Penny Wise, Pound Foolish
We all want to find and invest in a big investment opportunity of the year to get rich. There is nothing wrong with desiring to be rich. However, in the pursuit to find the next big opportunity, do not lose sight of the tiny details. Perhaps those tiny details are equally important to get you to your goals.
It helps to pay attention to how your windfall will be taxed. Use the right account to make the investments and understand how you can optimize your portfolio for tax efficiency. Sometimes, the tax savings from efficiently managing your taxes are greater than the gains achieved through a riskier investment.
Additionally, it is important to diversify your tax liability by allocating assets to differently taxed accounts. Taxation in the future, that is when you retire, is out of your control - the Congress or the political system can enact laws that could drastically change how your retirement accounts are taxed. For example, money in Roth accounts grow tax-exempt. However, it is a possibility that Congress enacts some laws that changes the way these accounts are taxed. As with anything out of your control, it is safer to diversify this risk by allocating your assets to the differently taxed accounts available to you today.
Here is a look at the trifecta of accounts and how they are taxed.
| Type of Account | Assets Invested | When taxed | What taxed |
|---|---|---|---|
| Traditional Brokerage Account | After tax assets | Every year | Realized gains, dividends, income |
| Traditional IRA | Pre-tax assets | At withdrawal | Entire amount |
| Roth IRA | After tax assets | Not taxed | None |
Talk with your financial advisor or book a time with us today to see if your portfolio is optimized to take advantage of tax efficiency.