top of page

Don't forget 'after-tax' investing

It's a good idea to take advantage of every pretax investment you can afford to make. Perhaps your company offers you a matching 401k program where they meet you one-to-one for the first 4 or 5 percent of your contribution. That's free money. But if you're allowed to go in for 10 and can invest that much comfortably you'll be well-rewarded. Who doesn't want to reduce their taxed income?

Now maybe you've been able to open an IRA with pretax dollars. Perfecto! But don't forget 'after-tax' investing.

Simply stated, after-tax refers to investments made from money for which you've already paid taxes. Because you've already paid taxes the investments will not be treated as income when you eventually access the proceeds and will be eligible for the lower long-term capital gains tax rate.

Let's take a step back here. Many people are surprised to learn that when one accesses pretax accounts such as a 401k, 403b or an IRA, income taxes will be owed. Why? Because they were never taxed in the first place. The government allows you to grow this money over time but in the end they want their share. Presumably you'll be at a lower tax rate in retirement as compared with when you were working so in the end you benefit. But over time the amount will have grown so that the tax will be on a bigger haul -- the government benefits.

But if you've also invested on an after-tax basis you can always rely on this pool of funds anytime and only be responsible for paying taxes at the long-term capital gains rate. For the pretax funds, in most cases the earliest you'll have access without a 10% penalty is at 59 1/2.

Featured Posts
Check back soon
Once posts are published, you’ll see them here.
Recent Posts
Search By Tags
Follow Us
  • Facebook Basic Square
  • Twitter Basic Square
  • Google+ Basic Square
bottom of page