Taxes and Investments
Watch our video on the market performance for the week of November 28th.
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WEBVTT
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Hey everybody, welcome to the market update
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for the week ending December 2nd, 2022.
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I hope you all enjoyed some time away with your families
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and had a great Thanksgiving.
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What I wanted to talk about today,
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and it's a little longer video, is taxes
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and specifically how taxes apply to different types
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of investments and income.
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Uh, so again, I'm gonna, I'm gonna attach this
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and we're going to, um, reference this
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so you can come back to it later.
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It may get a little wordy and I apologize,
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but there's a lot of good information to unpack.
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Uh, so first off, if we start on the left,
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this is taxable income
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and different types of taxable income interest
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and non-qualified dividends.
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So interest you would earn on any checking, savings, cd,
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et cetera, any short-term capital gain.
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If you bought a stock and sold a stock
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for more than you paid and you held it less than a year,
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and any rent or royalty, any income from a rental property
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or something like that, that's all taxed
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as ordinary income, alright?
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Which means you could pay as much as 37% on that money.
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Um, it all flows into your ordinary income tax bracket.
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By the way, of course, any income you earn to W2
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or 10 99, same thing.
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Now, one advantage of these three buckets,
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you don't pay social security tax on this.
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So like a rental income, you wouldn't pay the FICA
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and Medicare tax, but it is all ordinary income
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and there's a lot more supporting
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documentation as you scroll down.
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The second sort of tier is sort of a hybrid.
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It's still taxable income, but it's at a different rate.
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It's at a long-term capital gains rate,
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and this would be things like qualified dividends,
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which are specific dividends inside of a, uh,
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a non-qualified investment account.
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And that's, I know, jargon or long-term capital gains,
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long-term capital gains.
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If you buy a stock
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and you go to sell it for more than you paid
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for it, you've got a gain.
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But if you can hold it 12 months
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or longer, it's a capital gain max rate
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of 20% versus a max rate of 37.
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So that's why a lot of folks will try
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to hold something at least 12 months.
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Okay? Um, then we get into really the second category,
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which is tax deferred.
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Think of the word deferred is later. It's not tax, never.
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It's taxed later.
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So commonly here, 4 0 1 KIRA simples those types
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of qualified plans on this first bucket,
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you often will get a deduction on the money you put in.
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Not always, but most of the time.
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This other bucket, a non-qualified deferred annuity,
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it's not a 401k, it's not an IRA,
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it is a tax deferred vehicle,
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but you don't get a deduction on it.
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When you take the money out of either of those accounts, uh,
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you are going to pay ordinary income.
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And here's the kicker on the qualified money,
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it's on the entire amount.
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So if you put a half million dollars in your 401k
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and it grew to a million dollars,
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you got a deduction on half
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Million, but you're going to pay tax on a million dollars
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as you take that money out.
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And that's why you have to be really careful
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with those tax deferred accounts.
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By the way, if you don't use the money
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and you die, your spouse
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or your heirs are going to pay tax on that money.
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And for those of you over 72,
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you know about a great little thing called required minimum
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distributions, where the government's nice enough
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to make you take that money to make sure they,
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they get their tax on it.
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Now, there are some strategies around some of that stuff,
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but for the most part, this money is taxed later.
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Not never. The last bucket is tax free.
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And this is, this is our favorite bucket
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because the nature of it.
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Um, but I wanna outline a couple of how these could,
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a couple ways these could work.
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The first is tax exempt interest income,
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and this is typically through muni bonds.
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Now those have have kind of been moot for the last few years
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because rates have been down so low,
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but with rates coming back now you can get muni bonds
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that pay a a decent rate of interest
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and if you get 'em in your state, you pay no state
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or federal income tax.
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Uh, they are still subject to market decline life insurance.
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This is probably the most misunderstood vehicle in the
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world, and this is not gonna be a life insurance discussion,
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but if structured correctly
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and if funded correctly, uh,
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they can accumulate a very nice, safe rate of return
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and you can take that money without federal income tax, um,
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and kind of work it almost like a super Roth IRA.
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Again, it has to be done correctly. And then Roth accounts.
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Roth accounts most people have heard of, um,
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these monies go in after tax grow, tax deferred, and
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after 59 and a half you can take the money tax free.
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Now the big thing with Roth that people get turned off
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by is the fact that if you're over a certain income from
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married, uh, people, it's around 200 K,
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you make too much money, you can't fund a Roth IRA.
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That is true. However, uh, sometimes there are workarounds
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and one of the most common workarounds is if your employer
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adopts a Roth into your 401k,
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there is no income limit on a Roth 401k.
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So you could be making a million bucks a year
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and you could still fund a Roth 401k,
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which is different than a Roth IRA.
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However, the tax pretty much works the same.
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So this is just a nice piece
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that outlines all the different buckets.
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Um, if you're confused, I understand that's why we're here.
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Feel free to call us, but not all investments are equal
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and it's important to take taxes into consideration
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as it could take up to 50%
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of your earnings outta your pocket.
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As always, thanks for watching. Have a great week.