Retirement Plan Investment Strategies

Plan Your Investment Strategies Around Your Current Taxes & Your Retirement Plan

Retirement plan is impacted by your tax bracket. Reaching a higher tax bracket can cost you money, but not in the way most people think. Making $37,951 instead of $37,950 in 2017 doesn’t mean the entirety of your money is taxed at 35%.   Just that last dollar is taxed. But, finding yourself in a higher tax bracket does impact other financial factors based on your ordinary income.  It does impact your capital gains tax rate.

When do you qualify for a 0% tax rate?

Your capital gains tax bracket is 0% if your ordinary income tax bracket is 10% or 15%. Having a higher income means your capital gains are taxed at 15% (or 20% if you’re in the 39.6% tax bracket). So keeping within that margin for a 0% capital gains tax is essential.  This is especially important if you planned your ordinary income in such a way to access it.  Also, if you are retired and make most of your income from capital gain, then an unexpected 15% tax bill can upset your financial planning for years.

What should you do if you ‘make too much’?

While extra money can rarely be considered a bad thing, it can throw the planning out of alignment. Being on the slim upper margin of the 15% ordinary taxable income tax bracket and either a bonus or extra dividends can tip you over the edge.  You need to find a way to make that income not taxable. The solution is to reinvest it in a pre-tax account. Like a traditional IRA, 401(k) or SIMPLE IRA, if you’re still employed. SIMPLE IRAs are a great choice.  The reason is because, even if you have to start making withdrawals once your 70.5 years of age, you can still make contributions.

There are a lot of retirement strategies out there, and a lot of them seem like they only have highly technical differences. Taken altogether, these different types of stocks, retirement plans, and tax benefits can make it seem like you have to follow one person’s plan to the letter or else get caught in the weeds. But if you examine one factor at a time, it’s much easier to choose a strategy that’s right for you. One of the most common factors in deciding a retirement plan strategy is whether you should look for dividends.

What do dividends matter?

Many large companies give their stockholders payments at the end of each quarter or year based on their profits. This means you get direct, semi-reliable income based on your investments.  This can be a useful thing to have if your investments are one of your main financial backups.

The dividends are paid out, and not reinvested in the company so each share grows at a smaller pace. It also means you get that money whether you really need it or not.  It is much easier to accidentally spend your dividends instead of reinvesting them.

If dividends have advantages and disadvantages, should you have them?

In a short answer, probably not. Companies that have dividends generally have smaller stock growth than they otherwise would, which means the stock is comparatively worth less and less than it would have been if they never used dividends. Dividends are also money that you’re regularly given and are taxable in a way that growth on unsold stocks aren’t. The reason why investing in companies that give dividends has historically been so popular was due to:

  • simplicity, since you receive that money without selling,
  • regularity, since dividends are paid out on a set schedule regardless of the size, and
  • comparatively reduced fees, since buying and selling fees used to be much higher.

But most of those reasons don’t hold true anymore.  Due to automated investment strategies and the Internet in general, have reduced the fees for selling shares. Also, dividends are usually taxed as ordinary income.  This is a higher rate than your capital gains tax rate. Combined that with the reduced profitable growth of stocks with dividends.  This will mean you are likely to both lose out on and owe more money. If you invest online, selling stocks as you need the money is a better strategy.

Let us help you find the right solution.  Make sure to contact us here.

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