Written By: Stephen Smalenberger, EA
When people think about their portfolio, they often immediately remember the underlying investment holdings like stocks, bonds, mutual funds, ETFs, etc. What about you? What comes to mind when the word “portfolio” is mentioned?
Often times what they don’t think about are the types of accounts that make up their entire portfolio, the grouping. How are your accounts registered? Are they qualified or non-qualified?
Thinking of your accounts like tools in a toolbox, each serving a different purpose, allows you to accomplish a variety of goals in the best way possible.
Some quick terminology to define:
- Qualified: Retirement account
- Tax-Deferred: investment growth is not taxed when earned but rather delayed into the future when the money is withdrawn. The money deposited into this type of account is known as “pre-tax or before-tax” money.
- Tax-Free: investment growth is not taxed. The money deposited into these is known as “post-tax or after-tax” money.
- Non-Qualified: Non-Retirement account
- Taxable: investment growth is taxed in the year earned.
The retirement-focused accounts allow for some great tax benefits either now or in the future. Each has its own positives/negatives, rules, benefits and limits. Not every type of account is right for everyone. Just like how every tool is not necessarily the right one for the job. Many may get the job done, but there are some made specifically for the task. Their design and purpose is to accomplish it efficiently.
Do you know what type of accounts make up your portfolio and do you know how they are registered?
Here’s a brief list of examples within each type of account grouping:
Defined Benefit Plan
Thrift Savings Plan
Over the coming weeks, I will be discussing each in more detail and comparing the characteristics they provide.