How to Save $50,000 in Taxes by Moving Your Investments to the Right Accounts

Tyler Gardner (0:00)

Taxes matter, access matters, volatility matters, time horizons matter. And if you're not thinking strategically about where you put these investments, not just what you buy, you're leaving tens of thousands of dollars on the table.

Hello, friends. This is Tyler Gardner, welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be. Hello, and welcome back to Your Money Guide on the Side. I'm Tyler, and today we're talking about something that sounds incredibly boring, but could save you tens of thousands of dollars over your lifetime, account placement strategy, or as I prefer to call it, because I am addicted to watching shows like Selling Sunset Nightly, just to see the latest drama between Nicole and Emma, and to look at houses that I will never be able to afford. It's all about location, location, location. Because just like real estate, where you put your investments matters almost as much, if not more, than what you invest in. You wouldn't buy a beach house in Kansas, and you shouldn't put high-growth stocks in your taxable brokerage account when you have perfectly good Roth IRA space sitting empty waiting for some action. Now, I know what you're thinking, Tyler, this sounds like the kind of topic that will put me to sleep faster than a Ken Burns documentary on the history of wheat fields. And you're not wrong. Account placement strategy is aggressively unsexy. It's the financial equivalent of reading the ingredient list on a cereal box. But here's the thing. Getting this right in practice can save you more money than almost any other investing decision you're going to make. Because as we've addressed before, taxes matter, access matters, volatility matters, time horizons matter. And if you're just throwing money into random accounts without thinking about which investments belong where, you're leaving a shocking amount of money on the table. So today, we're going to talk about tax efficiency, liquidity, volatility, time horizons, and most importantly, alignment with your wants and your needs. We're going to give you specific examples of what belongs where. And yeah, I'll try to make it quasi-entertaining, which is a bit like trying to make a colonoscopy fun, but as always, I'm going to give it my best shot. And as always, if you have found this show even remotely helpful over the past few months or weeks, or it has helped you feel even one ounce more confident with your own financial decisions, please consider leaving a review on Apple or Spotify or wherever you listen as it helps others find the show, and it helps me continue to appreciate that at day's end, I'm putting something useful out into the world and not just contributing to the global oversupply of mediocre content and mildly inspiring motivational quotes over stock photos of mountain sunrises. I appreciate your help growing the show, and in return, let's get started and get you one step closer to where you need to be.

Part 1 The accounts you have and what they're actually for. Before we talk about what investments to put where, we need to establish what we're working with, because most of you have access to three basic types of accounts, and each one has very different tax treatment, withdrawal rules and strategic purposes. Account type number 1 Tax Deferred. This is your traditional 401k, 403b or traditional IRA. These are accounts where you contribute pre-tax dollars, meaning you get a tax deduction today, but you'll pay ordinary income taxes when you withdraw the money in retirement. Think of these as your instant gratification accounts, like that buy now pay later nonsense we're all obsessed with, side note, don't use buy now pay later programs. Anyway, with the tax-deferred accounts, the government is essentially giving you a loan. They let you skip taxes now, but they're going to collect when you take the money out, learning about what RMDs are, and when you're trying to figure out how to work the TV remote. The big advantage to these accounts, your money grows tax-free while it's in the account. No taxes on dividends, no taxes on capital gains, no taxes on interest. All of it just compounds quietly and efficiently until you decide to take it out. The big disadvantage here, when you do take it out, every dollar is taxed as ordinary income, which could be as high as 37% at the federal level plus state taxes. This is why personally, and we'll get more into this later in the show, I would only contribute to pre-tax accounts right now if my relative tax situation were knowingly worse, aka higher brackets, than I thought I would be in down the road. Now, to make matters worse, if you also watch Selling Sunset Nightly and choose to retire in a high-tax state like California or New York, congratulations, you just turned your retirement savings into a government subsidy program. So even though I don't love the marketing pitch of insurance sales folks who are telling you that the 401k is a scam, which it's 100% not, it is worth knowing that you will pay ordinary income tax on that money, and it could end up being a big tax hit down the road. So I don't want you taking that instant gratification now unless you've really thought through what this means for you and your family. Account type number two, tax free, Roth 401k, Roth IRA. These are accounts where you contribute after tax dollars. So not really tax free as some might lead you to believe. It just means you don't get the deduction today. But all future withdrawals after 59 and a half are completely tax free. Think of these as rip the bandaid accounts. You're essentially telling the government, I'll pay taxes on this $7,000 today, and then you, government, can never touch it again, ever. Not when it grows to $50,000, not when it grows to $200,000. We are done here. The big advantage, as should be obvious, tax free growth forever. Every dollar of dividends, capital gains and interest grows without ever being taxed again. It's the closest thing to a financial cheat code that exists in the US tax system. The big disadvantage, you don't get a tax break today. So if you're in a high tax bracket now, it can be painful to contribute. But here's what you should consider. If you're young and brokeish, you're probably in a low tax bracket anyway. Or if you do the quick cost benefit analysis on the back of an envelope, as you're listening to this, and decide that even if you're in a higher bracket today, you'd rather fund an account that has no RMDs, you also might choose to contribute to the Roth today. But, yes, there are limits as to who can contribute, so always consult IRS.gov or Google Roth Income Limits to find out the current year's limits. Overall with these accounts, by paying taxes now when your rate is potentially 12 or 22% marginal, it could be a screaming good deal compared to paying taxes later when your rate might be 32% or higher in the marginal system. Account type number 3, the taxable brokerage. This is your everything else account. Fewer tax advantages, but also no restrictions. You can contribute as much as you want, withdraw whenever you want, and invest in whatever you want. You'll pay taxes on dividends and capital gains as you go, which can genuinely sneak up on some folks. But, and this is one primary tax advantage here, if you hold investments for more than a year, meaning you buy an index fund and then don't sell it for over 365 days, you'll pay what's known as long-term capital gains rates. That could be 0%, 15% or 20% depending on your respective income. Instead of having to pay ordinary income rates, up to 37%, if you were to sell investments before you've held them for 365 days. So, the big advantage of having one of these accounts, total flexibility. Need money in 3 years for a house down payment? No problem. Want to retire at 50 and live off your portfolio before you can access your 401k without penalties? This is your account. Want to pass assets to heirs with a step-up basis so they pay zero taxes? Taxable brokerage, taxable brokerage, once again, for the win. The big disadvantage, taxes on your interest and dividends throughout the year, even if you click that little button that says, reinvest dividends, you're going to pay taxes on all capital gains when you sell. And if you're not careful, you can end up with a surprisingly large tax bill just from your portfolio doing what it's supposed to be doing, growing. Note, there is a strategy to work around this, known as tax loss harvesting, that I will get to in another episode. But if you're interested now in learning more about what that looks like, and how it could help you minimize your tax bill in your taxable brokerage account this year, type the following into ChatGPT. Can you please show me how I would minimize taxes, using tax loss harvest strategies in my taxable brokerage account, if I wanted to sell some of my investments this year that had appreciated, and I was going to realize over $50,000 of capital gains. Yeah, ChatGPT can help you with that type of work, and it's free. So, those are your three basic types of accounts, and the question we're now ready to answer, what goes where? In my 20s and 30s, one thing drove me crazy as someone who optimizes his finances, paying rent. If you're nodding along right now, I need to tell you about Bilt, the loyalty program that makes paying rent actually rewarding. Here's how it works. Every rent payment earns you points you can use toward flights, hotels, Lyft rides, Amazon purchases, and my personal favorite, SoulCycle classes. When I travel, there's no better way to start my day than through shared positivity and hard work. Now, if you're thinking, I own a home, I don't rent, well, my friends, I've got great news. Because starting in February, Bilt members can earn points on mortgage payments for the first time. Plus, you'll unlock exclusive benefits with over 45,000. Restaurants, fitness studios, pharmacies, and neighborhood partners. So whether you're renting or owning, Bilt helps you earn rewards just for living where you live. Join the Loyalty Program for Renters at joinbilt.com/tyler.