#1 Most Tax Planning Assumes You Want to Retire Poor
When I speak at a seminar, I ask how many people plan on retiring poor.It may not surprise you that no one raises their hand. It surprises me because the tax planning they have done works best if they retire poor.
This is because most tax planning focuses on tax deferral. Tax deferral means you are opting not to pay tax now and will pay the tax in the future.The most common example of tax deferral is the advice to maximize the contributions to your retirement plan.
Most retirement plans work like this:
– The money you contribute is deductible.
– The money you receive as a distribution when you retire is taxable.
– The tax is deferred until a later date.
What’s the problem with this? The deduction is at your current tax rate while the distribution is taxed at your future tax rate.If you plan on retiring rich, you will be in a higher tax rate when you retire. This means you are deferring your tax into a higher tax rate.
Example: If you are currently in a 25% tax bracket, and are in a 40% tax bracket when you retire, you are deferring your taxes into a higher tax bracket.This type of tax planning works best if you plan on being in a lower tax rate when you retire.
Example: If you are currently in a 25% tax bracket, and are in a 15% tax bracket when you retire, deferring your taxes works much better.If you plan on retiring rich, deferring your taxes will ultimately increase your taxes. Instead of deferring your taxes, create a tax strategy that focuses on permanent tax savings.
You may be wondering why tax deferral is such popular advice then? Because it’s easier than creating permanent tax savings. Creating permanent tax savings requires a much better understanding of the tax law.
#2 Your Taxes Keep You from Your Dreams
Taxes steal our time. In an average lifetime, no matter where you are in the world, taxes are stealing an average of 20 years of your life. That’s a prison sentence!
The average person spends 30% to 50% of their income on taxes.What if you were able to reduce your taxes (legally, of course) by 10%? Or 20%? Or even 30% or 40%?
You would keep more money in your pocket. You could then use this money to build your wealth.The result is more time – whether it’s an early retirement or not having to work as much.
#3 Following the Tax Law Can Improve Your Business and Investing
There are thousands of incentives in the tax law, in all countries, to encourage businesses and investors.Governments need businesses and investors to succeed. Governments want people to be employed. Governments want people to have housing. Businesses and investors help the government do this.
Governments are highly motivated to help businesses and investors succeed, so the tax law is written to help businesses and investors do just that. When looked at this way, the tax law is really an instruction book for businesses and investors.
The closer you follow the tax law, the more successful your business and investing becomes and the more money you’ll make in your business and investing.
Janice S. Vanderbilt, Vanderbilt CPA Group