Key Takeaways:
● Many tech professionals are DIY investors and don't necessarily see the need for ongoing advice.
● Most are paying “sloppy tax”; mistakes incurred by not optimizing their finances.
● If you are in a high tax bracket, it is critical your financial plan is 100% efficient.
● Consulting financial advisors who focus on tech professionals can help avoid paying sloppy tax.
If you’re in a high tax bracket, be sure you’re not paying a “Sloppy Tax”. Regardless of how you choose to grow your fortune, there is always a 100% efficient way to execute your financial strategy. If you get sloppy in your execution, you’re paying a “sloppy tax”. How much sloppy tax are YOU paying?
Sloppy tax refers to any unnecessary costs incurred from not optimizing your financial strategies. Think of it as an unforced error in tennis—avoidable yet potentially costly. Sloppy tax is the figurative price you pay for inefficiencies in your financial plan. While it may not be immediately visible, it can quietly chip away at your wealth over time.
The portfolio leakage that happens as a result of sloppy tax means you miss out on having that extra money in your portfolio over time, meaning you’re losing out on long-term compound growth.
Sloppy tax is leaving money on the table, and tech professionals are guilty en masse.
Accumulating Wealth: Finding Your Financial Path
When we think about ways to accumulate wealth, there are a few paths one can take. A few common examples include:
● Accumulating real estate
● Investing
● Creating a side hustle that generates passive income
Each path offers unique opportunities and challenges, but regardless of how you choose to grow your fortune, there is always a 100% efficient way to execute your financial strategy. Any deviation from the optimized way to do it is what we at Novel Wealth call sloppy tax. It’s the “tax” you pay for being less than perfectly optimized.
Why Sloppy Tax Matters for Tech Professionals
If you’re a tech professional, chances are you’re in a high-income tax bracket. In Ontario, for instance, the highest tax rate reaches an eye-watering 53.53%. This makes it even more critical for you to ensure your financial plan is as tax-efficient as possible.
Consider this: when you hold stock in a company that pays a foreign dividend, it’s taxed at the highest rate. Over time, this can eat into your returns significantly. Similarly, if you invest in growth stocks that don’t pay dividends and sell them later for a profit, you’ll face a capital gains tax rate of 26.76%. While these tax rates might seem unavoidable, the reality is that with the right planning, they can be minimized—or even eliminated.
Common Examples of Sloppy Tax
Below are some common financial missteps that contribute to paying sloppy tax:
● Inefficiently Structured Portfolio: Incorrect use of tax shelters can result in missed opportunities for tax elimination or deferral, and growth.
● Inefficient RRSP Contributions Between Spouses: Contributing to the wrong spouse's RRSP or making non-optimized contributions can hinder long-term gains.
● Paying High Fees: Choosing investment options with high fees when comparable or better, lower-cost options exist is a common form of sloppy tax.
● Company Matching Pension Errors:
- Not Enrolling: Missing out on free money from your employer’s matching contributions.
- Not Contributing Enough for Maximum Matching: Leaving money on the table by not maximizing contributions.
- Contributing more than necessary: Contributing more than is necessary to get the maximum matching from your employer.
● Penalties for Over-Contribution to RRSP/TFSA: Over-contributing can result in steep penalties that could be easily avoided.
● Late Fees and Unnecessary Bank Charges: These small, recurring costs can add up over time.
● Paying for Redundant Insurance: For instance, creditor protection insurance might be unnecessary if other adequate coverage is already in place.
● Paying Unnecessary Tax: This includes not leveraging available tax credits and deductions or improperly structuring income streams.
How to Avoid Sloppy Tax
Avoiding sloppy tax requires a combination of awareness, proactive planning, and strategy. Here are a few practical tips:
● Move Your Vested Company Shares into Registered Accounts: If you hold shares that vest, move them into a registered account such as a TFSA, RRSP, or RESP as soon as possible. This helps shield future gains from unnecessary taxation.
● Regularly Review Your Portfolio: Ensure that your investment portfolio is structured to maximize tax benefits and minimize inefficiencies.
● Maximize Employer Contributions: If your company offers a matching contribution to your pension plan, take full advantage of it. Not doing so is akin to leaving free money on the table.
● Work with a Financial Planner: A financial professional who specializes in tax-efficient strategies can help you identify and correct inefficiencies in your financial plan.
The Bottom Line
Sloppy tax isn’t an inevitability. By making thoughtful, informed decisions and optimizing your financial strategy, you can avoid these unforced errors and keep more of your hard-earned money working for you. At Novel Wealth, we’re committed to helping our clients build and maintain tax-efficient portfolios so that every dollar is maximized.
Don’t let sloppy tax quietly eat away at your wealth. Take the necessary steps now to identify and eliminate inefficiencies in your financial plan and start making your money work harder for you.
Experience Novel Wealth: You’ll love our personalized, done-for-you service that goes beyond big banks and DIY platforms - and saves you fees. Reach out to a Novel Wealth Advisor to get started today
