Back in 1974, newly installed President Gerald Ford unveiled his plan to beat inflation with his slogan (and lapel pin): “WIN” for Whip Inflation Now! The WIN campaign was later seen as a huge public relations failure because it did nothing to address the inflation problem.
And now the problem’s back.
Inflation, inflation, inflation is all we hear about. Yes, it’s here, and it means products and services cost more. People need more money to pay for these things. Where will it come from? There are two obvious solutions; either earn more or spend less. But neither one will produce the additional cash needed to keep pace with inflation.
One less obvious solution you don’t hear anyone talk about is taxes. Smart tax planning can produce a windfall of cash for life and even beyond for beneficiaries. Yes, tax planning is not as much fun as holiday shopping deals, but the savings can be massive and last much longer.
Tax planning can save clients thousands, tens or hundreds of thousands, or even millions in some cases for clients who hold most of their wealth in tax-deferred retirement accounts.
Clients with substantial funds in IRAs and 401(k)s will be subject to growing tax erosion where increasing balances may be subject to higher taxes as these funds are withdrawn.
Advisors need to remind clients that these retirement accounts are tax-deferred. These funds have not yet been taxed, but they will be, and likely at higher rates. The time to act is now.
The fundamental principle of all good tax planning is really very simple, but often not acted on enough: Always pay taxes at the lowest rates. That may sound simple, and it is simple. Think of tax rates like a stock. You want to buy low and sell high. It’s the same thing with tax planning. Pay taxes when rates are low.
The old-time comedian Henny Youngman said it best: “I’m putting all my money in taxes. The only thing sure to go up!” He was right!
Remember that tax-deferred retirement balances will be taxed at some point, so the only question is “how much will it cost?” That’s where tax planning comes in.