How We Helped a Couple Save a Lot in Taxes

Tax forms“I want to pay off our debts with some of the money from my 401(k) rollover.”

On the surface, that sounded like a noble plan for *Jim and Peggy (not their real names). After all, one of our core values is a debt-free retirement, and we look for ways to make this a reality for folks. Debt is, more than anything else, the enemy of wealth.

Jim and Peggy had worked very hard and had sacrificed a lot over the years as they were raising and launching their children. They had not lived extravagantly at all, but they did have a new car loan and a bank loan. Now that Jim was retiring and was looking at a rather large 401(k) nest egg, he wanted to use a portion of  it to get rid of all their indebtedness right away.

A lot of financial advisors who don’t have a direct affiliation with CPAs and tax planners could easily have just gone right ahead with Jim and Peggy’s plan: take out the necessary cash to get rid of the debt and invest the rest.

In contrast, we look carefully at the tax consequences related to investment management and how tax issues impact your overall financial plans. Through our close relationship with the tax professionals at Dickinson & Clark CPAs (we are under the same roof together), we looked for ways to help Jim and Peggy pay a lot less in taxes.

I consulted with one of the CPAs who is part of the CPA firm regarding Jim and Peggy’s situation. He looked at their 2013 tax return and ran a projected tax analysis for 2014 about how much it would actually cost Jim in taxes if he were to take out a large distribution this year. His analysis demonstrated how it would impact the couple to add a large sum to their taxable income for 2014. Then he developed a tax projection for them if they were to wait until the next tax year to take a distribution. In their case, paying off their debt next year when they would be in a lower tax bracket could save them a nice amount of money.

As I explained the tax analysis to them, Jim and Peggy decided to cut back on their monthly expenses for the few remaining months of this year so as not to take out the large distribution this year. They were still committed to paying off their debts as soon as they could, but they clearly recognized the benefits of not tapping in to Jim’s retirement assets to do so right away.

In conclusion, we recognize that this case may not be typical for all clients, and your experience may vary from this as you work with us. However, we would be glad to demonstrate how you too can reap the benefits of our approach to integrating your retirement planning, tax planning, and investment management.

 

[*Jim and Peggy are fictional names, but they represent the kind of clients we serve.]

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