Sometimes you can make more money by saving taxes than you can by making more money. This is important to understand, particularly considering what is inevitable: History reflects that taxes tend to rise.
It’s important to understand the difference between taxable, tax deferred and tax-free investing. Let’s take a look at how each would affect a typical account. Suppose you started with $100,000 and added $10,000 each year for 20 years. Let’s presume a rate of return of 4 percent and a tax bracket of 25 percent.
- On a tax-free account, the account value after 20 years would be $516,893.
- On a fully taxable account, your rate of return is effectively only 3 percent. After 20 years, the account value would be $449,315.
- On a tax-deferred account, your account value after 20 years would again be $516,893. However, you have only postponed taxes. If you now paid them all, you would be left with an account value of $462,670.
A financial advisor can help you determine which is best for your individual needs. Here is some simple advice though: You should only pay taxes on money you are withdrawing as money to spend. Otherwise, there may be better ways to manage it. Visit www.familywealthadvisory.com for more resources and start uncovering what tax strategy works best for your situation.
Mutual of Omaha Investor Services, Inc. and its representatives do not provide tax advice. Consult your tax advisor for advice regarding your particular situation.
