A Big Tax Tip Hiding in Plain Sight

There should be no tax season, it’s a year-round priority for investors.

The reason many put it off, and don’t like to think about it, is that too often it’s a painfully large number owed and it keeps getting more complicated – both the tax rules and investment products.

Here is my nomination for the most powerful way to slay both of those dragons for an investor. I would love to show you how we pay only a 10% effective tax rate on all the income from our largest accounts, no matter how high your tax bracket is.

It’s so simple that it’s hiding in plain sight from most sophisticated investors.  I’d rather you have a beautifully boring 1099 to hand to a CPA, so you can live an exciting life. I’m afraid too many investors have this upside down. They want their investments to be more exciting, but then their tax bills and anxiety prevent them from having a beautiful life.

The more I learn the more I realize that the ultimate sophistication is simplicity.

We escaped Wall Street’s manufactured complexity to share these simpler truths so that we can work for investors as their partners, not treat them as clients or customers.

For the partners we work for, this 10% tax magic is the backbone of their Freedom Day Plans.  We call it “Mailbox Money,” which is the combination of tax-free municipal bond interest payments alongside the highest quality stock dividend payments.

This most impactful tax calculation we are about to walk through requires no team of accountants, consultants, bankers or brokers, pie charts in pitch books, lawyers, or offshore accounts.

You can do this yourself with a pencil and the back of an envelope.

There is 0% tax owed on tax-free municipal bonds interest payments. Qualified stock dividends are taxed at a maximum of 20%, for even the highest income earners.  So, if you want to give yourself the very best chance of outperforming any complicated investment product over time, all you have to do is take that pencil and solve one math problem that each of our kids could do halfway through elementary school. 

(20% plus 0%) divided by 2 = 10% tax owed, on all of the income combined

When all those income checks hit your mailbox, after only paying 10% income taxes, there is a lot more cash left in your pocket than any other income-producing investments in the world - almost all of those others are taxed at your highest ordinary income bracket.

This simple math has such profound results over time, that I’ll take it a step further and share something I never hear discussed.  As always, here is a peek in my own personal portfolio for all our partners who trust us to treat them as family.  I want my NON-retirement Mailbox Money account to be just as important (or more) than my 401(k) or IRA. 

Again, take out that envelope we’ve now scribbled 10% income tax owed, on your fully taxable individual or joint account with a spouse. Now let’s compare that to any income received from your retirement accounts.  Retirement account distributions are taxed as high as 37%. 

So, to receive $200k in net after-tax income from retirement accounts, you would need to withdraw $317k.  The IRS gets $117k, you get $200k.

To get $200k from a fully taxable NON-retirement account generating Mailbox Money, you would only have to withdraw $222k.  The IRS gets $22k, you get $200k.

Not only will that simple math make a nest egg last longer (being taxed at only 10% instead of 37%), but I also like the flexibility of having zero IRS rules around what age you can turn on those income streams and when you have to.  The simple beauty of that back of the envelope math reveals that Mailbox Money from a NON-retirement account offers much more flexibility on retiring earlier or having the ability to pivot to more fulfilling jobs, crafts, or grins later!

 Your Partner,

 Ryan