How to Save $50,000 in Taxes by Moving Your Investments to the Right Accounts

0:00Taxes matter, access matters, volatility matters, time horizons matter. And if you're not thinking strategically about where you put these investments, not just what you buy, you're leaving tens of thousands of dollars on the table. Hello, friends. This is Tyler Gardner welcoming you to another episode of your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be. Hello, and welcome back to Your Money Guide on the Side.

0:41I'm Tyler, and today we're talking about something that sounds incredibly boring, but could save you tens of thousands of dollars over your lifetime. Account placement strategy. Or, as I prefer to call it because I am addicted to watching shows like Selling Sunset Nightly just to see the latest drama between Nicole and Emma, and to look at houses that I will never be able to afford. It's all about location, location, location. Because just like real estate, where you put your investments matters almost as much, if not more, than what you invest in. You wouldn't buy a beach house in Kansas, and you shouldn't put high-growth stocks in your taxable brokerage account when you have perfectly good Roth IRA space sitting empty waiting for some action.

1:26Now, I know what you're thinking. Tyler, this sounds like the kind of topic that will put me to sleep faster than a Ken Burns documentary on the history of wheat fields. And you're not wrong. Account placement strategy is aggressively unsexy. It's the financial equivalent of reading the ingredient list on a cereal box. But here's the thing. Getting this right in practice can save you more money than almost any other investing decision you're going to make. Because as we've addressed before, taxes matter, access matters, volatility matters, time horizons matter. And if you're just throwing money into random accounts without thinking about which investments belong where, you're leaving a shocking amount of money on the table.

2:10So today, we're going to talk about tax efficiency, liquidity, volatility, time horizons, and most importantly, alignment with your wants and your needs. We're going to give you specific examples of what belongs where. And yeah, I'll try to make it quasi-entertaining, which is a bit like trying to make a colonoscopy fun. But as always, I'm going to give it my best shot. And as always, if you have found this show even remotely helpful over the past few months or weeks, or it has helped you feel even one ounce more confident with your own financial decisions, please consider leaving a review on Apple or Spotify or wherever you listen as it helps others find the show, and it helps me continue to appreciate that at day's end, I'm putting something useful out into the world and not just contributing to the global oversupply of mediocre content and mildly inspiring motivational quotes over stock photos of mountain sunrises.

3:07I appreciate your help growing the show, and in return, let's get started and get you one step closer to where you need to be. Part one. The accounts you have and what they're actually for. Before we talk about what investments to put where, we need to establish what we're working with, because most of you have access to three basic types of accounts, and each one has very different tax treatment, withdrawal rules, and strategic purposes. Account type number one, Tax deferred. This is your traditional 401k, 403b, or traditional IRA. These are accounts where you contribute pre-tax dollars, meaning you get a tax deduction today, but you'll pay ordinary income taxes when you withdraw the money in retirement.

4:02Think of these as your instant gratification accounts, like that buy now, pay later nonsense we're all obsessed with. Side note, don't use buy now, pay later programs. Anyway, with the tax-deferred accounts, the government is essentially giving you a loan. They let you skip taxes now, but they're going to collect when you take the money out, learning about what RMDs are, and when you're trying to figure out how to work the TV remote. The big advantage to these accounts, your money grows tax-free while it's in the account. No taxes on dividends, no taxes on capital gains, no taxes on interest. All of it just compounds quietly and efficiently until you decide to take it out.

4:46The big disadvantage here? When you do take it out, every dollar is taxed as ordinary income, which could be as high as 37 % at the federal level plus state taxes. This is why personally, and we'll get more into this later in the show, I would only contribute to pre-tax accounts right now if my relative tax situation were knowingly worse, aka higher brackets, than I thought I would be in down the road. Now, to make matters worse, if you also watch Selling Sunset Nightly and choose to retire in a high-tax state like California or New York, congratulations, you just turned your retirement savings into a government subsidy program.

5:29So even though I don't love the marketing pitch of insurance sales folks who are telling you that the 401k is a scam, which it's 100 % not, it is worth knowing that you will pay ordinary income tax on that money and it could end up being a big tax hit down the road. So I don't want you taking that instant gratification now unless you've really thought through what this means for you and your family. Account type number two, tax-free, Roth 401k, Roth IRA. These are accounts where you contribute after-tax dollars, so not really tax-free as some might lead you to believe. It just means you don't get the deduction today.

6:11But all future withdrawals after 59 and a half are completely tax-free. Think of these as rip the band-aid accounts. You're essentially telling the government, I'll pay taxes on this$7 ,000 today, and then you, government, can never touch it again, ever. Not when it grows to$50 ,000, not when it grows to$200 ,000. We are done here. The big advantage, as should be obvious, tax-free growth forever. Every dollar of dividends, capital gains, and interest grows without ever being taxed again. It's the closest thing to a financial cheat code that exists in the U.S. tax system. The big disadvantage, you don't get a tax break today.

6:54So if you're in a high tax bracket now, it can be painful to contribute. But here's what you should consider. If you're young and broke-ish, you're probably in a low tax bracket anyway, or if you do the quick cost-benefit analysis on the back of an envelope as you're listening to this and decide that even if you're in a higher bracket today, you'd rather fund an account that has no RMDs, you also might choose to contribute to the Roth today. But yes, there are limits as to who can contribute, so always consult irs.gov or Google Roth income limits to find out the current year's limits. Overall with these accounts, by paying taxes now when your rate is potentially 12 or 22 % marginal, it could be a screaming good deal compared to paying taxes later when your rate might be 32 % or higher in the marginal system.

7:48Account type number three, the taxable brokerage. This is your everything else account. Fewer tax advantages, but also no restrictions. You can contribute as much as you want, withdraw whenever you want, and invest in whatever you want. You'll pay taxes on dividends and capital gains as you go, which can genuinely sneak up on some folks. But, and this is one primary tax advantage here, if you hold investments for more than a year, meaning you buy an index fund and then don't sell it for over 365 days, you'll pay what's known as long-term capital gains rates. That could be 0%, 15%, or 20%, depending on your respective income.

8:32Instead of having to pay ordinary income rates, up to 37%, if you were to sell investments before you've held them for 365 days. So, the big advantage of having one of these accounts? Total flexibility. Need money in three years for a house down payment? No problem. Want to retire at 50 and live off your portfolio before you can access your 401k without penalties? this is your account. Want to pass assets to heirs with a step-up basis so they pay zero taxes? Taxable brokerage, taxable brokerage once again for the win. The big disadvantage, taxes on your interest and dividends throughout the year, even if you click that little button that says reinvest dividends.

9:17You're going to pay taxes on all capital gains when you sell, and if you're not careful, you can end up with a surprisingly large tax bill just from your portfolio doing what it's supposed to be doing, growing. Note, there is a strategy to work around this known as tax loss harvesting that I will get to in another episode. But if you're interested now in learning more about what that looks like and how it could help you minimize your tax bill in your taxable brokerage account this year, type the following into chat GPT. Can you please show me how I would minimize taxes using tax loss harvest strategies in my taxable brokerage account if I wanted to sell some of my investments this year that had appreciated and I was going to realize over $50 ,000 of capital gains.

10:08Yeah, ChatGPT can help you with that type of work and it's free. So those are your three basic types of accounts and the question we're now ready to answer, what goes where. In my 20s and 30s, one thing drove me crazy as someone who optimizes his finances. Paying rent. If you're nodding along right now, I need to tell you about BILT, the loyalty program that makes paying rent actually rewarding. Here's how it works. Every rent payment earns you points you can use toward flights, hotels, lift rides, Amazon purchases, and my personal favorite, SoulCycle classes. When I travel, there's no better way to start my day than through shared positivity and hard work.

10:59Now, if you're thinking, I own a home, I don't rent. Well, my friends, I've got great news. Because starting in February, Built members can earn points on mortgage payments for the first time. Plus, you'll unlock exclusive benefits with over 45 ,000 restaurants, fitness studios, pharmacies, and neighborhood partners. So whether you're renting or owning, Built helps you earn rewards just for living where you live. Join the loyalty program for renters at joinbuilt.com slash Tyler. That's J-O-I-N-B-I-L-T dot com slash Tyler. And make sure to use our URL so they know we sent you. part two tax efficiency or how to stop giving the irs free money so let's start with the most important factor in how much money we make over time and no it's not our returns on our assets it's taxes here's the thing not all investments are taxed the same way some investments generate a lot of taxable income every year through dividends and interest.

12:18And some investors generate a lot of taxable income every year by being ding-dongs and selling for short-term capital gains when they didn't need the money or realize what they were even realizing. Other investments, however, generate almost no taxable income until you sell them. Growth stocks, many index funds. And if you put the wrong investment in the wrong account, you're going to pay some taxes that you didn't need to. So here's a general rule. Put tax inefficient investments in tax advantaged accounts and put tax efficient investments in taxable accounts. Let me break that down further as I appreciate we might need some examples.

13:03Let's start with tax inefficient investments that belong in 401ks, IRAs, HSAs, or Roths. These are investments that generate a lot of taxable income. Bonds. Most bonds pay interest, and most of that interest is taxed as ordinary income, the worst kind of tax. If you hold bonds in a taxable account, You're paying up to 37 % federal tax, plus potential state tax, on every dollar of interest. That's insane. So put bonds in your traditional 401k or IRA, where the interest can compound without being taxed every year, especially if you're investing in bonds for stability rather than cash flow. REITs, real estate investment trusts.

13:55REITs are required by law to pay out 90 % of their income as dividends. And those dividends are usually taxed as ordinary income, not the favorable qualified dividend rate. And most people don't realize this about REITs and just think they're now wonderfully exposed to the wonderful world of investing in empty office buildings in Nebraska strip malls. So again, terrible for taxable accounts, great for tax-deferred accounts, again, unless you need the income. Actively managed funds. This is a sneak attack of all sneak attacks. If you invest in some big bank's proprietary mutual fund that has been sold to you via a five-page glossy pamphlet with more fine print and couples smiling while kayaking through Alaska, you've been sold a tax nightmare, not to mention the biggest scam in the financial world.

14:50These funds are super expensive in and of themselves. They trade frequently, which means they generate a lot of short-term capital gains, which are taxed as ordinary income. So if you're going to own an actively managed fund, and I'd argue you shouldn't, but I won't digress or rant further here, at least put it in a tax-advantaged account. Finally, high-dividend stocks. If you own individual stocks that pay big, fat dividends, super-duper, that's awesome. You might be stoked that you found some great companies that pay out dividends and have increased those dividends for decades. Think utility companies, telecom stocks, or those dividend aristocrats that everyone loves to love.

15:36Those dividends are getting taxed every single year. So no, you're not making 3 % to 4 % as that's pre-tax returns. Put these individual stocks or dividend funds in a Roth IRA if you can, so those dividends can compound tax-free forever. Now, let's move to tax-efficient investments, and these are what I would place in a taxable brokerage account. These are investments that generate little to no taxable income until you sell. Index funds, especially total market funds. Index funds like VTI or FXAIX rarely distribute capital gains because they rarely trade. And that's why I endorse these types of funds in all of my content.

16:26They just sit there holding the same stocks, quietly compounding, perfect for taxable accounts. You'll pay taxes on the small dividends they throw out, usually around 1 % to 2 % annually, but that's it. And when you eventually sell, if you've held the funds for over a year, which you should because you have no business buying in and out of index funds randomly, you will once again pay long-term capital gains rates, usually 15 % or 20%, instead of ordinary income rates. Growth stocks. These could be individual or through funds. These are stocks that don't necessarily pay dividends. Think tech companies like Amazon, Tesla, etc.

17:06They generate zero taxable income until you sell the investments if you sell them for a gain. So you can hold them in a taxable account for decades, letting them compound and only pay taxes when you finally sell. And again, you'd pay long-term capital gains rates, not ordinary income rates. Not to mention, if a company doesn't pay dividends, it usually means they think they can invest the money back into their own company and get a higher return than you could from investing in the general market. AKA, they think they're smarter than you. AKA, that's the kind of company I want to actually invest in.

17:44But hey, that's just me. And finally, municipal bonds. If you're in a high tax bracket and want to own bonds, municipal bonds are a special case. The interest is tax-free at the federal level and sometimes at the state level too if you buy your own state's municipal bonds. So these actually benefit from being in a taxable account because you don't need the tax shelter. Though, honestly, if you're under 50 and investing for growth, you probably shouldn't own bonds at all. But alas, there's only so much I can do from the woods of Vermont. Here's a quick real-world example of how this actually saves you money.

18:22Let's say you have$50 ,000 to invest. You have$25 ,000 of available space in your Roth IRA and$25 ,000 in your taxable brokerage account. You want to own two things,$25 ,000 in bonds paying 4 % interest and$25 ,000 in a total stock market index fund paying 1.5 % in dividends. Here's the wrong way to do this. You put the bonds in a taxable account. You'll pay ordinary income tax on$1 ,000 of interest every year, and at a 24 % tax rate, that could be up to$240 in taxes annually. Then you put the index fund in the Roth IRA. The$375 in dividends compounds tax-free. That's great. Your total annual tax bill up to$240.

19:10Now, the right way to do this, bonds in the Roth IRA. The$1 ,000 in interest compounds tax-free. You pay nothing. Index fund in taxable account. You'll pay tax on$375 in dividends at a 15 % qualified dividend rate. That's up to$56.25 in taxes annually. Total annual tax bill,$56.25. By simply swapping the location of your investments, You just saved about$183 a year. Over 30 years, that's about$5 ,500 in taxes that you didn't have to pay. And that's assuming the investments never even grow. Once you factor in compounding, then you're looking at tens of thousands of dollars saved, all because you put the right investment in the right account.

20:01Now, quick side note, even though this sounds contradictory, I would not put bonds in my Roth as space in the Roth is like a VIP seating for investments, as we don't always get to directly contribute, and the limits are relatively low. So because it's a long time horizon account, and I will never pay taxes on this account, I shoot for the moon in this account, but that's just me. If you want more conservative investments, a Roth and bonds can play very nicely together. Part three, access and liquidity, or when you'll actually need this money. Okay, so we've talked about taxes. Now let's talk about the second most important factor.

20:40when you're going to need the money. Because here's the thing, not all accounts are created equal when it comes to access. Your Roth IRA has different withdrawal rules than your 401k, which has different rules than your taxable brokerage account. And if you put money in the wrong account, you might end up either paying penalties to access it early or worse, not having it available when you actually need it. When I was 27, I put$30 ,000 into a CD thinking I was fiscally responsible. Then, you know, I remembered I was 27 and would rather spend the money on beer and pizza and flashy cars, pulled it out before it matured, and ended up losing money based on the fees alone.

21:20Do as I say, not as I do. So let's break down time horizon and access to accounts. Let me ask you something. How much money did you leave on the table last year? Not because you didn't earn it, not because you didn't work hard enough, but because you didn't have a tax strategy. You just had a tax preparer who shows up in March, asks for your receipts, and files your return. If you're a small business owner or a high net worth individual, that approach is costing you, big time. Here's what I mean. A tax preparer tells you what you owe. A tax strategist tells you how to owe less legally, proactively, before the year ends.

22:07That's why I'm excited to tell you about Gelt. Gelt isn't just another CPA firm. They're the kind of tax partner that actually reaches out to you throughout the year, not just in April when it's too late to do anything. They help you make moves in real time. Should you buy that equipment now or wait? Should you take a distribution or keep it in the business? When should you make estimated payments to avoid penalties? And here's the part that genuinely shocked me. Their platform is actually enjoyable to use. I know that sounds ridiculous when we're talking about taxes, but it's true. Everything's organized, intuitive, and built for people who run businesses.

22:49So if you've been putting off finding a real tax partner because you assume it's expensive or complicated, stop. Gelt is the type of company that will make your life less expensive and less complicated. And they will provide you with a free consultation so you can see if they're the right fit. Visit joingelt.com slash Tyler. That's J-O-I-N-G-E-L-T dot com slash Tyler. And if you sign up by January 31st, they'll help you calculate your taxes due by April 15th. No headaches, no surprises, just a plan that works for you. That's joingelt.com slash Tyler. Go check them out today. If you need money in zero to five years, I would personally put it in a taxable brokerage or just have it in cash in a money market fund.

23:45If you need this money for a house down payment, a wedding, a new car, if you have an emergency fund, even though we've talked about that, do not put it in the stock market. I don't care how good the returns look. I don't care how safe you think a 60-40 portfolio is. If you need the money in five years, you cannot afford a 30 % drawdown right before you need it. So my common rule here, if you know you need X amount of money by Y time. And you can name both X and Y clearly. It's money market fund in a taxable brokerage account, period. Boring, yes. Safe, yes. And safety matters when your time horizon is short.

24:28If you absolutely insist on investing short-term money, and I don't recommend this, put it in a taxable brokerage account in something relatively conservative like an intermediate bond fund or a target date fund that aligns with today's date. At least then you can access it without penalties if and when you need it. If you need the money in five to ten years, once again, taxable brokerage. This to me is the sweet spot for taxable brokerage accounts. Maybe you're saving over time for a house or planning to retire early or building a life fund for a sabbatical or potential career change. You want growth, you might even need growth, but you also want access without penalties.

25:10That's where a taxable brokerage gives you both. You can invest in stocks, bonds, or a balanced portfolio. And if you need the money in seven years, you just sell. No penalties, no restrictions, no asking the IRS for permission. And the timeline usually gives you enough of a time buffer to make it through swings and be able to sell when it works for you and for the valuation of your portfolio. The downside, yeah, as we talked about, taxes. You'll pay taxes on gains when you sell, but if you've held the investments for more than a year, you'll pay long-term cap gains rates, which is better than ordinary income rates.

25:50If you need the money in 10 to 30 years, Roth IRA if you can, IRA or 401k or even HSA if you can't. if you're saving for retirement, but you're still decades away. The Roth IRA is your best friend. Why? Because you get tax-free growth and some flexibility that very few people still talk about. This little lesser-known secret about the Roth that most people just actually don't know. You can, in fact, withdraw your contributions, not your gains, at any time for any reason without taxes or penalties. There's no five-year waiting period. That's if you convert from a traditional IRA to a Roth. But if you directly contribute$7 ,000 per year for 10 years to a Roth, you can pull out$70 ,000 whenever you want.

26:45The gains stay locked until 59 and a half without penalty, but the contributions are yours. This makes the Roth IRA really flexible. It's technically a retirement account, but it can also function as an emergency fund or a medium-term savings vehicle if you need it to. Again, I'd strongly recommend not doing this unless it's a genuine emergency because you're giving up decades of tax-free compounding, but it's important to know that that accessibility actually does exist with the Roth IRA. Finally, money you won't touch until your 90s or whatever the relative equivalent of your 90s will be for your projected health and well-being, traditional 401k or IRA.

27:29If you're sure you won't need the money until you're 59 and a half or older, the traditional 401k or IRA is a great choice, especially if you're in a high tax bracket now and expect to be in a lower tax bracket in retirement. That tax deduction today is valuable. The tax-deferred compounding is valuable. And if you retire to a state with friendly 401k withdrawal rules, as we saw in an episode a couple weeks ago, you will pay way less in taxes than you would have paid if you'd used a Roth. The downside, the money is locked up. If you need it before 59 and a half, you'll pay a 10 % early withdrawal penalty plus ordinary income taxes.

28:08So unless you're absolutely certain you won't need it, be careful about overfunding these accounts. Personally, I'm actually working on contributing less to some of the pre-tax accounts now, as I've done the math, and based on my principle in these accounts as of today, I'm relatively secure knowing I'll be at least okay in retirement. So I'd rather open up some flexibility elsewhere and not lock up too much money until post-60. Here's a quick real-world example, a.k.a. another of my own silly mistakes. When I was 28, I maxed out my traditional 401k for three years straight. I was making some decent disposable income, and everyone told me to max out your retirement account.

28:50So I did. Then at 31, I decided I wanted to take a year off and hike the Appalachian Trail. The problem? All my money was locked up in my 401k. I couldn't access it without paying penalties and taxes, and I did not have enough in a taxable brokerage account to fund six months of unemployment and considerable amounts of gorp. So I didn't go. I stayed at my job, kept contributing to my 401k, and told myself I'd hike the trail someday. Well, I'm now 42. I still haven't hiked it, and my hips are far, far worse. Not only that, but after spending a night here and there in a tent, I realized I never actually wanted to hike it in the first place, and I hate camping.

29:32But the point is, even though I'm stoked that my pre-tax accounts are all very healthy, I do from time to time think, man, I wish I'd built a little more flexibility into my 20s and 30s. The lesson should be clear. Don't overfund your retirement accounts at the expense of living your life now. Build in at least some liquidity. Give yourself options, because the worst financial decision you can make is deferring all your dreams until you're 65. And then you realize that once you're 65, the idea of sleeping in a communal hut infested with mice and damp AT through hikers who haven't showered in months is about as appealing as realizing the only person who will now join you on said hike at that age is someone trying to sell you fixed index annuities before you reach Katahdin.

30:23Part 4. Volatility and risk tolerance. Or, don't put rocket fuel in your emergency fund. Let's talk about volatility, because here's something else we need to consider. Not all accounts are psychologically equal. This is new to some people. Losing 20 % in your taxable brokerage account feels very different than losing 20 % in your Roth IRA. Why? Because you can access your taxable brokerage account, which means when it drops, your brain is a little more likely to start screaming, sell, get out before it gets worse. But your 401k, you know that money's locked up until you're 59 and a half or willing to pay the penalties.