Financial Planning Fridays #27: Improving After Tax Returns

Let’s take a moment to review something that we’re all thinking about at this time: taxes. Specifically saving on taxes.

There are two primary ways you can most likely increase your after-tax return both now and over the long-term. The first we have discussed before but it is worth revisiting after a very
volatile 2022 investment year- tax loss harvesting.

In a peer reviewed article published by researchers at Chapman and MIT Universities in June 2020, the authors calculated that annual tax loss harvesting would have added 1.08% per year to the after-tax return in U.S. Stocks from 1926-2018. Clearly, this is something that most American investors should be doing most years but we rarely see in practice.

Don’t worry- at Presilium, we do this for you on a regular basis and discuss our process in detail in Financial Planning Fridays Episode #8.

So, if it’s clearly beneficial – why don’t more Americans and their advisors do this? It’s only 1.08% per year- why bother? Let’s see what 1.08% looks like from the years they studied, 1926-2018:

An initial $100,000 investment would have been worth about $400 Million less. That seems like a good investment. However, to be fair, most of us will not keep our investments over 92 years- how about 30 years instead? A $100,000 investment is worth about $500,000 less. At Presilium, we think that is well worth the extra effort.

Another strategy for improving your after-tax returns is by saving inside of a Roth account and/or converting the funds inside of your IRA to a Roth IRA.

This chart shows the top marginal tax bracket in the U.S. for the past 100 years. The average top tax rate during that time was 58% with a peak of 94% in 1944 and 1945. As you can see the top tax rate of 37% today is significantly lower than the 100 year average of 58%. Because of this history you may want to consider adding or converting as much as possible to Roth accounts to minimize future taxes and give you flexibility on the type of account to take withdrawals from in retirement. Roth accounts require you to pay the tax up front at today’s rate after which they grow tax free which could be a great strategy if tax rates increase going forward.

We are constantly looking for ways to maximize your after-tax returns at Presilium. Even during volatile years like 2022, there are things we can take advantage of, like tax loss harvesting that can have a major impact on your long-term plan. Tax time does not always have to be painful- it can also be a time for us to look back and appreciate how much we have saved!

Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.