Where to Put Your Money?

Real estate professionals always talk about location, location, location. Where a property is located has a lot to do with its value. Location also matters if you’re looking to maximize the assets in your investment accounts. We’ll get to that in a second,

But, first his week’s segment on WYFF News 4: How the Fed pause and latest AI developments may affect your money…

Now, let’s dive into where you should put your investment dollars to maximize their value.

There’s an adage in personal finance, related to income: it’s not what you make. It’s what you keep. Basically, it implies, you can make a lot of money, but if you spend every dollar, it’s going to be hard to build lasting wealth. Conversely, if you’re still able to find ways to save on a smaller salary, you’re in better position to grow wealth.

This was one of the basic premises of the book, Rich Dad, Poor Dad.

You can apply the same principle to your investing. If you look at your accounts, again it’s not what you make, it’s what you keep. Let’s say you have three investment accounts: a brokerage account, an IRA and a Roth IRA. There’s the exact same balance in each - $1 million dollars (said in Dr Evil’s voice from Austin Powers).

If you’ve repeating that line in your head over and over again, this newsletter was a success.

Okay, let’s proceed with a question: If there’s $1 million in each account, they should be worth exactly the same to you, correct?

Nope!

That $1 million is simply a stated number. In most cases, it’s not what you’ll keep. You can thank Uncle Sam for this.? The whole reason there are so many different types of investment accounts is because each has its own rules and restrictions…and tax treatment.

Let’s start with the brokerage account. It’s basically a savings account that allows you to hold a wide variety of investments. You don’t get any tax breaks when you fund the account, but you do get a more favorable tax rate if you hold investments for more than a year. You’ll qualify for long-term capital gains treatment, which is a lower rate for most taxpayers. 15% to 20% depending on your income. ?

Here’s an example:

You bought $500,000 of a stock fund two years ago. Now it’s worth $1 million and you decide to sell. You made $500,000. The Federal tax for most people will be 15% of the earnings = $75,000. So, in this example, the real value of your brokerage account is $1 million minus the $75,000 you paid in taxes for a total of $925,000.

Now to the Traditional IRA. In these accounts, you likely got to defer paying any taxes until you take money out in retirement. But, the catch is that you’ll pay ordinary income tax on the entire amount of your withdrawal. Let’s say you take money out of the account over the course of several years. Each time, you were taxed at a rate of 22%. In this case, $1 milllion gets fully taxed at 22% meaning you’d pay $220,000 in taxes. So, your account was worth $1 million minus the $220,000 you paid in taxes for a total of $780,000.

Finally, the simplest account to analyze, the Roth IRA. Here you did not receive any tax benefit when you funded the account, so you’ll likely not have to pay any taxes on the money you take out of the account in retirement. So, your $1 million account is truly worth $1 million.

These are simplistic examples, but they illustrate an important point: the real value of each account is not the number on the statement. It’s what you’ll keep after Uncle Sam grabs his share. As you’re evaluating which investments to buy, think also about where to buy them, in which type of account.

How to decide?

There are far too many factors to consider, but start with your current tax rate. Ask yourself if the tax rate you’re paying today is higher or lower than the rate you think it will be when you’re taking the money out. If the tax rate is higher today, then it may make sense to take the tax break today by utilizing a tax-deferred account like a Traditional IRA (401k/403b, etc). If you expect your tax rate is lower today, then it may make sense to utilize the Roth IRA (or Roth 401k).

Meantime, if you’re looking to invest for non-retirement goals, then the flexibility of the brokerage account may be best.

Other factors to consider include:

• What types of accounts may you inherit from loved ones?
• What are your charitable goals?
• What other tax breaks may be available depending on your income?

There are lots of moving parts to keep under consideration. And, in truth, there’s no way to know for sure what’s going to be the perfect strategy. You can’t possible know what the tax code is going to look like in the future. Nor can you know exactly how much money you’ll need or want to spend and precisely the timeline for spending it. ?

The real key is creating flexibility for how you’ll get your retirement income. That will give you the best opportunity to take advantage of the tax code year in and year out, hopefully helping you keep more of what you made.

Alright, time for you to respond:

How much do you think about tax strategy when making investments? ?

This material is provided as a courtesy and for educational purposes only.? Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.?

?All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.

Advisory Services Network, LLC does not provide tax advice.? The tax information contained herein is general and is not exhaustive by nature.? Federal and state laws are complex and constantly changing.? You should always consult your own legal or tax professional for information concerning your individual situation.

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