In our continuing series on Biggest Financial Planning Mistakes, this week we focus on Mistake #6.
Mistake #6: Lack of Tax Planning
While you may have grown up with your father advising you to invest in CD’s, or telling you that you’ll be in a lower tax bracket at retirement, that information is simply outdated. Life is more complicated today which is why proper financial planning is essential.
“Americans are living longer, so it’s increasingly important to have a distribution strategy in place for your family,” says Cullen Douglass, a CERTIFIED FINANCIAL PLANNER™ with Douglass Financial Services in Cool Springs.
According to Douglass, for many people, tax-deferred investments such as, IRAs and 401(k)s serve as “retirement savings” until they are used as income after they retire. However, as government laws change and with federal programs in place, it’s time to re-consider the wisdom of putting all of one’s eggs in a tax-deferred basket.
It has been a long-held belief that tax deferral allows you to invest more dollars, with compounded growth, and pay lower taxes in the end because when you retire, your tax rate will decrease since you will not be earning a salary any longer.
Today’s tax rates are low. However, with ongoing issues such as the federal deficit, Social Security and Medicare – not to mention an upcoming presidential election — those rates could just as easily increase as decrease in the future. If tax rates increase, having all your retirement savings in tax-deferred traditional IRAs or 401(k) plans could mean you’ll pay more in taxes, rather than less when those funds are distributed upon retirement.
“Most people believe that tax rates will go up in the future, which will change your distribution strategy,” explains Douglass. Cullen Douglass, CFP® and his team at Douglass Financial Services believe the best way to approach a financial security plan is to incorporate a tax distribution strategy along with strategies for managing risks and accumulating assets to meet your long-term financial needs.
Determining whether your overall tax strategy is prudent often requires the experience of a Certified Financial Planner. “I had a client come in and after reviewing his tax return we noticed a lot of passive income on earnings,” recalls Douglass — which translates into taxes being paid on the interest. “We helped our client by finding strategies to legally avoid paying taxes on passive income,” he says. “After all, the federal government doesn’t send you money back because you could’ve done it differently, but just weren’t cognizant.”
Douglass says in order to create a flexible income distribution plan in retirement, your assets must be invested not just based on risk tolerance and overall financial goals, but also with an understanding of the tax attributes of the financial vehicles, which are chosen to help you minimize your tax burden over the long term.
Cullen Douglass, CFP® can help you determine the best mix of vehicles for investing your assets, including tax deferred vehicles, such as 401(k) plans or annuities and traditional IRAs. Also included are vehicles that allow assets to grow and be distributed tax free, such as Roth IRAs, Roth 401(k) funds and life insurance.
To ensure your financial security for the long-term, begin now with the proper information and expert advice – from a CERTIFIED FINANCIAL PLANNER™. Cullen Douglass, CFP® and his team of professionals at Douglass Financial Services in Cool Springs has more than 60 years of combined industry experience.
Cullen Douglass, CFP® is a Wealth Management Advisor who focuses on complete planning including risk management, investments, estate planning, retirement planning and insurance. Douglass Financial specializes in comprehensive integrated financial planning, including:
- Personalized Financial Planning
- Investment Advisory; Products & Services
- Trust Services
- Wealth Protection & Risk Management
Just moved to Tennessee? Don’t delay in learning about Tennessee’s unique state laws. It’s not worth putting your spouse or children at risk. Cullen Douglass, CFP® & Douglass Financial Services can help you successfully navigate what can be murky waters.
Whatever your situation, if you have ten minutes, give Cullen Douglass, CFP® a call and take the first step in securing your family’s financial future. Douglass Financial Services is a division of Northwestern Mutual.
Click here to learn more about Cullen Douglass, CFP® and Douglass Financial Services.
To view our last article, Mistake #5: Operating Without A Goal, click here.
Check with us next week when we discuss Mistake #7 in Biggest Financial Planning Mistakes.