Tax Talk – How different Investments Are Taxed

Tax Talk – How different Investments Are Taxed

In the latest market update blog, I employed an analogy involving cars. And I will continue using it as we discuss how taxation affects various investments


We’re going to pretend the tax is kind of like a toll that we all go through.


We have three different categories of how things could be taxed. First, we have taxable account. You have to stop at each tool and pay every time you go thru (each tax year).


There are also a couple of different ways that you could have to pay the tax. You will have a base rate, similar to a car going thru the toll. Which in this case is income tax, which is based at your current rate.


But there is also another tax that can be due, and that is capital gains tax. (we talk about this in more detail in Tax Efficient Investing Part 1) It’s like the tolls that trucks have to pay at the toll both based on the number of axles.


Next up is tax-deferred investment vehicles. If you have an Ipass then you end up paying the toll (tax) at a later time, but unlike an Ipass, the rate(tax) we pay is based on when we pay it.  Later, when we take money out, we have to pay tax. This category includes not only investment vehicles, but just as an Ipass holder can switch cars, the investor with these tax-deferred accounts can switch to other investment vehicles, and it’s the investor who decides how to tax the vehicle.


Traditional IRAs as well as any type of 401k or 403b or any type of retirement plan go into that tax-deferred column. 


So to recap, if it’s just non-qualified money that means you saved it outside of any government-sponsored program, then it’s taxed based on how the vehicle itself is taxed, however, if it s a government-sponsored program, that is the driver and determines how the account is taxed.


The last category is tax-free investment vehicles. This means you paid the tax up-front before you invested and now all gains are tax-free.

Roth IRAs, Roth 401k’s, HSA plans 529 or other kinds of college plans, and most cash value life insurance falls into this category. (you can get more details by downloading our free report of the month Life Insurance as an Asset Class)


Hopefully, this analogy helps a little bit as well let’s talk.


If you have money in category one, then now is the time to plan and reduces those hidden capital gains taxes. 


If you’d like to schedule a personal one-on-one call with Michelle, click HERE to access Michelle’s calendar and schedule a day and time that is convenient for you.

Want to share this blog post? Click the links below!

Register for Monthly Newsletter