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Before the article, check out the latest on my podcast, Personal Finance for Long-Term Investors: On Apple Podcasts On Spotify On YouTube Now, here’s today’s article: Niki wrote in and asked: For the last several years, I’ve been able to save $80,000 pretax dollars (401k) per year as a business owner. But now I’m worried my pre-tax bucket is getting too large. I might have opportunities for Roth conversions later, but I’m wondering if it would be worthwhile to pay some tax now and save some of that money in a brokerage account. Because brokerage accounts are taxed at capital gains rates, doesn’t it make more sense? There’s some complicated math here that I may not be seeing, so any insight into this would be helpful! This is an interesting and common question. 401(k) accounts are ubiquitous. Between their large annual maximums, employer-matches, and the past ~15 years of bull market stock growth, it’s common to see large 401k balances. But is there such a thing as “too big” a pre-tax bucket? Definitely. Let’s dig into the details. Fixing the Premise First, I want to clarify part of Niki’s question. She wrote: “Because brokerage accounts are taxed at capital gains rates, doesn’t it make more sense?” The money going into a brokerage account is first taxed as income. Then, any growth in the account will then be taxed at capital gains rates. And any dividends and interest along the way are also taxed on an annual basis (some as income, some at capital gains rates). There are three possible layers of tax. All else equal, you will pay more tax on the dollars in a taxable brokerage account than on the dollars in qualified accounts (401k, IRA, etc). The article below shares some similar comparisons. It’s difficult to conceive a scenario where a taxable brokerage has better tax outcomes than a qualified account: Should I Use My 401(k) Without a Match? But It Still Might Be Worth It Sure, it’s unlikely the taxable brokerage will ever provide better tax advantages. That’s ok. Taxable brokerage accounts offer the critical, hard-to-quantify benefits of flexibility and liquidity. I think it’s fine to sacrifice some tax advantage as a trade-off for more flexibility. One reasonable example: Niki is currently contributing $80K per year into her Solo 401k. Perhaps she could dial that down, choosing to “only” contribute $50K per year into the Solo 401k. The other $30K goes to Niki as income. Of that, ~$8K will be paid as income tax. Niki could take the remaining $22K and invest it in a taxable brokerage. She’s still saving a lot of money, though not quite as much as before. But now, approximately 1/3 of her savings are flexible and liquid. One problem, though? I’ve been totally subjective so far. Why’d we split $80K into 50K + 30K (minus taxes)? Can we be a bit more rigorous and objective here?
How is everyone’s summer going? It’s too quick for me. For example, this article covers July, which is Really, the first month of summer, but I’m writing it while stressing that the last week of summer is almost here. Personal Update July was a BUSY month for us – in a good way. We were always doing something. That’s just what our tourist town of Newport, Rhode Island, is like in the summer. Here are […]
“The stock market is designed to transfer money from the Active to the Patient.” — Warren Buffett As Warren Buffett […] The post Enduring Wisdom: Applying Buffett, Munger & Bogle’s Timeless Investing Strategy Today appeared first on Even Steven Money.
What kind of investment accounts do you need for your financial goals? There are various investment accounts, depending on your lifecycle and financial goals. Choose investment accounts that advance your goals. Your goals may include beginning to invest, saving for retirement and college, maintaining liquidity for emergencies, and implementing tax optimization strategies. These accounts can help you build wealth. Families may want to set up college savings or custodial accounts for young children, including a […]
The month of July 2025 is another month of dividend income landing in my accounts. Due to becoming debt free, I changed my pay myself model. Starting the beginning of August 2021, I am paying myself 30%, just like before. This will now consist of 24% to investing, and 6% to savings. The investment portion is going to my TFSA. […]
The Roth IRA is one of the best investment vehicles available, which is one reason why they limit your contribution based on your modified adjusted gross income. Normally, if you’re under the income limits, a single filer can contribute $7,000 for 2025 ($8,000 if you are age 50 and older). If you make more than $150,000 but less than $165,000, the contribution limit is decreased as you move up that income spectrum. If you make more than $165,000 – you are not permitted to contribute to a Roth IRA. (For married filing jointly, the income phaseout is $230,000 to $240,000) But there are still ways for you to get money into a Roth IRA if you exceed the income limits. 😍 If you are looking for a Roth IRA, here are our favorite Roth IRA brokerages. Table of ContentsRoth 401(k)Roth ConversionBackdoor Roth ConversionMega-backdoor Roth ConversionConsult a Tax Professional Roth 401(k) While not technically a Roth IRA, it still benefits from the tax treatment of a Roth IRA but in 401(k) form. If your employer offers it, it’s a great way to essentially get a supercharged Roth IRA because there are no income limits and the contribution limit is $23,500 in after-tax funds. Those ages 50 and up can contribute an extra $7,500 while those ages 60-63 can contribute up to $11,250 more. This limit is shared with your traditional 401(k) so make sure you plan for this accordingly. Roth Conversion A Roth conversion is when you convert a tax-deferred account, like a traditional IRA, into a Roth IRA. You can convert all of it or just part of it and you’ll owe income tax on the amount you convert. This includes your original contributions plus any appreciation or dividends that have accrued. If you contributed after-tax dollars to a traditional IRA, those will not be taxed on conversion. If you convert a mixture of pre-tax and post-tax dollars, the pro rata rule says you pay taxes based on the percentage of pre-tax and post-tax dollars in all of your IRA accounts. You can’t “pick” to convert just the post-tax dollars. Another thing to remember is that the conversion has its own five-year holding period (for the purposes of calculating penalties if you withdraw the funds before 59.5) that starts on January 1st of the year you make the conversion. 🤔 Remember, when you withdraw funds from a Roth IRA, the IRS assumes you’re taking out contributions first, then conversions (in order of oldest to youngest), then earnings. Backdoor Roth Conversion A backdoor Roth conversion is a special name for a Roth conversion where you contributed dollars into a traditional IRA but never took the tax deduction, thus making them after-tax contributions. It’s titled backdoor because other than a few extra logistical steps, you’ve essentially contributed into a Roth IRA. You can convert the Traditional IRA into a Roth IRA at any time but if you invest your funds while in the Traditional IRA, any gains are subject to income taxes.
Retirement planning is a big part of your financial preparation and strategy. Your 401(k) is one of the best retirement investing accounts you have and so easy to set up through your employer. Add on tax free or tax deferred growth and matching employer contributions and you’ve got a retirement planning powerhouse. However, among the biggest retirement planning mistakes includes ignoring your 401(k) and forgetting to contribute to your workplace retirement account. Following are the 9 biggest retirement planning mistakes to avoid. Most of these 401(k) mistakes can be avoided with smart retirement planning and help from professional retirement consultants. 401(k) Mistakes That Can Cost You Most experts agree that a 401(k) is one of the smartest ways you can save for retirement. But here’s the catch, about one-third of middle-class Americans are dipping into their retirement funds before actually retiring, according to a 2025 Transamerica Research study, “Retirement in the USA: The Outlook of the Workforce”*. If you do that, you could be putting your future financial security at serious risk. Withdrawing from your 401(k) before you turn 59½ typically means paying a 10% penalty in addition to any income taxes owed. That one decision could cost 30%+ of the amount withdrawn. These are some common retirement planning mistakes to avoid: 1. Being Unaware of Types of 401(k) Accounts When it comes to 401(k) accounts, most people can choose between two main types: traditional 401(k) and Roth 401(k). The difference between them can have a big impact on your retirement strategy. With a traditional 401(k), your contributions are made before taxes, so you lower your current taxable income. However, you’ll pay taxes later when you withdraw money from your 401(k) in retirement. This can offer major tax advantages today, depending on your current tax bracket. A traditional 401(k) might be a good choice if you believe that you’ll be in a lower tax bracket when you retire and start your withdrawals. On the other hand, a Roth 401(k) is funded with after-tax income, which means that you pay taxes on your income before funding the Roth 401(k). When you retire, your 401(k) withdrawals, including any investment growth, are completely tax-free. This account might be good for you if you anticipate that tax rates will go up in the future or that you’ll be in a higher tax bracket in retirement. 2. Failing to Make Saving a Regular Habit It’s easy to think you’ll start saving later when you feel more financially secure. But, if you don’t save enough, skip contributions to a 401(k) or fail to gradually increase your 401(k) contributions as your income grows, it could seriously impact your retirement savings in the long run. The good news is that it’s simple to get started. You can set up your 401(k) to automatically deduct contributions from your paycheck, so that you’re saving and investing automatically. Many plans also let you schedule automatic annual increases to your contribution rate. This way, you’re contributing a greater amount each
At a Glance: 100% Bonus Depreciation Is Permanent Qualified Opportunity Zones (QOZs) Made Permanent Expanded Low-Income Housing Tax Credits (LIHTC) Disclaimer The information provided on this website is for general informational purposes only and should not be construed as legal, financial, or investment advice. Always consult a licensed real estate consultant and/or financial advisor about your investment decisions. Real estate investing involves risks; past performance does not indicate future results. We make no representations or warranties about the accuracy or reliability of the information provided. Our articles may have affiliate links. If you click on an affiliate link, the affiliate may compensate our website at no cost to you. You can view our Privacy Policy here for more information. How the 2025 Tax Law Creates Massive Advantages for Real Estate Investors Whether you love it or hate it, the new 2025 tax bill is here and real estate investors just hit the jackpot.The “One Big Beautiful Bill Act,” is a sweeping 940-page piece of legislation that’s made major waves in the world of taxation. While many provisions are complex or narrow in scope, real estate investors are emerging as one of the biggest beneficiaries.If you’re currently in the market—or even considering dipping your toes into real estate here’s what you need to know about the four major tax changes that can seriously improve your return on investment in 2025 and beyond. 1. 100% Bonus Depreciation is Back (and Permanent) Let’s start with the showstopper: 100% bonus depreciation is not only back it’s permanent. This means that if you invest in real estate, you can now write off the full depreciation of qualifying assets in the same year you purchase them. Prior to this change, bonus depreciation was being phased out under the 2017 Tax Cuts and Jobs Act, reducing to 40% in 2025 and down to 20% in 2026 before vanishing completely. Thanks to the new law, real estate investors can now: Write off 100% of building improvements and qualifying components (e.g., HVAC, roofing, security systems) in year one. Accelerate tax savings and reduce upfront taxable income. Enjoy major deductions even in passive investment deals, like real estate syndications. This is especially useful in models like the “Lazy 1031 Exchange,” where investors reinvest capital gains into new passive real estate opportunities, using upfront depreciation losses to offset taxable gains from previous deals without the red tape of a traditional 1031 exchange. (article continues below) Real estate investments? Awesome. Being a landlord? Less fun. Learn how to earn 15%+ on passive real estate investments in our free video course. Access Free Course 2. Qualified Opportunity Zones (QOZs) Made Permanent Originally introduced in 2017 to spark investment in low-income communities, Qualified Opportunity
In the world of investing, managing cash efficiently is just as important as selecting stocks or bonds. For Vanguard investors, the Vanguard Settlement Fund plays a pivotal role in this process. Often referred to as the core of a Vanguard brokerage account, this fund ensures seamless transactions while earning a competitive return on idle cash. If you’re new to Vanguard or looking to optimize your portfolio, understanding the Vanguard Settlement Fund can help you make […]