It may seem counter-intuitive that a generous steward must be a wise, prudent saver.
But it’s not.
What we often find with our clients is that the ones who give the most usually have savings that are growing and multiplying.
And when our clients hear and begin utilizing our Tax Control Savings Plan, or TCSP, they discover a new motivation for saving and giving.
The starting point of understanding the TCSP is that there are three basic ways savings are treated for tax purposes:
1. Money goes into savings before paying taxes (i.e., pre-tax), thus saving tax dollars, and grows tax deferred. When it comes out, it is taxed at ordinary income tax rates.
2. Money goes into savings after paying taxes (i.e., after-tax), and is currently taxable as ordinary income (dividends, interest, short term capital gains) or at more favorable capital gains rates for long term capital gains.
3. Money goes into savings after paying taxes (i.e., after-tax), grows tax-deferred or tax-free, and when it comes out it is tax-advantaged (i.e., generally not subject to any taxes, provided the distributions are handled properly and there are no gains inside any of the assets, such as municipal bonds). The savings vehicles available in this bucket are relatively few: Roth IRA, Roth 401(k), Roth 403(b), municipal bonds, and cash value life insurance.
BRS’s Tax Control Savings Plan helps our clients develop a finely tuned and refined method of enhancing the safety, efficiency, and control of their savings. This in turn allows them to be more secure in their present giving and more generous in their plans for giving in the future.
This correlation between saving and giving is liberating for our clients. Whereas before they may have been bound by fears of not having enough in savings for the future, they are now able to do their “giving while they’re living so they are knowing where it’s going,” as Ron Blue famously says.
And the BRS Tax Control Savings Plan is how they arrive at this happy place in their stewardship journey.
Most of our clients understand the power of pre-tax savings using a defined contribution 401(k) plan with company match, an IRA, defined benefit plan, or other qualified plan governed by ERISA and the Internal Revenue Code. Most of our clients have savings in one or more of these these kinds of qualified plans.
Every dollar that goes into the plan saves you taxes, right? So if you are in the 30% tax bracket, you save 30 cents. If you are at 40%, then 40 cents. And if you company provides a match, that’s free money. So take it.
Many of our clients have most of their wealth in IRAs or a 401(k) plan.
When they retire and begin taking money out, it will be taxed at their marginal tax rate. This works well if the rate is low, but it’s risky if rates are higher. Most Americans believe that tax rates will most likely increase. Take a look at the graphic below and tell us what you think.
If tax rates increase in the future because the government needs more revenues to pay down the trillions of dollars of debt it is in, then your pre-tax savings could get wiped out fast.
That’s why our TCSP is so important and helpful. It’s a diversified savings methodology that helps you be able to adjust to future economic and tax rate changes.
Second, you will want to have savings in what we call the “after-tax, currently taxable” bucket.
These are things like stocks, bonds, mutual funds, money market, certificates of deposit, other interest bearing accounts, and pass through dividends from business you may own. The savings go into this bucket after you have paid taxes on them or after you have inherited non-qualified assets. As they grow you are taxed at ordinary income tax rates on the dividends, interest, and short term capital gains. Long term capital gains are taxed at lower capital gains tax rates.
Many of our clients are highly successful doctors, entrepreneurs, and business owners who have most of their wealth and savings tied up in their practices or business ventures. This gives rise to the need for wise succession planning that we help our clients implement.
Planning for a liquidity event from the sale of a practice or business is important. And thinking through the grid of the TCSP helps our clients make sound decisions regarding how best to avoid unnecessary taxes and allocate the after tax savings to the before tax, currently taxable, or tax advantaged buckets.
Third and finally, in order to diversify your savings and provide a hedge against a high tax rate environment, you will want to have savings in a tax-free bucket. Money saved here and withdrawn properly generally comes out tax free.
You will want to start this as early as possible. Or you can help your children and grandchildren jump start their tax free savings. The savings vehicles available in this bucket are the Roth IRA, Roth 401(k), Roth 403(b), municipal bonds, and cash value life insurance.
We at BRS believe stewardship is about relationships. Careers, reputation, financial stability, and personal goals are all important pursuits. However, none should come above our relationships with family, friends, and our community. Our relationships are the cornerstone by which we leave a positive impact and lasting legacy.