Ep 19: Tax Consequences for Different Account Types

Different types of accounts have different tax consequences. Let’s talk about those advantages and disadvantages in different types of accounts and how you use them (or don’t) in your retirement planning.
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Show Notes For This Episode

On this episode of Saving the American Dream, we’re talking about tax consequences and what advantages and disadvantages you might have with them in your retirement planning.

Tax-deferred accounts

These are accounts most people are familiar with. We’re talking about 401ks, IRAs, pensions, business equity, etc., where you defer paying taxes until you pull out the money.

When you pull the money out, you’re going to pay ordinary income tax on whatever tax rates are at the time that you pull it out and whatever tax bracket you’re in at the time.

The pro is you’re only going to get taxed one time on it, which is going to be in the future. So you’re able to kick that tax consequence down the road. A con is that it’s not liquid. You have limited access to the money that you have in tax-deferred accounts.

For example, you have to pay a penalty and income tax to pull the money out before age 59.5, which is when you’re able to start pulling that money out with no penalty. Then you have required minimum distributions, which is another con once you’re 72.5. Then you have to start taking income out of it and paying income tax on that money that you pull out.

If you want to leave your retirement account or your tax-deferred retirement accounts for legacy purposes to your children or grandchildren, this is not a great asset for that. But if we’re talking about business equity or real estate equity, that’s a different situation.

Tax-free accounts

An example of this is a Roth IRA. There aren’t a lot of downsides to it. But if you end up being in a lower tax bracket and tax rates are lower when you pull the money out, that could be a disadvantage. That’s not likely to happen, though, because taxes will likely be higher.

Another disadvantage is you have limited liquidity on Roth IRAs and can’t touch it till you’re 59.5 without paying a penalty.

Listen to the full podcast or use the timestamps below to jump to a specific section.

Navigating the Show

[5:26] Tax-deferred accounts

[9:45] Tax-free accounts

[12:05] Taxable account

[15:46 ] CDs

[17:45] Life insurance

 

A lot of people just enjoy not paying the taxes early, but it might not be the best decision for you over the long term.

– Michael Schulte

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Copyright 2020 Saving The American Dream Podcast. Michael Schulte is an investment advisor representative and certified exit planner with WestPac Wealth Partners, located at 330 South Center Street, Suite 344, Casper, Wyoming 82601. The podcast is for informational purposes only. Individual risks and investment objectives must be reviewed prior to making any recommendations. Podcasts are for informational purposes only. Any guest speakers and their firms are not affiliated with or endorsed by PAS, Guardian, or WestPac Wealth Partners and opinions stated are their own. Guardian, its subsidiaries, agents, and employees do not provide tax, legal or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. Michael is a Registered and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 5 Centerpointe Dr Suite 150, Lake Oswego, OR 97035, 503-207-4550. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. WestPac Wealth Partners is not an affiliate or subsidiary of PAS or Guardian. 2022-140225 Exp 7/24