The Tax Bucket that often gets overlooked is one of the more valuable tools that we have for the retirement and estate areas of financial planning. Sadly, this bucket gets little love, and many investors do not even realize that it exists. Let’s dive deeper…

The Taxable Bucket contains a variety of investments that you might already have in there. Unlike your common Individual Retirement Accounts (IRAs), which will typically NOT allow you to hold assets like collectible art, jewelry, or physical real estate, the Taxable Bucket DOES have all of those and more.

What we really like about the Taxable Bucket is that it doesn’t have rules around WHEN you are able to take funds out or MUST take funds out. There are also NO limitations on how much you can contribute and withdraw from this bucket outside of your own limitations and comfort levels. This allows you the flexibility to fund goals outside of retirement AND even help facilitate an early retirement or transition into “Work-Optional Lifestyle”.

Here’s how it works in simple numbers:

• Purchase Real Estate for $100,000
• Sell Real Estate 5 years later for $200,000
• Pay Capital Gains tax on difference +$100,000

The same principle applies to non-retirement investment accounts, savings accounts, collectible art, etc. You are also able to write off losses created by sales. There are a lot of nuances that we will get into in a later email, but you should get the idea here.

Conclusion: Having a Taxable Bucket with liquid assets in it is a great opportunity for you to fund goals like early retirement, travel, a second home, etc. In a perfect world, all of our clients would have investments in all 3 Buckets so that we have OPTIONS with funding their financial dreams!

Next up: Effective vs. Marginal Tax Rate – what percentage do you ACTUALLY pay in taxes??

Disclosures

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.