Diversify Your Taxes, B!tch

What are you more confused about? The unnecessary and oddly-placed vulgarity OR the never-before-seen need to diversify your taxes? I think both deserve an explanation.

What are the odds of you clicking on an article titled “Diversify Your Taxes”? I’m assuming the chances are slimmer than Brent Musburger’s chances of ever  being allowed in the same room as the former Miss Alabama.

So I tricked you into clicking on the article…now I have the more difficult task of keeping your attention and explaining why you need to diversify your taxes.

Diversity is Good

We have all heard the importance of diversifying your investments, right? It’s important to hold stocks and bonds, American stocks and international stocks, etc. The idea is that if one goes down, the other goes up. Regardless of what kind of economy we’re experiencing, we’re benefiting.

Using the same logic, it’s also important to diversify your taxes. The importance grows as does your wealth. In other words, as you accumulate more money, you want to make sure you are keeping as much of that money as possible. As your wealth grows, the government will want a larger portion of your pie.

In addition, the only way to describe our current economy is “uncertain.” We don’t really know what to expect. Will stocks go up or will stocks go down? Will taxes go up or will taxes go down? We can certainly make educated guesses that both stocks and taxes will rise, but nothing is certain. That is why we have to be prepared for everything.

How To Diversify Your Taxes

The first thing you’ll have to do is separate your money. I would recommend separating it into 3 categories:

1. Money that is taxed now

2. Money that will be taxed later

3. Money that will not be taxed

Now, obviously, we would want all of our money to fall into this 3rd category but that’s impossible. We need money now to survive and we’ll need money later to survive. The key is to find how much of your money can be placed into the 2nd and 3rd categories, while still maintaining a comfortable standard of living NOW.

What Falls Where?

Here is a list of which of your assets falls into which of the above categories.

Taxable Now – Checking Account, Savings Account, Stocks, Bonds

Taxable Later – 401(k), IRA’s, Annuities

Never Taxable – 529 Plan, Life Insurance, Roth IRA’s, Municipal Bonds

Unfortunately, I can’t sit blindly at my computer and give you an exact percentage of what should fall where. But, I can say the biggest problem I see is that most investors keep the bulk of their money in the 1st category. Consider shifting some of your assets from the 1st category to the latter two. This way, you’ll basically be taxed on what you spend rather than what you earn.