There are a few important takeaways here. First, if you invested $500/month in an index fund over the last 40 years you would be very rich no matter WHAT type of account you invest in. Sometimes I hear about investors who are so worried about taxes they forget that you’re only taxed on the GAINS. That’s a good problem to have. Personally, about 95% of my money is in a regular, taxable brokerage account. That’s because I have too much money to fit into tax advantaged accounts! (Another good problem to have).‎
‎
But here’s the other takeaway. If you can use a Roth IRA, you should! In this example it saved our friend Tim about $600K. That’s a lot of post-tax cheddar in your pocket not the governments. ‎
‎
Here’s how taxes work in a regular taxable brokerage account: You get paid and pay income tax. With what you have leftover you invest in a brokerage account. Then each year you get a tax form that says how much you collected in dividends, and you pay tax on that amount. Then when you sell your investment, you get a tax form that says the total amount you gained on that investment and you pay capital gains tax on that. You get to keep what’s left over.‎
‎
Here’s how taxes work in a Roth IRA: You get paid and pay income tax. With what’s left over (up to $7,000/year) you can contribute to a Roth IRA. Everything inside of that account is protected from additional taxes FOREVER. (But you do have to leave the gains in the account until you’re 59.5).‎
‎
So that’s why it’s great to prioritize a Roth IRA! ‎
‎
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.‎
‎
-Jeremy‎
‎