Every sound financial strategy includes a strong savings program. But is it possible to save too much? How can too much be too much? Believe it or not, but the answer is yes, too much can be too much. Okay, we agree that that sounds a bit odd, but look at it this way – it’s possible to save money that you should be investing.
Let’s delve into this further. Many investors simply put their savings into what appears to be not only the most convenient, liquid, yet stable financial vehicle they can find. It could be certificates of deposit (CDs). Yes, CDs have a strong benefit being that they are FDIC insured up to $250,000 per depositor, per federally insured institution, and they generally provide a fixed rate of return. But beware, CDs are taxable and placing the bulk of your hard-earned savings in taxable CDs can result in a large income tax bill. Not good.
Donnie Laurence Jr., Managing Director of Stone Oak Wealth Management says, “In an effort to help provide stability, some investors inadvertently produce a liability” He continues with the analogy of “it’s like turning on all the taps in your house just to make certain the water is still running. Sure, you’ll know that the water is still running, but a lot of it will go down the drain.” The simple solution is to turn off some of the taps.
By shifting part of your cash reserve to other vehicles, you can keep your money working for you. An example is a fixed annuity contract. This is a retirement vehicle that helps you meet the challenges of tax planning, retirement planning, and investment planning. They accumulate interest at a competitive rate, and the interest is usually not taxable until the money is withdrawn.
Another tax-exempt investment opportunity is a municipal bond. These are issued by state and local governments and are usually free from federal income tax. Another plus is that may also be free of state and local taxes for those who live in the areas where they were issues. Municipal bonds can be purchased individually through a mutual fund, or as part of a unit investment trust. Your wealth management advisor can help you select the bonds to ensure they offer a worthwhile tax savings. This advice is important as municipal bonds will have lower yields and the tax benefits tend to accrue to individuals with the highest tax burdens. Note also that if you sell your municipal bond at a profit, you could incur capital gains taxes.
There are several other tax advantage vehicles available. Do consult your wealth management advisor to discuss which ones would be a fit for your portfolio. With sound advice of the ins-and-outs of the available options, you can find ways to pay less taxes on your investments.
In the Word
“Pay to all what is owed to them: taxes to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed.”
Romans 13:7 ESV (ESV)
In a world filled with diverse opinions and conflicts, this verse calls us to a higher standard. It urges us to recognize the importance of authority and to fulfill our responsibilities as citizens. Whether it be paying our taxes or obeying the laws of the land, we are called to be people of integrity and good character.
As believers, we are called to be examples of righteousness and obedience. By obeying the laws and honoring those in authority, we reflect the character of Christ to the world around us. Let us embrace this command, living as responsible citizens and shining lights in a world that desperately needs it.
Sources: Broadridge Investment Management Solutions
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