Address Taxation

All tools are designed to get a task completed in an efficient way. A power saw will cut wood into desired shapes much more quickly than a hand saw will do. However, if you try to do it without plugging it in, you will find it is terribly inefficient. Much less efficient than a hand saw. The thing that makes it better, when not present, makes it worse.

Compound growth is a tool to build wealth. Like the power saw it needs to work without impairment to work best.

The most commonly seen impairment is taxation.

Like the power saw, if you want to use the tool efficiently you will need to pay attention to how it gets it power. Do not try to run investment accumulation tools at lower voltages.

If I start with $1.00 and double it every day for 20 days I will have $1,048,576. But if I let the power of compounding be harmed, I will get less. For example, suppose I give 33% of my growth to the government each day. How much will I end with?

No it is not 67% of $1,048,576. That would be $702,546. An acceptable outcome.

You would end up with $56,932 all tax paid.

Admittedly the example is extreme but the point is clear. Tax takes a great deal more than people think. In our 33% tax example, we ended up with $56,000. You could double that if you paid tax at 27% instead. Pay careful attention. Even small tax advantages add up over a long time.

As an investor or as an adviser, the job is not finished until the tax reduction tactics have been considered and implemented.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. | Twitter @DonShaughnessy | Follow by email at moneyFYI

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