Kind of a strange greeting, right? But this is one of my happiest years when it comes to taxes.
What may sound even stranger is the fact that this year, I have to write a bigger check then I ever had to in the past.
The reason I’m so happy is because when I file my taxes and write that humongous check, I get to zero out that giant liability that has been a part of my net worth tracking spreadsheet for almost a year.
My tax liability has been a guess, and a very conservative one at that. Basically, I assumed I would lose 50% of my 401K early withdrawal. That is probably a tad high. If instead, it comes to around 48%, my net worth will actually grow a little. It also means the vast majority of my 401K money is now out of that restricted, costly plan and instead totally in my hands. Whatever stupid tax that was tied to using that mechanism will be paid in full and behind me.
I have entered a new era. For about a year, my plan to dump my 401K and instead switch to something more productive has been in progress. This will be the last major step to making the transition. (See the graph to get a picture of what I mean by more productive).
Don’t get me wrong
I don’t like parting with such a big chunk of cash, but it means that the old way of saving up money in a deferred plan is gone. Instead, I’m now building up a portfolio of valuable assets that come with some of the best tax laws in the land. From here on, I will be focused on having the most tax advantaged strategy in play all the way into retirement.
If you’re new to this site, then that may sound strange as well. Aren’t deferred plans great because they let you duck income taxes while you save? Strangely, no. They were designed to instead make you pay even bigger taxes when you reach retirement. In fact, after avoiding taxes for 30 years, it might take as little as five years to blow through all the tax savings.
Retirement should have as small of a tax footprint as possible
That is no longer going to happen to me. Instead, when I retire, I will receive a big chunk of my rental income shielded by depreciation. I will also have the option of taking out tax free loans from my EIULs (I plan to have more than one by then).
These things all help deal with the fact that I probably will have paid off my primary mortgage, have no more tax deductions from my children, and would essentially be tax naked. I might have to pay some capital gains taxes when I sell a chunk of Berkshire Hathaway, but the dividends coming from things like VNR will be tax free thanks to its MLP status.
It seems a little strange that people so obsessed with fees happen to ignore the biggest fee out there: taxes. When you reach retirement it’s probably a good idea to avoid as many taxes as possible. That is the point when you are most vulnerable and who knows what the tax rates and structure will be then.
But in order to get from here to there, I need to pay a bunch of taxes right now. This is what it takes to launch my wealth building plan, and today marks the day when its in full gear. See why I’m so happy?