Don’t Let Tax Drag Drag Your Investments Down!
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What is Episode 032 All About?
Have you ever wondered whether your retirement nest egg is mired in Tax Drag? If not, it’ll definitely be on your radar after this episode of The Retirement Equals Freedom Podcast.
Host Josh Bretl, founder of FSR Wealth Strategies, is breaking down the intent behind portfolio rebalancing and the difference between sheltered and unsheltered investment vehicles.
We don’t have to live in fear of capital gains or let tax liability on non-qualified investments scare us out of cashing in and enjoying the fruits of the assets we’ve accrued! All we need to do is get our heads out of the sand and create a solid strategy, which is where the professionals come in!
Cohost Dave Schmidt’s portfolio may be heavily tilted towards socks and “Naughty Dip “ingredients, but he still needs to know about mutual funds and why they can upend tax planning.
Tune in and it will all become clear – both how different types of investments have variable tax impacts and why it matters. And even if you don’t wind up following Dave’s recipe, you’ll definitely come away with a better understanding of all the ingredients that go into proactive, tax-savvy investment management. And very likely an undeniable craving for Girl Scout cookies!
Wondering what kept Dave awake through Josh’s rambling? It was a big cup of iced Cometeer's "Counter Culture" roaster. Get $25 off your first order by using this link!
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Click here to learn more about or listen to previous episodes of The Retirement Equals Freedom Podcast. Or join the conversation over at our private Facebook group, which you can find here.
Click here to explore the services that FSR Wealth Strategies offers and schedule a discovery call with one of the team’s CPAs. When it comes to living your best life, it’s never too early to get started!
MST3K intro with theme song!
Smores. Samoas. MST3K.
Interior Design Update from R = F! The new table – dedicated exclusively to all things pod – has finally arrived and the co-hosts are upping their game accordingly!
The Girl Scout Cookies Are In! Tip of the hat to Josh’s wife Missy, the Cookie Coordinator, for managing distribution of 1,700 boxes for her daughter’s troop of about 20 Daisies (first-grade Girl Scouts to be).
Josh is sharing a cute anecdote about Alex, who is all in on the guitar and currently practicing one of his dad’s fan faves! His two younger siblings are waiting in the wings, ready to form a band, should their brother be interested!
The focus of the past few months has been tax-oriented: Social Security, 401ks, Roth conversions, the Secure Act 2.0 … and this episode piggybacks on that theme.
Why it can be easier to manage investments that are inside of a retirement account (such as an IRA, 401k or Roth IRA) as compared with non-qualified brokerage accounts, where there are more tax variables and impacts to consider.
The Theory of Tax Drag: The loss or reduction of potential income on investments that are unsheltered versus tax-protected investment vehicles like retirement accounts.
What’s a Dividend? It’s the shareholder distribution of profits made by publicly traded companies – and taxable.
Not All Investments Pay Dividends:
- Some grow via taxable dividends (or interest income).
- Others grow via capital appreciation. Instead of taxable dividends, the value-add is in increased stock value.
What You Need to Know About Mutual Funds:
- They offer an excellent way to diversify assets and hold investments in just one basket.
- They can be expensive and extremely tax-inefficient.
- The overhead costs for mutual fund management can be anywhere from .25% to 1.25%.
- You have no control over what happens inside of a mutual fund, including the timing of dividend and capital gains distributions.
Capital Gains Explained: The difference between your purchase and sale prices when an investment (stock or real estate, for instance) grows in value over time.
Josh predicts that it could be a rough tax season for people whose mutual funds were impacted by necessary year-end capital gain distributions – insult to injury given the overall down market. Dave is feeling good about his investment in Bombas socks – the actual things you wear on your feet, not the company itself.
It’s important for mutual fund holders to be aware of tax inefficiencies and strategies to manage, which is where a financial advisor can be very helpful.
A Brief Break to Feature Dave’s Recipe for "Naughty Dip:” Put a log of Jimmy Dean Sausage, a brick of cream cheese and a can of Ro-Tel tomatoes into a pot. Dip big Fritos into the cooked mixture.
Have a Plan, Stan! (Not literally you, Stan.) While it may seem tempting to shift into avoidance mode, if you’ve got a tax liability in your mutual fund or anywhere else, it’s better to bite the bullet and put a strategy in place asap.
Holding Onto Stocks to Avoid Paying Capital Gains Taxes? You may achieve that goal but at what cost? Your money is perpetually locked up, for starters.
The Theory of Rebalancing: It’s a methodical plan for diversification, based on variables like risk tolerance that can trigger buys and sells that result in capital gains distributions.
Important to Know: Thanks to new technologies and user-friendly investing platforms, we can own and manage stock index fund-type investments directly ourselves and avoid the added expenses that mutual funds impose.
Room to Dance? Cue the jingle and Get to Know Josh and Dave! What’s your favorite flavor of Girl Scout cookies?
- Dave: He’s eager to try the latest, but – even though in general he loathes all things coconut, his standing favorite is Samoas (now known as Caramel deLites).
- Josh: Despite his longstanding love of Thin Mints, he’s going with S'mores – with an important caveat. They differ regionally and his special passion is for the non-Chicago ones chocolate-dipped on the outside with marshmallow on the inside.
DR2R, including a belated shout-out to Mr. Mark Thomas – the rebound king, the rubber band, the glue. Trapped on the Satellite of Love, unable to escape his predicament Mystery Science Theatre 3K protagonist Joel is stuck. Very stuck. But we don’t have to be! We can get expert help and escape the scourge of non-qualified investment distributions. Even though Josh doesn’t “get” or care about MST3K, he can get on board with the idea that help is out there an expert financial planner can get you unstuck, at least in this galaxy.
Stay tuned for our follow-up episode with solutions that will transform the way you think about spending – and enjoying – your assets! There are strategies and things you can do to minimize tax drag – and increase your portfolio’s overall net value!
“When you’re picking investments inside of an IRA or 401k or Roth IRA, it’s actually a lot easier than when you’re not … One of the variables you don’t have to take into consideration – at least not very heavily – is the tax impact internally.” ~Josh
“You may have lost money on your mutual fund – it could have been down 10, 15 or 20% – but you’re still going to pay a capital gain distribution that could be really huge.” ~Josh
“I don’t think there’s a sock mutual fund but if there is, it’s all yours!” ~Josh
“I’m talking about problems here and sometimes the first thing to do is just be aware of them. Sometimes people like to bury their head in the sand and pretend like problems don’t exist … but why not have a plan in place and make it beneficial to you?” ~Josh
“Yeah, the last year was down. But if you’ve held stocks for a long period of time, then you’ve seen large gains.” ~Josh
“We call it the Retirement Equals Freedom Podcast – not the Retirement Equals Don’t Spend Your Money Podcast … because I want people to understand that they can and should use their money.” ~Josh
“With technology nowadays, mutual funds have become less important. You can own these assets yourself. The S&P 500? We can own it for cheaper than buying a mutual fund and you have more control over the rebalancing.” ~Josh
“I’m nervous that we have too much invested in our Arby's Beef 'n Cheddar fund to where we’ll be taxed so much!” ~Dave
“If non-Chicago-made S’more cookies were sold in Chicago … all of our spare cash would be going to S’more cookies.” ~Dave
“It comes down to choice ... Retirees, you have choices! You need to own your retirement and find someone who can help you!” ~Dave
“As Erin likes to say, ‘Just because you’re in a place now doesn’t mean that you’re going to be there forever. There are ways to fix it. You just may not know it yet.’” ~Josh
- Want to get involved with the Girl Scouts? Here's more info!
- From Nerd Wallet: "Mutual Fund Fees: A Guide for Beginners."
- Tax Drag examples from MorningStar: at this link.
- Ingredients for Dave’s “Naughty Dip” can be found here, here and here.
- From Forbes: "Why You Need to Rebalance Your Portfolio."
- More about Arby's Beef 'n Cheddar.
- Mystery Science Theater 3K (MST3K): Click here.
- R=F's new private Facebook group. Come hang out!
- Don’t miss out on our staff java pick: Cometeer Coffee!
About your Co-Hosts
A certified public accountant, Josh Bretl has spent the past two decades growing FSR Wealth Strategies into a firm that specializes in tax-focused retirement planning. Because taxes have the single biggest impact on how much you can spend in retirement, Josh is dedicated to developing individualized financial plans that extend and grow his clients’ retirement savings. Based in Elmhurst, Illinois, FSR Wealth strategically preserves and maximizes resources through tax-efficient strategies designed to fulfill retirement dreams.
Apart from producing and co-hosting The Retirement = Freedom Podcast, Josh's longtime friend Dave Schmidt is a content production and marketing adviser to local businesses and nonprofits. He’s also an advocate for t-shirts, all things 90s (especially the music), short walks and long naps. A serial “wallet forgetter,” Dave nonetheless swears that he has picked up the check on at least one or two meals with Josh over the years. Evidence pending.
FSR Wealth Management is a registered investment advisor located in Elmhurst, Illinois. Information and opinions contained in this audio have been arrived at by FSR Wealth advisors. All information herein is for informational purposes and should not be construed as investment advice. It does not constitute an offer, a solicitation or recommendation to purchase any security. FSR is not providing legal, tax, accounting, or financial planning advice in this audio. These views are as of the date of this publication and are subject to change.
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