I’m not a maniac on avoiding taxes. Living through the 80s and 90s, I saw many cases where people bought financial products that made them less after-tax money than many fully-taxable products would have made them. Limited partnerships, life insurance, annuities, etc… I never saw the value in focusing on what the government would not get. I was more focused on what I would get after taxes.
That doesn’t mean there aren’t clever strategies to avoid taxes, particularly if you are rich. For the rich, taxes can be more of a negotiation. How much work will the IRS have to go through in order to drag incremental dollars out of me? (The same logic applies to corporations… I have seen it in action.) Perhaps Leona Helmsley had a point, even if she overstated it, “Only the little people pay taxes.” Maybe it should be, “Only the little people pay sticker price on taxes.”
Now, as for me, I have a Health Savings Account, a Rabbi Trust, IRAs for me and my wife, and a Rollover IRA from all of the jobs I have worked at. It’s not as if I don’t try to manage my tax position. But I don’t let it drive my investment decisions on its own. I own my house free and clear. I enjoy the benefits of flexibility in my finances; I have not used 529 plans, for example. Where the investment fits my overall goals and objective, then I will consider how it affects my tax position. In general, the higher dividend stocks go into my Rollover IRA, the lower dividend stocks into my taxable account. I also gift appreciated stock through my taxable account to charity.
At present, I don’t own any munis. That’s something I’ll have to revisit.
Now, here are two things to be careful about. If IRAs grow too big there can be additional taxes on them. I’m not too clear on the rules, perhaps readers can more fully flesh that out. The other is that taxes are likely to be higher in the future, so avoiding taxes today may lead to more taxes tomorrow. Also, I would question whether our government will honor the concept of a Roth IRA. Social Security benefits were not supposed to be taxed, but today they are mostly taxed. The same might happen to Roth IRAs at some point in time. Congress giveth, and Congress taketh away.
My closing point here would be to not overcommit to any single tax strategy. Congress changes the rules so often, that it is difficult to make long term decisions. Stay flexible, and avoid taxes where it does not compromise your flexibility.