Good Financial Advice Made to be Broken – Lowering Your Taxes.  Sometimes following financial advice, while technically correct, could turn out to be a costly mistake.  It is important to note that the correct choice and the best choice are not always the same thing. The following are the three most egregious examples I saw this tax season where people took factually correct information that in reality was financial terrible advice. Will the best financial advice go horribly wrong for you and your wallet? Want to pay fewer taxes on your investments keep reading.

Earning Less to Pay Fewer Taxes? Financial Advice to Break Part 1

An excerpt from a client’s email to me:

“My tax person told me to tell you to earn less money in my investment accounts so I won’t have to pay so much taxes– Thanks.”

Clients typically do not request lower returns, so I gave my client a call. She explained that she owed money on her previous year’s taxes. When she asked her tax preparer how she could pay fewer taxes this year, this is what she was advised. “Have your financial guy earn less on your investments or move it to the bank.”

While her tax preparer’s advice isn’t technically wrong, it is terrible advice. It is true that she would likely pay less in taxes if her investments grew at a lower percentage. The long-term capital gains rate for many investors is 15% but you get to keep the other 85 cents of every dollar of growth in your portfolio. And with a tax-efficient portfolio or strategies like tax harvesting, you can defer taxes or lower them further.

This client’s portfolio increased by about $150,000 in 2017. The result was $50,000 in realized gain and a capital gain tax bill of about $7,500 for the year. That may seem like a lot of taxes until you realize that she still has approximately $142,500 more than she had at the beginning of the year.  I don’t know too many people who would complain about an extra $142,500 after taxes.

Why Earning Less Won’t Really Save you on Taxes or Otherwise:

If that same client invested her money at a bank, at an interest rate of 1.5%, she would have earned $11,250. (1.5% of her beginning account balance of $750,000). Because bank interest is taxed as regular income, she would have owed $2,812.50 of taxes on this interest.

Assuming a 25% federal tax bracket, her tax bill was reduced by 62% for this money. That may seem great until you realize she netted 94% less money. She would have earned a net amount of $8,437.50 at the bank, which is $134,062.50 less than what she earned in her actual tax-efficient investment account.  Sometimes paying more taxes can be a good thing.

This is a prime example of good financial advice gone wrong. No one in their right mind should earn less money just to pay less taxes.  Make sure to work with a Fiduciary Fee Only Financial Planner to make sure you are getting the absolute best Financial Advice Los Angeles has to offer.

Live for today, plan for a richer tomorrow. Keep making that money.

DAVID RAE, CFP®, AIF® is a Los Angeles- retirement planning specialist with DRM Wealth Management. He has been helping people reach their financial goals for over a decade. He is a contributor to Forbes.com. Has also written for the Advocate, Investopedia and Huffington Post.  Follow him on Twitter @davidraecfp on Facebook or   www.davidraefp.com.

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