Unveiling the Treasures of Tax Planning: A Strategic Exploration
Today, we're discussing a topic that might sound a bit fancy at first but stick with me
because we're going to break it down in a way that it makes sense (hopefully!)
Now, imagine you're on a treasure hunt. You've got three different kinds of treasure
chests: pre-tax, Roth, and taxable accounts. Each one holds its own kind of treasure,
and it's up to you to figure out the best way to fill them up and then disperse them so
your Uncle Sam steals less of your hard earned treasure! Okay, yes, the metaphor is a
stretch but we tried!
First, let's talk about pre-tax accounts. These are like magic chests that let you save money without having to pay taxes on it right away. It's like getting to keep more of your allowance to spend on toys and games now without having to give any to the taxman… Pretty cool, right?
2. Now, picture Roth accounts as treasure chests filled with special coins. You put your money in after paying taxes on it, but here's the best part: when you take the treasure out later when it has hopefully grown for you and it’s now tax-free! It's a little like having a secret stash of candy in the house your that your children can’t have!
3. Last but not least, we've got taxable accounts. These are like regular old piggy banks with no restrictions on how much you put in the piggy bank. You put your money in after paying taxes, and when you take it out, you might have to pay taxes on any extra treasure you've earned along the way. Many ask why would I use these accounts… Once you learn the uses though many change their mind and use them often!
Now, here's where things get real interesting. You might have heard that using all three
kinds of accounts is the smartest move, but guess what? That's not always the case.
Sometimes, it's better to focus on filling up one chest more than the others, depending
on what's happening in your life.
Let's say you're having a year where you're earning a lot of “dough/cash/big bucks” or
will retire in the near future. During times like these, it might be a smart move to put
most of your treasure into pre-tax accounts. Why? Because it can help lower how much
you owe the taxman right now, leaving you with more to use now and maybe pay the
taxman a lesser percentage than you would now.
On the other hand, there might be years when it makes more sense to get your
business partner off your back (IRS) and pay them their share now. Maybe based on
your age, goals, income, and other investments it makes the most sense. In these
times, it may be wise to focus on filling up your Roth treasure chest.
So, the bottom line is this: using pre-tax, Roth, and taxable accounts is like having
different tools in your tool bag. You don't have to use all of them every year, but
knowing when to use each one can help you keep or give more of your hard-earned
money! (Unless you prefer giving to the IRS more than you do already!)
Now, if you're feeling a bit overwhelmed by all this talk of treasure chests and tax stuff,
don't worry. That's where a West Michigan financial planner comes in. These are like
the professional treasure hunters who can help guide you through the maze of financial
planning and make sure you're making the best decisions for your future.
And here's another part. We are a fiduciary financial planner, which is legally obligated
to always put your best interests first.
There you have it! A simple beginning guide to smarter financial planning. Remember,
it's not about using all the treasure chests every year, but rather knowing when to use
each one to your advantage.
Disclosures:
This is not tax advice. Consult a tax professional. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. AI (artificial Intelligence) sourced articles may be prone to error, due to the vast information they assemble from the internet. Always confirm any questions or concerns you may have with an experienced professional. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual