It’s tempting to celebrate when your tax bill drops to zero—but is that always the smartest move? In this month’s video, Michael Brady explores why focusing exclusively on tax minimization could limit your long-term wealth and how strategic tax planning can set you up for a stronger financial future. From managing your tax brackets to considering Roth conversions, Mike shares the big-picture mindset that keeps you wealthier over your lifetime.
Read on, watch the video, and explore related case studies that show these strategies in action.
Transcript
Hi there. Mike Brady with Generosity Wealth Management, a comprehensive full service financial services firm headquartered here in Boulder, Colorado. Although I am recording this from my place up in Wyoming, I spend the summer up in Wyoming, and it’s just a wonderful place for me to do a lot of business thinking and strategy. What are my convictions? What’s most important? Sometimes it’s good to get out of the day-to-day. Although I have to say this summer, thanks to wonderful clients like you, my friends, and my network, I’ve really met with a lot of people. I’ve had more meetings than normal this particular summer. But that’s okay. There are worse things, that’s for sure. I really enjoy staying busy, and I love my business. I like what I do. I never want to stop doing this, and hopefully you’ll always be my client.
So today I want to talk about taxes. There’s a philosophy: tax minimization or wealth maximization. Tax minimization means you do everything you can to get your taxes as low as possible, celebrating when they’re down to zero. I’m in the wealth maximization business. That means we want to make an individual, a couple, or a family as wealthy as possible. Sometimes that means paying more taxes. What would you rather have? Would you rather have $10 million in income this year and pay $2 or $3 million in taxes—which is a lot of taxes—or would you rather have $10,000 in income and pay a couple thousand bucks in taxes? Let’s keep the big picture in mind. The prize is that you become wealthier. If you double your income, your taxes are probably going to double. You could minimize your taxes by losing lots of money—a big tax loss—but that’s no good. Nobody likes that. So let’s keep our eye on the prize.
When I ask people, “Do you think taxes are going to be lower, the same, or higher in the future?” I have to tell you, nobody ever says they’ll be lower. Almost always, people say it’s going to be higher or at least the same. Then I ask, “What’s your standard of living when you retire? Do you want it to be lower or higher than it is now?” Everyone says they want it to be the same. Nobody ever chooses a lower standard of living. My experience has been that people think they’re going to spend a lot less in retirement, but that’s not true. You’re not buying suits or paying gas for commuting, but the same money gets redirected to visiting grandchildren, going on cruises, or healthcare expenses. So your expenses are not necessarily going to go down in retirement.
If we can agree that in the future taxes are going to be equal or higher, and your income needs and lifestyle might be very similar, the question is: when do we pay the taxes? We’ve got certain choices. Do we try to minimize our taxes to zero now, or do we try to pay taxes at the lowest average rate through our lifetime? One approach I take with clients is to say, “Maybe you’ve got some space within your tax bracket—10, 12, 22, 24, etc. Instead of working to get it all the way down, sometimes it’s good to say, wow, I have a lot of space in the bracket I’m in. Should I convert some money now and pay the taxes, like maybe over to a Roth, so that I don’t have more taxes on my IRA or 401k in the future when I’ll still need the money but might be in a higher tax bracket?”
We’ve got our income and our deductions. You pay taxes on the difference. If your deductions are equal to or higher than your income, you could convert IRAs all the way up tax-free. Money that would have been tax-deductible in the future becomes tax-free. We look at these things to see if there’s something you could do to minimally increase your taxes now but have a huge benefit in the future by converting to tax-free money upon retirement.
When I work with clients, I’m not a tax professional. I don’t have those letters after my name, I’m not a CPA, and I don’t have tax preparer errors and omissions insurance. I want to brainstorm with you and work with your CPA to find out—maybe as an outsider—what we can do to minimize your taxes because it’s your single biggest expense. At the same time, how do we increase your wealth over your lifetime by maybe paying a little bit of taxes now for a huge benefit in the future? At least that’s the question we want to ask so we don’t overlook it.
It’s good to know if your tax professional is a tax preparer who just takes your stuff and prepares your forms, really just a historian putting boxes in the right places, or if they’re a tax planner who gives you proactive advice. Do they meet with you during the year, maybe in the spring and fall, to decide what can be done to maximize deductions? The more deductions you have in a year, that’s great. I hope I’m not giving the impression that tax minimization is a bad thing. The question is, it shouldn’t be the only thing, the only focus. We should try to minimize our taxes, because once again, it’s the single biggest expense we have. But we also want to keep an eye on whether we should defer some of that benefit of tax minimization to the future because we might be in a lower or higher tax bracket in the future. We might want to have tax-free money, not taxable, in that future scenario. Good tax planners are worth their weight in gold. A good one is invaluable, but you’ve got to know how to work with them. I like to be part of a team.
If you’ve got a CPA you think I should talk with, please send them my way. I love having that conversation. If you have not yet sent me your 2024 taxes, send it my way. I’ll look at it, put it in the computer, look at it through my AI software, and give you some conversation pieces to discuss with your CPA. If you say, “Hey, Mike, let’s get on the phone or a Zoom with my CPA,” you can explain what you see. Tax preparers, especially around tax time, are so busy trying to do the best job they can as quickly as possible, and that doesn’t always give them the opportunity to step back and say, “Huh, what’s the tax planning opportunity here?” That’s where someone like me comes in. As an outsider, I can take the time to give you suggestions to talk with them or to give them directly to your CPA.
I love talking taxes with people. I’ve been a financial advisor for 34 years. There are few things I haven’t seen before. The best wealth maximization I can do for you means the happier you are, and then you’re bringing more people to me because you’re saying great things about me, which I would love. There’s more money left in your kitty that we can manage and that you can keep, which reduces your anxiety—and of course reduces my anxiety as well.
Mike Brady, Generosity Wealth Management. I am part of the Generosity Group, which includes Generosity Wealth Management, the wealth management part, Generosity Estate Planning, a full-service estate planning firm run by a licensed attorney, and Generosity Business Exit Planning, which is the business consulting side working with business owners who might want to transition or sell their business in the next three to five years. We help maximize the value of their business. We work and consult with them—through my business partner, Betsy—to figure out, if you’re a business owner, what do you need this to sell for to support your lifestyle, your legacy, and your retirement. If you know someone like that or if you own a business, send them my way. I love these conversations. It’s my passion. One of my niches is working with business owners who are ready to transition or want to get their business transition-ready so they get the maximum value for their legacy when they’re ready on their schedule.
Mike Brady, Generosity Wealth Management. I’d love to hear from you if you have any questions or concerns. Have a great rest of the summer. Bye-bye now.