If you’re deciding how to invest your money, it’s important to understand the effects that these investments will have on your taxes. We asked a panel of professionals to share their opinions on this topic. Read on to learn more.
Combination of both
I suggest combining both pre- and post-tax investments for better tax diversification. This can also help hedge against a change in tax rates and income in the future. With your pre-tax account contributions, you’re likely to pay lower taxes during your retirement. On the other hand, an after-tax account means that you’ve already paid the tax so you’ll only worry about paying the tax on future earnings.
Ethan Taub
Ethan Taub founded Taxry Inc with the mission to create one place to reach financial goals and comparison shop for any money matter.
Post-tax investments
Post-tax investments seem like a better idea to minimize tax liabilities. This is because post-tax investments would have already been taxed, therefore you know you will not be losing more than you’ve put in due to taxes. You can then look to minimize liabilities with the investments made which would already have been taxed, therefore you are not losing out on more than staked.
One factor
There is only one factor you can use to determine this: If your marginal tax rate is going to be lower, in the future you want pre-tax now and vice versa.
Kimberly Porter
Kimberly Porter, CEO at Microcredit Summit.
Stick with post-tax
If you want to minimize your tax hit when the tax season rolls around, it is best to stick with post-tax investments. This means that the investments and deductions will only be done after taxes are withheld. Otherwise, you will be able to invest more each month, but because that percentage is figured based on before taxes are coming out, you will still be liable for taxes based on the full amount.
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