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THE WEIRS TIMES, Thursday, April 8, 2010

Your Money

TIPS & TRICKS FROM FINANCIAL EXPERTS

WHAT ARE SOME OF THE OBSTACLES TO TAX EFFICIENCY?

by Tom Sedoric

Sometimes, public pol-

icy can interfere. One might do a terrific job managing one’s assets over the years and Con- gress can undo it all by changing the tax code. And all too often there is confusion about the ben- efits and mathematics of tax deferral because sometimes a tax deferred investment, only defers one from paying poten- tially more down the road. Let me repeat this important distinction: Not paying taxes in a tax deferred account means you won’t pay taxes until later but that may not always be to your ad- vantage. Think of all the acro-

nyms such as IRA and 401(k) and cute tools to help people save for their

retirement. I’m not say- ing they aren’t useful as part of an overall savings plan -- but people who do not create diversified tax efficiencies in their long-term plans may find themselves hit with much greater tax burdens in later years than expected. Few expect tax rates to be lower in the years ahead.

What is the goal?

We know the current tax

code is obscenely complex and we would like to see more simplicity to allow people to plan. But even with uncertainty, tax ef- ficiency comes into play in how and where you hold your assets. If some- one has invested wisely, they will have flexibility and manage their tax li- ability when their savings flow back when they need

it. Our most success- ful client is one who has maximal flexibility in the distribution years, and can pick and choose from which asset pool to draw down their resources in the most efficient man- ner. In my experience, those who have greatest success in retirement are ones who don’t drive their spouses crazy, and have the greatest flexibility in an ever-evolving tax code. Once it’s explained, clients do understand the subtle changes can have long lasting effects. In most cases, one does not have to blow up an entire life’s savings to enjoy these im- portant efficiencies.

What are some exam- ples?

Here’s a simple but tell- ing hypothetical example.

Imagine if you had $1 mil- lion in IRA savings and $1 million that had invested in stocks from company XYZ. On paper, both as- sets are worth the same except for the tax liabili- ties. The obligation of the tax-deferred IRA is settled at the income tax rate which could be 35 percent -- or higher if the income tax rate goes (which could very well happen to deal with soaring budget defi- cits and the federal debt). The sales of stocks would be subject to a much low- er, long-term capital gains tax bite. To summarize our hypo-

thetical investments, the $1 million XYZ stock in the IRA could theoretically become around $650,000 while the $1 million in XYZ in the investment account provides a theo-

retical value of as much as $800,000. Not an in- significant difference. If you add up multiple tax deferred investments, you can see without tax ef- ficiency planning people could surrender a sub- stantial amount of their retirement income to fu- ture tax liabilities. Another example of mak-

ing tax efficiency work is exploring the conversion of a traditional IRAs to a Roth IRA. Yes, you lose the deduction now but potentially gain in the long run because it’s tax free income when legally withdrawn -- and from a long-term investment perspective, not subject to possible income tax rate increases. This is a complex and challenging strategy that needs the best of tax counsel before taking action.

How Do We Deal With Investment Losses?

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get in the way of sound strategy and common sense. Utilizing invest- ment losses -- which were in abundance in 2008 and 2009 -- can provide

See SEDORIC on 29

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