Tax Now, Tax Later and Tax Never
Do you know what type of investment vehicles do you own? Tax Now, Tax Later, and Tax Never? Wow, Tax Never? I will come back to this Tax Never later. Like me, I never learned how to invest and becoming wealthy in school. However, I always wanted to know why people are so well off, and some people are not? I finally found my answer after two years of working in a Prestige Financial Firm. The answer is, "knowing how to save, manage, calculate, use the Tax Law as in your favor, and to take action to plan ahead to build the passive income makes the difference." There are many great vehicles to generate passive income, and today I am going to focus on investment vehicles that you can sign up from traditional banks, and investment companies. So, what is Tax Now? Tax Now means that all the earning you make from investment vehicles need to be taxed every year. Everybody has to report his earning to the IRS on their Tax Return. These vehicles include both checking, saving and CDs accounts that generate interest for you. All the capital gains and dividends generate from Stocks and Mutual Funds; moreover, earnings from Bonds and Treasuries.
What's Tax Later? All the money people put in this vehicle is Pre-Tax. Which means this money is never taxed by IRS. Sounds pretty good huh! Yes, the downside of this vehicle is that people have to wait until there are 591/2 years old to take it out. There's 10% Tax penalty + Income Tax Penalty for taking money out before 591/2, unless you are taking money out for your first property purchase you still have 10% Tax penalty. Also, people have to take money out before they turn 701/2, because IRS cannot wait that long for your money. All the money you take out after 591/2 is subject to "income Tax" depending on how much you take out. So, what are the investment vehicles in his category? These are 401K or other Qualified Plans, IRA, SEP-IRA (for self-employee), Annuities, and Savings Bonds. The only factor left to think about is "Is Tax going to be higher or lower in the future comparing to Today's Tax Rate?"
Last, what's Tax Never? Tax Never means people will never get taxed from all the gains when they take money out from this vehicle. Well technically speaking, money in there is after Taxed. Just like the money in the Bank is after Taxed. I have seen many people use this vehicle to build their wealth, and depending on the investment vehicles some don't need to wait for 591/2 to take out the money, no tax to pay on all the capital gains.
Sounds very delicious to me, these vehicles are ..............are you ready? Ok, there are only three vehicles in this Tax Never Category. One is Roth IRA Roth 401K, and the other one is Cash Value Life Insurance (if you are interested, check out Variable or Equity Index Life Insurance). Both Roth IRA and Roth 401K have 591/2 rule, and contribution limitation depending on your Annual Income. For Roth 401K check with your company, the law just passed in 2006 so don't be surprised your company is with traditional 401K.
Remember, no one size fits all! Not everybody is suitable for all the vehicles. It takes understanding of how the Tax Law works for all the investment vehicles, how much time you have, what is your objective, what your risk tolerance is, and what your financial goals are, and many more. Every single detail counts and makes a big difference in your financial life. Please do not purchase bunch of cash value life insurance, or put more money in 401K after reading this article. It is very important for you to consult with a financial planner or advisor who has license with the governments. Please, do not consult your financial plan with whose financial condition is worse than yours. Now, I wish you all the success in building your massive passive income journey. Welcome to any questions and feedback.