Broker Check

Curing the Parking Disease

By Mike Lynch CFP®

Financial Planner

Anyone’s who’s ever lived in an impacted city can relate to the parking disease. This is the affliction that attacks a person who purchases a car to make life easier but then learns quickly it’s stressful to use it due to the difficulty of finding return parking. In my San Francisco days, I cured this by finding a spot in front of my Mission-District Victorian apartment straddled by two driveways. When my car exited, my motorcycle, hitherto parked on the sidewalk, entered. I always returned to “rock-star” parking.

Now that I’m well-garaged, I notice that investors are apt to catch a version of parking disease. Yet here it’s not the car that can’t be used due to lack of parking, but their money due to an abundance of taxes. You see, Americans are taught to defer and avoid taxes, which can be achieved with buy-and-hold equity investing, retirement plans, some forms of U.S. Government bonds, and non-qualified annuities. This is often a sound strategy and should be a component of most people’s financial plan. Yet if overdone and un-supplemented, when it comes time to use the money, far more than a dollar needs to be withdrawn. Taxes must be paid. This prevents people from using their money.

The cure for this comes from an unlikely place—mutual funds invested in a non-qualified account. I say unlikely because most mutual funds in non-qualified accounts create taxes each year, with dividends, interest and often dreaded capital gains distributions. They generate 1099s and add to a person’s tax bill. As a result, strategies are often employed to avoid these accounts to minimize these taxes. 

But it’s a classic pay me now or pay me later. Pay a little as you go or a lot when you want it. The cure for one problem, annual taxation, becomes the cause of the tax problem later, a big tax bill. Therefore, the cure for the problem later is to embrace the tax-problem now. The good news is that people rarely sell the investment to pay the taxes. It comes from other funds. Effectively, these investment compound as if in a deferred account.

Investing in mutual funds in a taxable account can be a smart-money move. When it comes time to use the money, whether, for retirement income, vacations, home improvements, whatever, you will likely have moved your tax-basis us each year and trigger little gain at point of use. This will put a smile on your face.

This strategy is not a replacement for all tax-deferred investing, but rather a compliment to these other accounts. A tax-efficient plan will contain a variety of accounts:

  • Health Savings Accounts: avoid income taxes now and in the future if used for health care
  • Traditional IRAs and retirement plans: avoid taxes now but pay income taxes on withdrawals in the future.
  • Roth-style accounts: accept taxes now for the promise of zero tax on future withdrawal if rules are followed
  • Non-qualified accounts that lock in long-term gains on a low-cost basis

Each has its place, advantages, and disadvantages. But so too does the often maligned mutual funds in non-qualified accounts. You’ll be happy you have them later.

To see how this may fit into your financial plan, schedule a financial check-up. We’ll focus on your finances, so you can focus on your life.

Mike Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT. He can be reached at mlynch@barnumfg.com or (203) 513-6032.

Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. Michael Lynch is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. www.SIPC.org. 6 Corporate Drive, Shelton, CT 06484. (203) 513-6000.

CRN202107-250355