“In this world nothing can be said to be certain, except death and taxes.”
- Benjamin Franklin
With the new year comes many exciting changes, new careers, promotions, & a fresh start to make all of our mistakes or shortfalls from last year a thing of the past. I absolutely love the new year, except that one little nuisance that seems to show up at the beginning of every year, Tax Season!
Depending on whether you’re a business owner or an employee of a large corporation, tax season means something different to you. Are you already picking out the new jacket or pair of shoes you want to spend your refund on, or are you trying to figure out what investment or savings account to withdraw from to pay your tax bill?
When it comes to Financial Planning and saving for retirement, we at Power Forward believe that focusing on the tax consequences of your investments & accounts is imperative to a sound strategy. There are essentially three different ways accounts get taxed:
1. Always Taxable: After tax dollars fund these accounts, every year you pay taxes on any gains you made and lose out on some of the compound interest.
2. Tax-Deferred: Pre-Tax dollars are used to fund these accounts, while you get the magic of compound interest. Take into consideration the fact that every dollar will be taxed later on which includes all of the interest earned over the years.
3. Tax-Preferred: Like the “Always Taxable” accounts, these are funded with after tax dollars and also get the benefit of compound interest. However, when you withdraw money you don’t pay taxes on the gains or principal.
None of these accounts are better than the other, they all have unique features that can be used to work for you. Deciding which account type to save in is something that should be determined from looking at a full financial plan (PFG: “Enter stage right”), give us a call to build out your financial strategy as a part of the PFG team.
- Chris DeVito, Partner at Power Forward Group