The Tax Deferred Account

The only difference between death and taxes is that death doesn’t get worse every time Congress meets.

- Mark Twain

Continuing our discussion on “asset location,” we turn now to the tax-deferred account.

These are accounts that are exempt from the tax man currently, but will eventually be taxed – typically when you want to use the funds. Think of your retirement accounts like 401(k) or IRA. 

Also, a Health Savings Account is tax-deferred and you may never pay taxes if you use the funds for medical purposes.

Because these accounts are not being taxed currently, we want to hold investments that pay higher dividends and capital gains. These are our higher turnover funds and funds that create higher levels of income.

Typically, this includes our fixed income and high yield investments along with large cap stocks which pay higher dividends.

Once again, your tax strategy should never overrule your risk tolerance, so you may end up holding some lower dividend investments in your tax-deferred accounts, but they should be minimized.

Investment allocation is more an art than a science.

Next week, we’ll discuss “never taxed again” accounts.

So, what do you think? Do you have most of your retirement savings in tax deferred accounts? Does it make sense to have so much in a single type of account? How will tax law changes between now and retirement affect you?

Comment here or send me a direct email at [email protected].

Or if you’re ready to have a conversation about improving your financial life, schedule a complimentary phone conversation here.