Part 1 Analysis of Investment Accounts Pre-Tax Savings

Hi welcome to family wealth playing partners I’m Brian Ramsey and this is our weekly blog series. Today we’re kicking off the first of a five part series on the different account types. Now we’re going to evaluate these on a number of different ways. Today we’re talking about pre-tax investing versus post-tax investing. Week two we’re going to be talking about the different accounts that make up a pre-tax investing with three we’re going to be looking at post tax investing in the different accounts associated with that week for we’re going to be talking about where to allocate dollar ones so what’s most effective account type at allocating your dollars down to the least attractive account. And then week five we’re going to be talking about the taxation of each of the accounts so that makes up our five part series but today we’re talking about pre-tax versus post-tax. So we talk to clients all the time about having two different buckets of money or savings when it comes to how to allocate dollars.

So you get a pretext bucket and a post-tax bucket. Let’s look at the value let’s look evaluate each of these account. So on a pre-tax side let’s use a thousand dollars as an example on a pre-tax side. We take a thousand dollars that comes out of your check before you get taxed and it’s invested in the county. Now most people are aware of like a 4 or 1 k for 3 B. That’s a very common pre-tax account. As that money’s invested. It grows what we call on a tax deferred basis meaning dividends and interest that are that you accumulate in the account. You don’t pay tax on its deferred till later. And then when you withdraw all the funds in retirement it’s taxable. Now not in every case and there’s an exception to the rule. We’ll talk about that next week when we get into the pre-tax account but for the most part we find when we work with clients that some form of their distribution is taxable in retirement. So let’s take a thousand hours for example and take a thousand dollars invested in a 4 1 k or 4 3 b it comes out pre-tax so you not pay tax on that money yet it grows tax deferred which means dividends and interest again or not you’ll be taxed on that. And then when you withdraw if you want when you get into retirement when you get into retirement you want that same thousand dollars you may have to take out eleven or twelve hundred dollars to get that same thousand dollars because it’s gonna be taxable again not in every case but in most cases that’s what we see. Now let’s look at post-tax savings. So post-tax savings is money that you’ve already pay tax on money may be sitting in your checking account and you want to allocate those dollars to an investment account. When you allocate those dollars to an investment account those in those investments grow sometimes on a tax deferred basis sometimes not. If it’s not on a tax deferred basis along the way when the money is invested you may get dividends and interest and capital gains that you pay tax along the way. And then when you get to the distribution phase some of the accounts are either tax free withdrawals or they may be taxable and we’ll get to that in just a second. We do get more detail that in week three and we talk about post tax savings accounts but let’s go back to the same 2000 scenario. You invest the money in a on a post-tax basis means you already pay tax on it. It grows and we’ll say it’s a non retirement account just a general brokerage account. So as you invest the money you’re gonna pay dividends and interest along the way. And then when you go to take the withdrawal in retirement you may have to pay taxes. If it’s invested in you sell it to the capital gain you may have that or if the money is already accumulating cash you can withdraw that same thousand dollars out of the account tax free. And the reason we talk so much about the pre-tax and post-tax accounts with clients is there’s a big difference between investing today in a pre-tax and a post-tax account and looking at the impact to that same investment 20 30 years down the road. It’s a big difference. And so when we get into the distribution phase of life we want to make sure we have assets in both buckets so that we’re not having to take all of our distributions out of a pretext bucket and having it taxed. And so it’s just a good it’s a good investment strategy to make sure that yes you’re saving on a pretext basis but you’re also saving on a post-tax basis. So that’s it for this week. Tune in next week we’re gonna be talking more detail around pre-tax and the accounts that are associated with pre-tax savings. That’s it for this week. We’ll catch you next week. Well we’re talking pre-tax savings.