Planning a Tax-Deferral Strategy for your Pre- and Post-Tax Investment Accounts
Sign up for our FREE Monthly Email Newsletter
In addition to keeping in the financial know, you may be interested in checking your credit score and report.
¹The credit scores provided under the offers described here use the Equifax Credit Score, which is a proprietary credit model developed by Equifax. The Equifax Credit Score and 3-Bureau scores are each based on the Equifax Credit Score model, but calculated using the information in your Equifax, Experian and TransUnion credit files. The Equifax Credit Score is intended for your own educational use. It is also commercially available to third parties along with numerous other credit scores and models in the marketplace. Please keep in mind third parties are likely to use a different score when evaluating your creditworthiness. Also, third parties will take into consideration items other than your credit score or information found in your credit file, such as your income.
²The Automatic Fraud Alert feature is made available to consumers by Equifax Information Services LLC and fulfilled on its behalf by Equifax Consumer Services LLC.
³Equifax Credit Report Control™ is only available while you have a current subscription to Equifax Complete Premier. Locking your credit file with Equifax Credit Report Control will prevent access to your Equifax credit file by certain third parties, such as credit grantors or other companies and agencies. Credit Report Control will not prevent access to your credit file at any other credit reporting agency, and will not prevent access to your Equifax credit file by companies like Equifax Personal Solutions which provide you with access to your credit report or credit score or monitor your credit file; Federal, state and local government agencies; companies reviewing your application for employment; companies that have a current account or relationship with you, and collection agencies acting on behalf of those whom you owe; for fraud detection and prevention purposes; and companies that wish to make pre-approved offers of credit or insurance to you. To opt out of such pre-approved offers, visit www.optoutprescreen.com/.
4We will require you to provide your payment information when you sign up and we will immediately charge your card $4.95. After that, we will charge the card $19.95 for each month you continue your subscription. You may cancel at any time; however, we do not provide partial month refunds.
Equifax® is a registered trademark and Equifax Complete™ Premier is a trademark of Equifax, Inc. © 2014, Equifax Inc., Atlanta, Georgia. All rights reserved.
For many of us, our investment strategy includes both pre- and post-tax investment accounts.
Pre-tax investment accounts include traditional IRAs and work-related retirement plans, such as 401(k)s, profit-sharing plans, 403(b)s, and defined-benefit pension plans.
With pre-tax accounts, federal and state income taxes have not been paid. If you contribute to an account like a 401(k) from your paycheck, you’ll see this reflected. (Note: Tax-deferred contributions are still subject to Social Security and Medicare tax withholdings.)
Tax deferral is a key concept here. Using a non-Roth 401(k) account as an example, money is deferred each pay period and invested according to your instructions. The money grows over time, and no income taxes are due on it, including any gains.
When you begin to withdraw the funds, this money is subject to full income taxation. There is no preferential treatment of capital gains. Your money is fully taxed, even if your investments are worth less than what you have contributed over the years.
For example, if your income is $50,000 in a given year and you withdraw $10,000 from a tax-deferred account, your taxable income is now $60,000, and this amount will then flow through your tax return.
Post-tax investment accounts are typically accounts where the money deposited has already been subject to income taxes. Examples include a taxable brokerage account or a taxable account with a mutual fund company.
With a post-tax account, all capital gains and income distributions are subject to taxes in the year received, based on the type of income they represent. Investment losses can also be deducted.
I am often asked which types of investments are right for various investment accounts. The answer depends on a number of factors, including your individual needs.
Assuming that your investment strategy includes taxable, tax-deferred, and perhaps some hybrid accounts, here are a few things to consider when deciding which type of account should hold a particular investment:
The answer as to which account should hold which investment may vary over time based on your current and projected tax situation:
While some of my financial planning colleagues may disagree, there is no hard-and-fast rule to determine which specific investment to hold in a certain account. Again, and I can’t stress this enough, tax planning is an important aspect of your overall financial planning, but it’s not the only one. I have seen far too many folks get so hung up on the tax impact that they make decisions that hurt them over the long term.
The biggest unknown in all of this is the future direction of income tax rates.
529 College Savings Plans Are Best For Saving For Your Grandchildren’s College Education
Bonds and the Bonds Market: A Basic Primer
The Volatility Index – Much Ado About Nothing
Annuities: The Good, The Bad, and The Ugly
Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.