Happily Eating Table Scraps

Happily Eating Table Scraps

Sometimes, a hard lesson is realizing that you are not really that good or smart. And that living off of table scraps is the best possible outcome in life for you. I have come to realize that I am not high up the food-chain. Therefore, I had to optimize my table scraps strategy to become my nourishment.

“…yet even the dogs eat the crumbs that fall from their masters’ table.” Matthew 15:27

In this article I am talking specifically about these “table scraps” investments. I remember when I first told people about my investment strategy, they either dismissed or discouraged me. Everyone who had an ounce of care about me, said that I was making all the wrong decisions. Yet today, because of those decisions, I'm benefitting from dividends that are largely untaxed, while my retirement accounts continue to grow untouched. Below is a plan on how I developed my investment "table scraps" strategy.

TLDR: My Contrarian Wealth Strategy Steps

The Beginning

Everyone told me the same thing: "Don't invest outside of a retirement account, because you'll pay taxes." The typical financial advice insists that tax-advantaged accounts should be your primary focus, and taxable brokerage accounts should be avoided whenever possible. I completely ignored this advice and opened a taxable brokerage account anyway!

Then came the second piece of generic advice I broke: "Don't put dividend stocks in your taxable account because you'll pay taxes." The standard asset location strategy calls for holding tax-efficient investments (like growth stocks) in taxable accounts and less efficient investments (like dividend-paying stocks) in retirement accounts.

Again, I did the exact opposite. I deliberately placed my growth stocks in my retirement accounts and my dividend stocks in my taxable account. I knew what I was getting myself into, and I prepared for this beforehand.

The Work

I began systematically funding my taxable brokerage account with dividend stocks, starting with almost nothing. Then I added more, and so on. Eventually, I built it to generate a good amount annually in dividends. This is just from the taxable account that everyone warned me against.

The beauty of this approach became clear when my dividend income surpassed my expectations. I had created a machine outside my 401(k) with no penalty for early withdrawal. Meanwhile, my growth stocks could continue compounding inside my retirement accounts, untouched and growing tax-deferred.

Tax Advantage

Here's where the strategy becomes effective: When one stops working, the earned income drops to zero. The only income would be those dividends from the taxable account. If one follows this strategy, then it is possible to live off that dividend income.

Info: For 2024, qualified dividends are taxed at 0% if your taxable income falls below certain thresholds. According to the IRS, these brackets are $47,025 for single filers, $63,100 for head of household, and $94,300 for married filing jointly. Above these levels, the qualified dividend tax rate jumps to 15%.

As you can probably tell, I pay a very low effective tax rate on my income, because most of my income fell into that 0% tax bracket. The generic advice completely misses this crucial point: You can achieve a super low tax burden by structuring your income to consist primarily of qualified dividends!

“Then Isaac sowed in that land, and received in the same year an hundredfold: and the LORD blessed him.” Genesis 26:12

I enjoy my small income ”table scraps” stream that's largely untaxed, while maintaining the flexibility to buy and sell growth stocks within my retirement accounts with no immediate tax implications.

The Approach

The traditional advice about asset location isn't completely wrong. It's just incomplete, because it does not mention all the details.

The standard approach of holding tax-efficient investments in taxable accounts makes a lot of sense for high-income earners during their working years. But for those looking to minimize taxes in their non-working years, the rules change dramatically.

If you focus on qualified dividends in a taxable account, you can create a flexible income stream that can be structured to fall within the 0% tax bracket. This approach provides liquidity, accessibility, and tax efficiency that traditional retirement accounts simply cannot match!

Conclusion

Sometimes the best financial strategies are the ones that seem counterintuitive. While everyone else was avoiding taxable accounts and dividend stocks, I was building a small tax-efficient strategy that would eventually be successful.

The “table scraps” path I was told to avoid turned out to be my nourishment. I am and I will happily enjoy its value, and I hope you can do the same.

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