In part 1 last week, I discussed the two best kinds of money - free money (by far thr best) and tax-advantaged money (a close second). Today, I will review the last two kinds of money - tax-deferred money and taxable money.
TAX-DEFERRED MONEY
Tax-deferred money is the type of money with which most people are familiar. It is our traditional IRA, employer-sponsored retirement plan or a non-qualified annuity. Essentially, you put money into an investment vehicle that will grow in value over time and you do not pay taxes on the earnings until you distribute them. Once the money is distributed, taxes must be paid.
TAXABLE MONEY
Taxable money is everything else and is taxable today, later, or whenever it is received. Some investors own stocks or mutual funds outside of an IRA or employer plan. The money that most likely purchased the stock/fund was taxed when it was earned or received. Any interest or dividends that the stock/fund pays throughout the year is taxable. And if you sell that stock/fund at a gain, you pay tax on the gain. I'm all for paying my share of taxes but three different taxes on one account seems a bit much.
OUT OF BALANCE
More often than not, investors are out of balance with their kinds of money. They usually have a lot in tax-deferred money, quite a bit in taxable money, and very little in tax-advantaged money.
One final question for you:
If you’re like 99% of Americans, you answered that you believe taxes will go up. Based on the state of America's current financial picture, I would agree with you. If tax rates are going to go up, be smart and start planning by tax diversifying today and avoid that tax bomb in retirement!