The Tax-Planning Life Cycle

Music plays throughout.

Onscreen text: Charles Schwab presents

                         The Tax-Planning Life Cycle

                         Copyright MMXXII Charles Schwab & Co., Inc. All Rights Reserved

A desktop globe and books and pencils appear on a table covered in white, animating to either side of the frame. A chalkboard appears in the middle of the frame.

NARRATOR: Most people would agree that tax planning is a smart idea—

Drawings of stick figures with the text Most People, an arrow to a drawing of a calculator and the text Tax Planning, an arrow to a drawing of a light bulb and the text Smart Idea.

NARRATOR: but those same people might also think it sounds like a lot of work, and boring work at that, so they generally choose to avoid it.

Notebook opens with text at the top of a page Tax Planning Work. Mathematical equations and symbols fill the page. The notebook is then closed.

NARRATOR: Skip the planning, and you may miss out on the chance to grow your wealth.

Two small clear containers appear, one labeled Your Wealth and one labeled Taxes. Lots of colored pencils go into the Your Wealth container. Hand appears and sharpens pencils with the shavings falling into the Taxes container.

NARRATOR: Plus, you could end up paying more in taxes than you should.

Pencil shavings in the Taxes container overflow.

NARRATOR: Being able to avoid that double whammy to your finances makes tax planning sound a lot more interesting.

Onscreen handwritten text appears on the chalkboard that reads Not Growing Wealth plus Overpaying Taxes equals Double Whammy.

Chalkboard gets erased.

NARRATOR: It's pretty straightforward if you think of tax planning as having a life cycle with three phases spread out over your investing journey: Save More, Invest and Grow, and Distribute.

Onscreen text: Today's (Pretty) Straightforward Lesson

                         Tax-Planning Life Cycle

1. Save More
2. Invest and Grow
3. Distribute

NARRATOR: Let's break that down. In the first phase you could have more money to invest if you save money on your taxes.

Onscreen text: First Phase: Save More

Big textbooks pile up on table with a label above that says Tax Laws. Books disappear one by one until there is only a red book. Label changes to The Basics. Hand with stick points at textbook.

NARRATOR: To do this you need to know the basics, like the difference between tax deductions and tax credits and how capital gains are taxed versus your ordinary income.

Onscreen text: Tax Deductions vs. Tax Credits

                        Capital Gains Taxes vs. Income Taxes

NARRATOR: That way you can claim every write-off you're entitled to and pay at the correct tax rate.

Onscreen text: Write-Offs

                         Correct Tax Rate

Thumbs up appears on screen.

NARRATOR: Otherwise, you could end up not just paying your fair share—but overpaying.

Two clear containers appear, one labeled Fair Share and one labeled Overpaying. Pencil shavings fill the Fair Share container to the brim while the Overpaying container overflows.

NARRATOR: And a basic knowledge can help you avoid making simple—and all too common—filing mistakes.

Onscreen text: Pop Quiz

Chalkboard with text on it.

White sheet of paper appears labeled Tax Knowledge Quiz.

NARRATOR: Things like underreporting income, claiming deductions you don't have documentation for—such as childcare or charitable donations—not having enough tax withheld throughout the year, or paying your taxes late.

Handwritten answers appear on the sheet of paper.

NARRATOR: Those can all trigger a red flag with the IRS and can result in costly IRS penalties.

Handmade red flag waves in front of completed quiz.

NARRATOR: Next, you invest intending to Grow your money. Part of a comprehensive tax plan is to select the appropriate types of accounts for your individual circumstances to help maximize your long-term wealth. By using tax-advantaged accounts, you can have some control over when you pay the tax.

Two clear plastic pencil boxes move to the chalkboard with arrows over each of them and a handwritten label, Tax-Advantaged Accounts.

NARRATOR: For instance, with a tax-deferred account, like a 401(k) or a Traditional IRA, you generally fund the account with pre-tax dollars.

Pencil box on the left is labeled with 401(k)/Traditional IRA. Then a close-up of a hand holding a bundle of colored pencils with a label on it reading Pre-Tax.

NARRATOR: That means you typically don't pay taxes on what you contribute or on the earnings, only when you begin making withdrawals.

A pencil is taken from the bundle and is sharpened, with the shavings going into a clear container.

NARRATOR: Not paying taxes up front can leave you with more dollars to invest. Alternatively, Roth accounts, such as a Roth IRA or a Roth 401(k), are after-tax accounts, meaning your contributions are made with dollars that have already been taxed.

Pencil box on the right is labeled Roth IRA/401(k). Then a close-up of a hand holding a bundle of colored pencils with a label saying After-Tax.

NARRATOR: The assets in these accounts grow tax-free, and if you follow the rules, you don't pay any tax on future qualified withdrawals.

Pencil from bundle is sharpened, leaving shavings in the clear container and then is put with the other pencils on top of the pencil case.

NARRATOR: In some cases, paying the taxes up front could offer tax benefits later―during the distribution phase. Maximizing contributions to tax advantaged accounts is a big part of the growth phases, …

Handfuls of pencils go into both pencil cases very rapidly.

NARRATOR: but your taxable brokerage accounts can also be tax-efficient depending on your investment selection, the timing of your asset sales, and your individual tax circumstances.

Handwritten text changes to Tax-Efficient Account. A new pencil case animates on, and a label Brokerage appears above it.

NARRATOR: For some investors, municipal bonds and ETFs can be smart choices in a brokerage account, …

Close-up of a hand holding a bundle of pencils with a label Muni Bonds and then a hand holding a different bundle of pencils with the label ETFs.

NARRATOR: and holding your investments for more than one year qualifies them to be taxed at the much lower long-term capital gains rate.

Orange day planner notebook opens and reveals handwritten text, One Year Later.

Onscreen text: Long Term Capital Gains Rate

NARRATOR: Sell them in one year or less, and they are considered a short-term gain and taxed at your ordinary income rate.

Orange day planner notebook opens to reveal handwritten text, Less Than One Year Later.

Onscreen text: Short Term Capital Gains Rate

NARRATOR: Tax planning is still important when you reach the Distribute phase and start taking money out.

Three pencil cases animate on and pile on top of each other. A clear glass animates on with the label Withdrawals. Bundles of pencils move from the pencil cases, are sharpened, and then are dropped into the glass.

NARRATOR: By creating a tax-efficient distribution plan, you can take withdrawals in a way designed to help your savings last longer, while possibly minimizing the impact of taxes on Social Security benefits and potentially avoiding higher Medicare premiums, which are based on income.

A cork bulletin board appears as the pencils in the glass are used to draw pictures. One piece of paper has My Retirement on it. A child's drawing of a cruise ship appears and is pinned to the bulletin board. Then a different child's drawing of a large airplane appears and is pinned to the bulletin board.

The bulletin board is taken off screen.

A silver gift bag animates onto the screen along with scissors, a spool of green ribbon, and tape. Text appears on the chalkboard, and a hand takes pencils from the Withdrawals glass, which are dropped into the bag.

Onscreen text: Gifting During Lifetime

NARRATOR: If one of your goals is to gift a portion of your wealth, strategies like gifting during your lifetime and potentially setting up trusts could help you ensure your assets are used the way you intend.

Onscreen text: Trusts

More pencils are taken from the glass and dropped into the bag.

NARRATOR: A comprehensive tax plan may also help minimize estate taxes and maximize your charitable giving.

Onscreen text: Minimize Estate Taxes

                        Maximize Charitable Giving

More pencils are taken from the glass and dropped into the bag. Green ribbon is tied around the bag handles, and a hand takes it out of frame.

NARRATOR: In the end, the tax-planning life cycle is a guide to use at every stage …

Chalkboard is replaced by another chalkboard with text on it and a hand with a black pointer gesturing toward it.

Onscreen text: Today's (Pretty) Straightforward Lesson

                         Tax-Planning Life Cycle

1. Save More
2. Invest and Grow
3. Distribute

NARRATOR: to help postpone certain taxes, avoid unnecessary taxes, and maximize your after-tax wealth.