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Tax Diversification PART II

Last week, I mentioned clients that wanted me to review their statements and try to make sense of what their advisor called “being diversified.”

We uncovered the fact that just because wall street has you diversified doesn’t guarantee you won’t lose money, or truly understand how to best use and enjoy it.

In my 32 years in this business, while I agree in principal that it’s never a good idea to put all of your eggs into one basket, what amazes me is that most consumers, and apparently most advisors, have neglected to understand the importance of being tax diversified.

You see, the government has basically implemented a very complex tax system when it comes to investing. You have assets that are after-tax-taxable, you have other investments, such as 401(k) and IRA plans that are pre-tax-tax-deferred. The third type of taxation of assets are those that are after-tax-tax-deferred, and finally, you have assets, such as Roth IRAs and Life Insurance proceeds that are after-tax-tax-free.

The problem is that most hard working people are not tax diversified. That’s because they have been taught by wall street to put all of their eggs into the proverbial 401(k) basket…a basket that is full of taxes that you or your heirs are eventually going to have to pay.

I call it the Tax Tumor, and just like any tumor, you can either deal with it now, or let it grow and get out of hand.