In this episode, John Smallwood of Smallwood Wealth Management discusses the “evil twin” of compound interest — compound taxation.
John is the author of 5 Ways Your Wealth is Under Attack. He has lectured extensively on financial planning and has received the Five StarSM Wealth Manager Award for 2011, 2012, 2013, 2014, 2015 and 2016.
John’s strength lies in his ability and commitment to continually improve the level and quality of the financial planning process. His dedication to his clients’ growth involves an evolving strategy that strives to meet the demands, desires, and needs of his clients in a continually changing economic environment.
In this vlog, you will learn:
- How compound taxation is eroding your wealth and its potential.
- How to appropriately predict and plan for compound taxation in your portfolio.
- The importance of creating strategies designed to reduce this taxation over the period of wealth accumulation.
John illustrates a compound taxation scenario:
- $300,000 in capital, invested at 5% interest, will earn you $15,000 after the first year.
- With compounded interest, 30 years out, your $300,000 has gained almost a million dollars.
- But that first year’s interest of $15,000 will generate a 1099, which will go on a line on your tax return and create taxable income.
- Assuming a 30% tax bracket, after paying the tax you only have $11,000 to reinvest in that first year―and each year you have less and less capital to compound as you pay the tax from that account.
This is especially important in retirement, as you may have fewer outside sources of income from which to pay the taxes generated in your portfolio.
We’d love to help you prevent the “miracle” of compound taxation from eroding your wealth and its potential to earn even more for you. We want to reduce both your current taxes and your future taxes. Give us a call at 732-542-1565 and schedule a time to have a conversation, or on our website you’ll see “Contact us,” and “Schedule an appointment.”
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We look forward to speaking with you.