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Redrick Terry: 4 Your Money time, we’re joined by David Nelson, CEO of NelsonCorp Wealth Management. David, welcome back.
David Nelson: Thanks, Redrick, appreciate it.
Redrick Terry: Of course, and transitioning into retirement, obviously a pretty big decision. It’s not as simple as how much you saved; but more importantly, where you save.
David Nelson: Yeah, this is an exciting one.
Redrick Terry: Yeah.
David Nelson: I get to talk taxes. Sometimes I get to talk about leading indicators like we did last week. Today, we’re talking real money and trying to give people something tangible as far as that they can use as far as tomorrow as far as making some important decisions.
This graphic that I brought is absolutely fantastic. It’s such a simple thing, but I want to spend a little time and walk people through this. So these are the four tax buckets. Now, we’re not talking about stocks and bonds. We’re talking about tax buckets. So you have the traditional taxable account. This is money markets, this is checking accounts, this is the basic stuff that most people have a few dollars in.
Then where all of the action is, as far as for most people, tax-deferred. This is your 401(k) at work, simple retirement at work, 403(b), IRAs. This is where the bulk of people’s money is.
Now we get to the fun stuff. This is where we want people to really focus, and it’s tax-free. This would be a Roth, is going to be probably the most common one. Tax-free municipal bonds, things of that nature fall here.
Then the last one that we have here is income and estate tax-free, which again, used to apply a lot more than it does today. The estate part of it is key. That’s for really big estates. Over here, you’re typically going to find tax-free life insurance, is what’s going to be in this particular bucket.
So just glancing at it here, I think what people can come to the conclusion of, if they understand it from a tax perspective, is they’d like to have some probably in all of the above, with the main emphasis being here. Because when you get to retirement, I’ll use the example of somebody’s retiring and they have a half a million dollars as far as in their plan. That half a million dollars in their plan, if they have it here, tax-deferred, it means it hasn’t been subject to tax. So they really don’t have a half a million. They probably have $350,000 here. Whereas, if you had a half a million here, you have a half a million here. This has already been subject to tax.
So it’s the trade-off. Today, you get tax benefits on this, tomorrow you’re going to pay through the nose. This one, you’re going to pay taxes today, but then you’re done with it, and this bucket of money is going to be tax-free for those individuals.
So again, if I had a half a million, I’d rather here versus here. Hundred thousand, I don’t care the number, it’s going to be better here than it is going to be here. But this is where most people have the lion’s share of their money.
Redrick Terry: Certainly. So I guess one of the bigger takeaways from there is, there is more to managing your money and your income beyond just your tax return.
David Nelson: There really is. And so the tax return is just part of it, understanding this. I call this the sugar high. You get that immediate gratification as far as that tax benefit today, but you’re going to pay tomorrow and then the next day and the next day as far as on this.
But the other variables to look at … Well, there’s many. But one of them that’s obvious is Social Security needs to be incorporated into this. Then the other is Medicare. Medicare is such an important decision that people get this thing right. Again, bringing it all together helps have those individuals have a much more stable retirement and a more enjoyable retirement as far as having options down the road for them.
Redrick Terry: Important stuff. David, as always, we thank you for coming in.
David Nelson: Thank you, Redrick. Appreciate it.
Redrick Terry: Absolutely. If you missed any of our discussion, you can watch it on our website. That’s OurQuadCities.com
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