BusinessWeek recently posted an interesting article discussing some
strategies used by the ultra wealthy to avoid paying taxes. Some of
these techniques hold lessons which are useful for more than just the
ultra wealthy. And several of them are simply about avoiding estate
taxes rather than income taxes (which don?t help much when the vast
majority of folks aren?t going to be paying any estate taxes anyway).
But it?s worth reading.
In my own blog post about this article (wherein I discuss at greater
length the specific 10 techniques the article lists), I demonstrate how
the headline numbers so often used in the press can be terribly
misleading, by showing how taxes as a percentage of AGI can be very
different from taxes as a percentage of taxable income (in my example,
I use a large charitable contribution to do so, though I note that
making large gifts to charity is *not* one of the techniques the
Anyway, there are a couple of techniques in there which are worth
considering for non-ultra-wealthy people (if they have some cash
One which may be (somewhat) controversial is the use of permanent life
insurance (especially if owned by an irrevocable trust).
The other is deferred comp, which the article makes sound like
something out of the reach of normal everyday people (which, of course,
it's not - for most folks it simply means maxing out their 401(k) -
which most folks don't do).
And there's tax-loss harvesting, which the article complicates by
mixing in wash-sale rules, but anyone with taxable investments should
be keeping an eye on losses and harvesting when it makes sense.
David S. Meyers, CFP®
Re: Business Week article
Someone once advised, "Don't ignore taxes, but do not make investment decisions
based on tax strategies." That would seem to fit with your analysis. Another
point often overlooked is the size of the tax bill in dollar amounts. I've seen
"wealthy" individuals' tax payments, and they're huge. There are ways of
deferring taxes, and maybe even some advisor-costly ways of reducing tax bills
IF the tactics work, but in the end, taxes are paid. The wealthy pay higher
rates on their incomes at the Fed level, usually live in high-tax locations
(NYC, L.A.) and pay 10%-15% State taxes, plus municipal taxes and property
taxes. The wealth accumulated - which often employs 100's of people and benefits
the economy in that very good way - then becomes subject to estate taxes, and
one pays applicable rates on after tax dollars. Add up all the taxes paid on the
same dollars, and you get a percentage easily over half of your money paid to
The simplicity about too much government is similar to the advice I got
regarding taxes and income and investment: when you reward people for not
working, or for being victims, or for engaging in "tricky" borrowing, INSTEAD of
rewarding them for being productive, honest, and wise with their savings, you
get people who are less productive, honest, and wise with their savings. In
fact, you get people frantic about money, or even not believing in the honesty
of money as a medium of exchange, making bad decisions leading to bubbles and
crashes, and that is NOT good government.
I wonder what effect a max-tax dollar amount of $1,000,000 a year would have? If
the super-rich knew that all income, or capital gains, or other, of over
$4,000,000 a year would be tax-free, would a certain new mind-set about making
ever larger amounts of money set in, and perhaps rein in some of these $100
million dollar CEO "packages" on nothing more than common sense and surplus and
maybe a tinge of guilt? If you actually got to keep what you made, 100% of it
(horrors - what a notion!), would that restore some sanity?
A couple of things. First using large donations is only for the wealthy
and buying life insurance with an irrevocable trust as the owner is for
estate tax planning only. I do like the idea of using permanent life
insurance for estate planning though. There are quite a few good plans
available out there, one being indexed universal life and another being
dividend paying whole life with the paid up addition rider so that cash
grows quicker and stronger. For the common man to invest in the stock
market and hope and pray that one day he/she has enough money to retire
is a shot in the dark. Nobody knows when the stock market is going to
go on a down swing and it always happens at the most inopportune time.
With permanent life insurance you at least have a guarantee that your
money will be there for you when you get ready to retire. Secondly if
premature death happens, there is a death benefit for your family.
Lastly, investing into a 401k or IRA is not the smartest way of
investing for retirement. Would you rather pay taxes today on a small
amount of money or taxes on a large amount later, not to mention the
threshold tax that you have to pay on your social security.
Tell that to my sister. I pushed her to max her 401(k) as best she
could. At 40 she became disabled, $300K all pretax. She's able to
withdraw the full $12K (4%/yr) at no tax as her medical out of pocket,
exemption and standard deduction wipe out the $12K.
Much of it went in while she was still married and a 25% bracket.
The $300K pretax is worth far more to her than $225K post tax.
Tell it to my Mother in law. 28% while working and hubby still living.
Now, 15%. Again, standard deduction, exemption, medical. And some room
to convert a bit to Roth each year to top off that 15% bracket.
Your comment is misguided, misleading, and another mis, I'm sure, to
complete the alliteration, but I'm getting old myself and slowing down.
Either way, finance is not one size fits all, and to be sure, the above
(your comments) certainly do apply to some, but I dare say, not most, of
the people you're targeting.
You realize that multiplication is commutative and associative?
[principal * (1 - tax)] * growth = (principal * growth) * (1 - tax)
On top of that, the "growth" in the 401K/IRA case will actually be
higher because there's no tax drag on compounding (since
(1 + r)^N is always larger than [1 + (r - something)]^N)
So (cancelling out "principal" from both sides and with ">?"
meaning "is it greater than?") it's really:
(1 - taxNow) * growthTaxable >? (1 - taxLater) * growthPretax
growthPretax >= growthTaxable always and then you have to make
your assumptions about taxNow vs. taxLater.
Now, what assumptions you make about taxNow vs. taxLater can
absolutely tip it either way! But if you assume the same rates now
and in the future and conservatively assume pretax growth will be the
same as aftertax growth, "taxes on a small amount of money now" and
"taxes on a large amount of money later" turn out to be equivalent.
Certainly not valid for my case. In 2009, the last full year I worked, my
taxable income was 68.4% of my AGI, resulting in a nominal Federal tax rate of
In 2011, with my income consisting of mostly Social Security, plus some IRA
withdrawals and annuity incomes, my taxable income was 40.5% of my AGI,
resulting in a nominal Federal tax rate of 4.29%
I'm a single guy with income slightly above my state's per capita, no kids, with
a mortgage and car payments.