facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
Military Finances 101: It's Not Just What You Own, It's Where You Own It Thumbnail

Military Finances 101: It's Not Just What You Own, It's Where You Own It

Investment Taxes

Back when I was in 6th grade (I know, some of you weren't even born yet), my teacher, Mr. Rast, asked me a question about money. He asked me if would rather have $100,000 or start with a penny doubled every day for a month ($0.01, 0.02, 0.04, 0.08, 0.16 and so on). Well I knew $100,000 is a lot of money and I went for it. Boy, was I wrong. The result of the doubling would have yielded $5,369,709.12. Of course, this is America and I wouldn't get to keep it all. The IRS is going to want a cut.

If I assume a 25% tax rate, the Government would take $1.3M of my $5.3M. Ouch. But that assumes that I get to wait until the end to pay the taxes. What if I have to pay taxes along the way? If I pay 25% in taxes on the income each year. I'd "only" have $1.1M at the end of the 30 days. That's right. 25% of the amount I received after tax when I got to defer the taxes. It isn't that I paid $3M in taxes. It is that I lost the compounding on the money that I paid in taxes.

What to Do?

Think about not just what you invest in, but where you put your investments. You have options for tax free tax treatment of earnings, tax deferral or fully taxable accounts. As much as possible you want to avail yourself of tax free and tax deferred accounts.

Specifically, if your investments produce ordinary income (Bond Funds, CDs, Money Markets), put them inside your tax deferred accounts. If your investments produce primary capital gains, then a tax-free account, like a Roth IRA, is a good option.

What should you put in taxable accounts? Assets that produce capital gains and qualified dividends are a good choice as the income has a tax rate that is lower than your marginal tax rate. International Stock Funds and ETFs are especially attractive as they often pass on a Foreign Tax Credit that you can use to offset some of your US tax burden.

There is more to Financial Planning than picking investments. Taxes are a big part of an overall plan and you can greatly increase the amount of money "in your pocket" by properly planning for them.

If you liked this article, you might enjoy the following blog posts:

Military Finances 101: 8 Tax Pros and Cons After "I Do"

Military Finances 101: Permanent Versus Term Life Insurance

Military Finances 101:  SGLI

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.