• Treavor Dodsworth

#148 - Three Types of Money


Three Types of Money

I love writing about taxes. I liken them to a massive puzzle or a strategy game. I love the complexity and trying to get to the most optimal end. In fact, in my younger years, I was quoted in Investment News as saying “taxes can be lots of fun.” Not one of my more intelligent quotes but I’ll stand by it. While I realize 99% of people do not enjoy reading or learning about taxes, I do believe that in personal finance simple education can go a long way in assisting people in using their funds to reach goals. Below is a quick definition of the three general tax types of invested assets.

  1. Tax Deferred - You receive a tax deduction when making the contribution but both the earnings and growth are included in taxable income when withdrawn. For example, deductible contribution to a Traditional IRA.

  2. Tax Free - You don’t typically receive a deduction when making the contribution but the contribution and earnings are tax free when withdrawn (if done correctly). For example, a Roth IRA contribution.

  3. Taxable - You don’t receive a deduction when making the contribution. You are taxed on any realized gain or dividends. For example, investments purchased in a joint brokerage account.

There actually is kind of a fourth type that I won’t go into that is somewhat a combination of Tax Deferred and Tax Free. It is unfortunately way more complicated than the above and there are more exceptions than can be counted. For example, Health Savings Account contributions receive a tax deduction when contributed and come out tax free if used for qualified expenses. On a dollar-for-dollar basis, they are the most tax-efficient investment vehicles that I am aware of. Another quick note, it isn’t always as simple as looking at the account type to know what type of money is in the account. For example, a 401k can have both Tax Free and Tax Deferred money in the “same account.” Below are three takeaways:

  1. Be aware of what type of money you are buying and selling before you make trades. Will this cause a taxable event?

  2. Be aware of what type of money you are withdrawing before you withdraw from an account. Will this cause a taxable event?

  3. Be aware of what type of money you have. For example, $100K Tax Deferred dollars is “worth” significantly less than $100K Tax Free dollars (unless you can utilize a strategy to get the Tax Deferred money out without paying tax).

Thank you for taking a quick few minutes to learn about taxes and investments this weekend. I hope you have a wonderful day!

 

Interesting Articles/Videos

A Wealth of Common Sense - We're Still in a Bear Market You Know

  • “In his book The Four Pillars of Investing, William Bernstein offers up one of my all-time favorite stock market analogies courtesy of Ralph Wanger, a portfolio manager from the Acorn Fund:

  • He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner."


 

Thank you for reading!

Thanks! Message sent.

All written content on this website is for information purposes only. Opinions expressed herein are solely those of Sycomore Financial, unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. The owner of this website takes great care to thoroughly research the information provided to ensure that it is accurate and current. Nonetheless, the content on this website is not intended to provide tax, legal, accounting, financial, or professional advice, and readers are advised to seek out qualified professionals that provide advice on these issues. All information or ideas provided should be discussed in detail with an advisor, accountant, legal counsel, and/or other pertinent professionals prior to implementation. In addition, the owner cannot guarantee that the information on this website has not been outdated or otherwise rendered incorrect by subsequent new research, legislation, or other changes in law or binding guidance. Neither Sycomore Financial or it's owner shall have any liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website. In addition, any advice, articles, or commentary included on this website do not constitute a tax opinion and are not intended or written to be used, nor can they be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. Any mention of an investment product or solution is not a recommendation to buy or sell. ETFs that are mentioned may not accurately reflect the market segment mentioned. Past performance is not a guarantee of future results. Any mention of rates or return should not be seen as a guarantee those rates or return will be received.