Understanding the Three Buckets of Taxes: Secure Your Financial Future

Achieving financial independence isn't just about how much you earn; it's about how much you keep! Understanding the three buckets of taxes—Tax Now, Tax Later, and Tax Never—can transform your financial strategy and ensure your family is not left behind, financially.

Tax Now: The Double Taxation Trap

The "Tax Now" bucket includes tools like bank savings , bank cash deposits (CDs) , stocks, and mutual funds , where you immediately pay taxes on your income, But there's a catch—you're taxed twice! First, when you earned the money, and then taxed again on any gains you make within this account. The amount you pay to uncle Sam grows as the account value grows in this bucket. These accounts offer easy access to funds, but the increasing annual tax bill can significantly reduce your overall amount.

Example of Tax Now: A bank savings account provides liquidity, but any interest earned is taxed yearly, diminishing your gains and compounding the impact of double taxation.

Tax Later: Uncertain Future

In the "Tax Later" bucket, you defer taxes until retirement, where the future tax rate is unknown. Vehicles like traditional IRAs ,  401(k)s, 403b or 457 allows your investments to grow tax-deferred or taxed later. However, there's a significant unknown: future tax rates. Even if you earn less income in retirement, if tax brackets rise, then all tax brackets will rise also. This means you will have to pull out more money from your retirement accounts to neutralize the annual tax bill.  It's like being in a business partnership with Uncle Sam, where this partner can dictate what percentage of your earnings it keeps after you've paid all the fees and taken all the risks all these years.

Are you building your retirement, or Uncle Sam's?

Example of tax later: With a 401(k), you contribute pre-tax dollars, reducing your current taxable income. But remember, taxes are paid upon withdrawal, and the rate could be higher than anticipated.

Tax Never: Harvesting Tax-Free

The "Tax Never" bucket includes Roth IRAs, Health Savings Accounts (HSAs),municipal bonds, college saving plans (529) and financial products under Section 7702, allowing for tax-free withdrawals. In the tax never bucket, you pay taxes upfront—on the seeds—not the harvest (like in tax later accounts). This strategy can significantly reduce your tax burden in retirement, providing clarity and control over your financial future.

Example: A Roth IRA involves paying taxes on contributions now, but your investments grow tax-free, and withdrawals are tax-free after age 59.5. Similarly, products that comply with Section 7702 offer tax-free growth and withdrawals without any age restrictions unlike a traditional IRA, providing a powerful vehicle for building wealth without future tax liabilities.

The Wisdom of Financial Strategy

Those who truly understand money put all of their money "Tax Never" bucket first, maximizing their tax-free growth and withdrawals. After the tax never buckets are full,  then they consider the "Tax Later" bucket, followed by the "Tax Now" accounts. This strategic allocation isn’t just about diversifying investments—it's about diversifying tax consequences, ensuring that you keep more of your hard-earned money.

Secure Your Future

Imagine a future where your financial security is not subject to the whims of tax policy changes or who is in office. By putting your money in the right tax bucket today, you can protect your wealth, your legacy, and the dreams you hold dear for yourself and your family. It's time to take control and make choices that secure your tomorrow. Book a discovery call with me.

Join Our Mission of No Family Left Behind

We are committed to ensuring that no family is left behind financially. By educating individuals on these tax strategies, we empower them to build a secure financial future. Join us in this never-ending mission! Evaluate your financial plan and consider how these tax buckets can enhance your strategy. Together, we can create a future where financial security is accessible to all.