainly be making sizable contributions to a joint brokerage account. This account doesn’t have any tax benefits, but it does combine liquidity with an ability to invest in securities. The management of this account needs to be tax conscious.
If you all have children or are connected to children you would like to help with college then 529 Plan contributions could be another option.
In general I do not recommend permanent life insurance, or life insurance as an investment, but in your scenario buying policies that are tied to a stock market index and maximum funding them over 1-5 years is another option to explore.
A private family foundation and/or a donor advised fund are potentially perfect for you and your wife depending on how much your living costs are.
Lastly, buying real-estate perhaps in a separate LLC which you create could give you a way to accumulate a great deal of wealth in a tax efficient way.
The best advice I can give you is to consult with a combination of your team of experts and review all the options. You team should include a wealth/investment adviser, CPA, and estate planning attorney. If you do not have a team, then you should begin building it right away. You and your wife fall into a category where paying for expertise is a no-brainer. Your wealth is not a DIY project that can be managed on the cheap.
– Wyatt Swartz
– 9/17/2018
The post can be viewed on Investopedia here.
Question Headline:
Should I borrow from my thrift savings plan (TSP) to pay off $45,000 of credit card debt?
Question Body:
I am 58 years old and would like to think about retiring in the near future. I have $45,000 worth of credit card debt that I am only able to make minimum payments on at this point. Should I borrow from my thrift savings plan (TSP) to pay off this debt? I also understand that at age 59.5 I can make a one time withdrawal of 50,000 which would pay it off. I have no money put away for emergencies.
Answer:
Yes! Yes you should. If you can knock out all your credit card debt in one move you should do it. It is so incredibly important that once the debt is gone you reform your habits and budget, budget, budget, and start saving and living within your means or you will simply rack up credit card debt again and be back in the same position down the road. Based on the little bit of detail you provided you should probably cut up all your credit cards after you pay them off, and certainly you should stop using them completely. You should budget out how much you will save and spend monthly and make the savings automatic. Example: say you bring home $5,000 per month and you have determined that you have $1,200 in fixed living expenses and have budgetted out that you will spend another $1,000 a month in additional expenditures, and $3,000 in savings/investment. Have the $3,000 in savings/investment immediately/automatically electronically go to the appropriate accounts so that you are forced to stay within your planned budget.
– Wyatt Swartz
– 9/7/2018
On July 2nd, 2018 I sent an email message to the members of the W. Swartz & Co. Private Client Group regarding the current market conditions and global macroeconomic environment. Below is that message.
Hi friends,
We are halfway through 2018 and I imagine that many investors are looking at capital markets with frustration and fear. When markets behave like they did these past two quarters investors start to get “the itch,” that feeling that says, “we need to change something.”
It’s human nature to crave a sense of control. One of the ways we typically gain that sense is through action, but when it comes to investing the best action is inaction.
In 2017, global markets returned ~+25% and had historically low volatility. With the combination of high returns and extremely low volatility last year investors should have pared back their 2018 market expectations. Over the next few weeks I will start to get more and more updated data on economic forecasts moving forward and how the numbers played out in 2Q. We can make a better assessment as this information comes out.
In the meantime, a few thoughts…
1. Markets have had a correction, which is normal, and a big uptick in volatility. This was expected.
2. Despite a lot of strong upward and downward moves, markets are basically flat for the year. This shouldn’t be a surprise.
3. 1Q & 2Q18 saw headlines & sentiment move markets, especially those coming from the White House. This is nothing new, even if the speed of reaction is faster than ever before.
4. Economic data looked good going into 1Q and 2Q, and the chance of recession looked low. Let’s see what the new numbers look like the next couple of weeks.
5. Lastly trade wars are bad, and nobody wins. Global trade wars could drastically change economic forecasts, & corporate earnings forecasts, and lead to a global recession. Hopefully the trade wars talk is all bark and no bite.
Adam Smith the father of classical economics believed that the ingredients for prosperity were:
1. Limited government that grows at a lower rate than the private sector
2. Low tax rates
3. Stable currency and property rights
4. Freedom… Free Market Capitalism
In the United States and abroad, we see conflicting forces. Will the good forces outweigh the bad?
2018 Year-to-date VT Chart:
Wyatt Swartz