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Mailbag Episode #1, Episode #28 Thumbnail

Mailbag Episode #1, Episode #28

This is our first-ever mailbag episode. In it, we answer three different questions we’ve received over the past few months: 

#1) I’m not sure if I’m doing everything I can to minimize taxes – is there a way I can check this and what should I be considering? 

#2) I’ve built up quite a bit of cash in my savings account that I don’t know what to do with, and I’m nervous about investing now after the market has gone up.

#3) I like the idea of passive income and I’ve heard real estate is the best way to do this – what are your thoughts? 

If you would like to have your questions answered on the show, please send them to us at info@mdwmllc.com!

Outline of this episode

  • Answer to question #1 [1:54]
  • Employer retirement plans are one of the best ways to lower your tax bill [2:34]
  • Saving on taxes by saving for college [4:04]
  • Tax-loss harvesting [5:06]
  • Answer to question #2 [9:30]
  • Answer to question #3 [14:53]

Am I doing everything I can to minimize taxes?

Taxes tend to be a hot topic for people and everyone wants to pay less in taxes, or at least avoid paying more than they have to. Unfortunately, we all have limits on our ability to reduce our taxes and there isn't a magic formula that will allow you to avoid them entirely. However, for each person, there is a list of things that you can do to lower your taxes based on your specific situation. Let’s look at a few of the most common ones. 

For people who are still working, the first place to look is your employer's retirement plan. Different employers offer different retirement savings plans, whether that's a 403b, 401k, 457b, etc. These plans give you the ability to save for retirement while also saving on taxes by making pre-tax contributions. Different physicians have different amounts of saving space in their employer’s retirement plan based on age and the specific plans offered by the employer. Using these is one of the best ways to lower your tax bill. Outside of retirement plans, another area to look at within your employer benefits is a Health Savings Account or Flexible Spending Account.

Another way to save on taxes, at least in Michigan, is by contributing to a 529 college savings plan. Additionally, you could possibly save on taxes by giving money to charity. During your working years, you will likely only receive the tax benefit for charitable contributions if you itemize your deductions.

The last item on the checklist we want to mention is a bit more nuanced, but relevant if you have a taxable investment account, also known as an individual account or a brokerage account. If you have one of these accounts, you can do something called tax-loss harvesting. In the episode, we cover these in a bit more detail so check that out if you would like more information.

I’m sitting on cash but the stock market is up and I’m nervous to invest

This is one we see across the board in all age groups. The first step in tackling this question is to think about what the money is for. Is this money you're planning to use within the next year or two or is it for retirement? Think about this because you're going to manage and invest the money differently depending on the time horizon. When you invest money, you expect to earn a higher return than just keeping it in the bank, however, when it comes to investing those higher returns are never guaranteed, especially over shorter periods of time. While investing in the stock market has historically averaged a return of around 10% per year, it hasn't been a consistent 10% each year. 

If you're planning to use the money in the short term, there's a risk that the market could experience a temporary decline and you would have to sell your investments at a loss to use the money. In this situation, the potential higher return from investing isn't worth the risk. Keep the money in the bank where you know it will be worth the same amount when you need to use it. On the other hand, if you're not planning to use the money anytime soon or you’re investing it for retirement, whether it's 5 or 25 years from now, you have a longer time horizon and the ability to take on more risk with how you invest the money, knowing that you can ride out the temporary declines of the market without needing to withdraw the money.

I like the idea of passive income, is real estate the best way to do this?

Passive income and real estate tend to be popular items in the physician community especially for people with an early financial independence goal. It makes sense that it’s popular because who doesn't like the idea of passive income and getting paid for something that theoretically doesn't require any ongoing work or effort? However, there are often misconceptions and things people overlook when considering real estate as an investment and it’s important to understand the full picture before thinking real estate is a free pass for passive income. Before deciding on investing in real estate—or any other investment—the starting point is thinking about the best use of your money and what its purpose is. Consider things like whether you are looking for a vacation home that will be rented on a part-time basis or if you’re just looking for regular monthly income? 

When you invest in real estate, you earn a return on your investment in two ways, through price appreciation and rental payments. Similarly, when you invest in the stock market, you also earn a return on your investments in two ways, price appreciation of your investments and dividends you receive each quarter or each year from the stocks you own. In the episode, we break down the risk vs reward of real estate but the main point we want to leave you with here is that for most people, you can accomplish the same goals with a lot less effort by simply investing in a well-diversified stock and bond portfolio and holding it over the long term. This type of investing can also be viewed as a passive income source since your money is working for you with very little effort on your part.

Resources & People Mentioned

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