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    Henry Yoshida
    Henry Yoshida

    Co-Founder & CEO

    In response to the COVID-19 pandemic, the IRS has extended the federal income tax filing due date from April 15, 2020 to July 15, 2020. If you have not yet contributed to your IRA for 2019, you have until the tax filing due date to make a contribution, or fund a new account via contribution. (Visit our Knowledge Base for more information.)


    Today I wanted to talk about a concept specific to the placement of your investment accounts. By placement, I mean whether you own your investments inside of a tax-deferred investment account such as an IRA or 401(k), the Self-Directed account types offered by Rocket Dollar, and/or a taxable brokerage account. Placing your retirement dollars in a tax-deferred account allows your earnings grow tax-free.

     

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    Let’s take two individuals on the Rocket Dollar team (just for the fun of it): Ryan, one of our engineers, invests $100,000 earning 7% consistently year over year, for 20 years, versus Tiva, another engineer for Rocket Dollar, who also invests $100,000 and earns 7% consistently over 20 years, too. The difference is Tiva has a tax-deferred account and will actually have a $136,874 increase in value over Ryan, who owns the investment in a taxable brokerage account.

    Even if Tiva were to withdraw that money, sure, she’s going to have to pay the taxes somewhere down the road, but it would still only be $90,000 in taxes. Tiva’s earnings, even with taxes, still offer a net of almost $50,000 better than what Ryan earned with the exact same investment in a taxable account.

     

    The Power of Tax Deferral

    (Assumes $100,000 invested; 33% combined federal and state tax bracket)

      5 years 10 years 15 years 20 years
    Ryan $125,755 $158,144 $198,874 $250,094
    Tiva $140,255 $197,715 $275,903 $386,968

     

     

    This chart makes it easy to understand that investing with a tax-deferred account will always win out over a taxable brokerage account. You can take advantage of the tax savings with a Self-Directed IRA or Solo 401(k), and this way you can also invest in alternatives (real estate, private equity, peer-to-peer loans, etc.) should you choose to.

     


     

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    Topics: Case Studies, Alternative investing, HENRYS, Taxes

    Published on June 05 2020