There are three types of accounts—that are not the same as my bucket strategy—that I believe everyone needs to use to save for their retirement. These accounts will benefit you in retirement. They are Roth accounts, traditional accounts, and brokerage accounts. Listen to this episode of the Retirement Made Easy podcast to learn more about each and how they can benefit you!
You will want to hear this episode if you are interested in…
- [4:33] Get a FREE 30-minute coaching call at RetirementMadeEasyPodcast.com
- [7:15] Account Type #1: Roth IRA, 401k, 403B, or TSP
- [10:13] Account Type #2: The traditional IRA, 401k, 403B, or TSP
- [14:48] Account Type #3: A brokerage account/trust account/non-qualified account
- [18:42] Why you want all three types of accounts for your retirement
Account Type #1: Roth IRA, 401k, 403B, or TSP
With a Roth account, you pay the taxes now. You can invest the money however you want and it will grow tax-free until your death. When you retire and take withdrawals from the Roth IRA, you will not have to pay taxes on those withdrawals. Biting the bullet and paying taxes now, in a favorable tax environment, can make a positive impact on your retirement.
If you’re younger and just starting out with your first job, you’re likely in a lower tax bracket. It’s far easier to pay 12% taxes now than when you make more money and land in a higher tax bracket down the road. Another bonus? You’re never required to take withdrawals from a Roth IRA.
Account Type #2: The traditional IRA, 401k, 403B, or TSP (tax-deferred)
With a traditional tax-deferred account, you get a tax deduction when you contribute. Any money matched by your employer is pre-tax as well. So taxes have not been paid on what you’ve contributed or on the growth. So when you retire and want to make withdrawals, you pay taxes. And once you hit age 72, you have to take a required minimum distribution and pay the taxes on them.
What’s the problem with this? The more withdrawals you take, the more taxes you pay. If you take out too much money, it can throw you into the next tax bracket. If you withdraw too much it can also impact the taxes you pay on social security, the price you pay for Medicare Part B, and even capital gains taxes. So what’s the benefit? You get the tax deduction now.
Account Type #3: A brokerage account/non-qualified retirement account
A brokerage account doesn’t have a rule that enforces a 10% withdrawal penalty if you make a withdrawal before age 59 ½. You can put money in and take it out at any time, an unlimited amount of times, with no restrictions. You can invest it in index funds, mutual funds, stocks, bonds, golds, ETFs—whatever you want. Is there a downfall? Any capital gains, dividends, or interest earned are reported on a 1099 that must be reported with your taxes (i.e. you pay taxes on them).
Why is a brokerage account so beneficial? Brokerage accounts can save you a lot of money in taxes. If you’re in the 12% bracket, you can harvest capital gains and pay zero taxes. However, if you’re in the 22% bracket and harvest capital gains, you’ll pay 15% long-term capital gains.
Why do you want all three types of accounts for your retirement? Listen to hear why I think it’s important for you to have all of the accounts working hand-in-hand.
Resources & People Mentioned
- 3 Steps to Retirement Planning
- Get a FREE 30-minute coaching call at RetirementMadeEasyPodcast.com
- Episode #104: What You Should Expect from Your Financial Advisor
- Episode #24: Why I Love the Retirement Bucket Strategy
- Episode #93: The Importance of Roth Conversions
- Episode #30: Why You Need a Roth IRA in Your Retirement Portfolio