Other Retirement Facts:

We must understand the tax consequences tied to each of our retirement accounts. You’ll want to have a diversified tax strategy and plan. Investing in multiple types of buckets will hopefully keep you from paying all your taxes at once. Today, we will go over the tax consequences of 5 different types of accounts and the pros and cons of each.

Tax-Deferred Account

These are the most common types of retirement accounts. Your 401(k) or IRA are an example of this type of investment vehicle. Tax-deferred accounts have been immensely popular because you don’t have to pay taxes as you put money in. However, you have to be aware of the taxes you’ll pay on the growth of your account once you take distributions. You are not getting a tax deduction; you are simply getting a deferral.

Tax-Free Accounts

An alternative to a tax-deferred account is a tax-free account. For example, Roths are tax-free. You pay tax on the principle as you are putting money in. Any growth is tax-free, as long as you follow the rules! Some of these accounts require you have a Roth open for a certain number of years before you qualify for tax-free distributions. Roths have income and conversion limitations you need to keep up to date on. You’ll also have to be a certain age to take distributions out without a significant penalty. These rules are always changing so it’s best to discuss the best strategy with your advisor.

Taxable Accounts

Taxable accounts are investments held: mutual funds. stocks, etc. You can take out this money whenever you want! The downside is you’ll pay taxes on growth. Taxable investments can create a challenging tax planning strategy. Every year you’ll have to keep track of how much you made and the tax consequences to that growth.

CDs

CDs probably aren’t the best investment anymore, especially in this interest rate environment. Back in the day, interest rates were great, and if you could get locked into one of those higher rates you could make money. With CDs, if you reinvest, you’ll get locked into a lower rate. Generally, CDs are not going to be our best option when planning for retirement.

Life Insurance

Do you think of life insurance when it comes to tax planning? The beneficiary will not have to pay taxes on the benefit and that can make up for the loss of income. But there is a lot to consider when it comes to life insurance. You’ll want to make sure this investment is structured in the right way. Don’t write off this type of an account, but don’t go into it without understanding. Having a financial advisor can help you understand what type of accounts will be best for you and your scenario.

Listen to the entire episode or skip ahead using the timestamps below. 

[1:00] – Tax-deferred

[3:11 ]– Tax-free account

[6:00] – Taxable accounts

[7:47] – CDs

[9:43] – Life Insurance

A Quotable Moment:

“You’re not really getting a deduction, you’re deferring.”

-Phil Putney