People can be too focused on tax savings today and not having a balanced approach to their tax liabilities over a lifetime. The reality is taxes work in long cycles. Today, we are actually on the lower end of the cycle! This means over time, clients will be faced with higher tax rates, less deductions and other limitations.

We have designed three buckets for taxes to frame this conversation.

    • Taxable- The first is a taxable bucket where you have your checking and savings accounts, mutual funds, stock and real estate. This is money that’s easily accessible. If you have your holdings for at least one year, it typically means you will be taxed at capital gains rate, so 15%, 20% or 23.8% depending on your income. You typically don’t want to pay ordinary income tax in this bucket. Be very wary of banks offering CDs and other products which are taxed as ordinary income. Your returns after tax and inflation can be negative or very small!


    • Tax Deferred - The next bucket is tax-deferred. This bucket includes some annuities, IRAs and 401(k), along with other work retirement plans. For the most part, this money is deductible from your income and any growth is tax-deferred. This means you don’t pay taxes until you take the money out of the account! The compounding of interest can be huge in these accounts. The downside here is, in general, you aren’t able to access this money penalty free until age 59 ½.


  • Tax Free- The third bucket is tax-free. This is one of my favorite buckets and one of the most underutilized vehicles out there. Typically, you put in after-tax dollars, but your growth and subsequent withdrawal are tax free! If you can still save money after maxing out your work retirement and Roth IRA, then for supplemental retirement, we help clients look at implementing life insurance strategies to add to their tax-free bucket. Be careful though! These products can be high in commission and are for someone who can commit to the product for at least a decade.

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