Part 3 Analysis of Investment Accounts Post Tax Accounts

Hi welcome to family life partners. This is our weekly blog series and you are watching the third part of a five part series that we’ve done on a different investment accounts. So if you have a call the other to make sure you go back and watch them and then we have two more after this. But today we’re talking about post tax savings accounts. We’re going to first start off with the IRA. Now we talked about the IRA rate in the pre-tax accounts but you could also save in an IRA on it after tax basis as well. So when we say after tax basis I think pretty much everybody knows what I’m talking about. But just in case. That means that you’ve you know you get paid on a Friday. Money that’s in your checking account and you want to have some of that money put into an investment account for some financial goal that is on an after tax basis. That’s what we’re talking about. So when an IRA a again you can invest in an IRA and a pretext basis but you can also do it on an after tax basis. Now there is one catch to investing money in an after tax basis that want to make sure that you keep in mind and that if you do this on a regular basis make sure you talk to your tax preparer about this. If you have money in an IRA or a 4 or 1 k that you might eventually rolled to an IRA at some point in your in your life and you’re also contributing to an IRA on an after tax basis.

Make sure you don’t ever commingle the two together meaning put them together. If you do it there’s a weird calculation or accounting calculation you have to do because you’re mixing pre-tax and post-tax dollars and it gets very complicated and it’s a formula you have to carry on throughout your life essentially when you’re taking distributions it gets very complicated. So just make sure if you’re contributing to a forum like a or an IRA on a pretext basis those dollars stay on a pre-tax Ira. And if you’re making contributions to an IRA and a post-tax side just make sure those are are kept separate the contribution limits for an IRA. This is two thousand ninety. Six thousand dollars. If you’re younger than the age of 50 if you’re over the age of 50 you can contribute an additional thousand dollars. So the average good is a good way to invest no doubt. The second account that most people are familiar with is a Roth IRA. Martha Raye has the same contribution limits as the IRA. No no difference. However it’s treated a little bit differently from a tax perspective. So you do contribute to that Roth IRA on a pre on a post-tax basis like the IRA that the investments within the account grow tax deferred meaning you don’t pay tax on them. So if you get dividends and interest in capital gains and things like that you don’t pay the tax then the difference with the Roth IRA is that the distributions from the Roth are tax free. Unlike the IRA where it’s taxable. The Roth IRA is non-taxable. So that’s a great thing it’s a great way to save.

We have a ton of clients doing it. The issue with a Roth IRA is that you have income limitations. So for example in 2019 if you’re an individual and you make more than one hundred and thirty three thousand dollars you begin to phase out the ability to contribute to a Roth. If you’re a couple and you make more than one hundred ninety three thousand combined then you start to phase out of being able to contribute to a Roth. However there is an exception. Make sure that you go back in and search for our blog on Backdoor Roth IRAs because there are ways around it which kind of got know what you’re doing. There’s a specific way you have to do it. The other account type that we talked to a lot of clients about that sometimes can be misunderstood and not necessarily utilized to its fullest. Is a college five to nine plan. Most clients or have heard of them or maybe invest a little in them. Every month. But there are ways to actually take advantage of that account type. And so we walk clients through that and through the benefits behind contributing to a Roth maybe more than what they’re doing now it takes in in anticipation of college expenses. Now here’s how the college fact in and plan works. There’s really no contribution limits. There is a maximum which I’ve never really run into a client that ever has put the maximum. But I think it’s like two hundred thirty nine thousand dollars is the max that you can put in college five to nine plans.

But for the most part that doesn’t really affect that many folks. However here’s how the taxation that works so the contributions made into the five to nine are made on an after tax basis. The investments grow tax deferred. Just like the Roth. Just like the IRA. They grow tax deferred meaning dividends and interest things like that you don’t pay tax on. And then as long as the withdrawals are made equal to expenses for used to be higher education it’s. It can also be secondary education. Those withdrawals as long as they’re equal to. The expenses. It’s tax free. So we work with clients to show them the impact of saving in an account like this and offsetting college expenses later down the road. So again that’s a even if sometimes what clients say why don’t they want to pay 100 percent for college I want my you know what my children to work while they’re there I want my children to you know to have to earn their way to their college expenses not unless they want to pay a hundred percent of it. There’s still ways to take advantage of that investment account and we walk clients through that. The last account that we’re going to cover today is just a traditional brokerage account. What we call a non retirement account or a non qualified account and that’s a traditional brokerage account you put money into it. You can invest it. The contributions are made on an after tax basis. Now here’s a little bit of difference in a traditional brokerage account or what we call a non qualified account. The investments are not growing tax deferred.

So as you get dividends and interest they you report those on your taxes. If you have capital gains you pay those kind of along the way but the distributions can be treated a little differently. So the distributions and typically what we do is we have cash that’s sitting in an account and that’s accumulation of dividends and interest over time. When clients get into distribution mode we can take distributions out of that account and they don’t pay any unless they pay any taxes. Now if we have to sell a security for example to create the cash to do the distribution there could potentially be capital gains to pay there. But but that’s you know again that that’s a an account type where you’re investing on an after tax basis. You don’t get the preferential tax treatment on the growth but the distributions are treated a little differently in that you know typically we just have cash and we take the withdrawals. So that is sort of the core of the core account lineup of a post tax investing in the reason we sort of look at pre-tax and post-tax again. I’m going to say this again you’ll hear me say it over and over and over if you watch all of these videos. It’s incredibly important to have different buckets of income or different buckets of investment accounts. You’ve got pre-tax accounts and you have post-tax accounts. It’s very important to make sure that we’re allocating dollars every month every year. However often you do it to pre-tax accounts and post-tax accounts. And again there’s a variety of accounts in each one of those buckets.

But what we’re trying to do is allocating enough dollars to when you get into retirement or some point down the road when you need distribution we’re able to pull assets from different buckets and we pull assets from different buckets depending on what the need is. And so that’s all it’s all outlined and typically in a cash flow plan that we would do if the client would show them the impact of their saving in a pre-tax basis in a post-tax basis not only today from a tax standpoint but also 20 30 years down the road when they get into full distribution mode of the impact of them having saved money on a pre-tax and post-tax basis. So anyway sorry. I know that was long but it’s very important that we outline all the different accounts that are available on a post-tax basis and the importance of saving pre-tax and post-tax. The very next video that we’ve got. This is will be the fourth segment is the where to allocate dollar one. So what’s the best account to allocate dollar one all the way down the dollar. However many you save. So that’s coming up next and we’ll see it actually.