Keep Running: Tax-Free Runners … Always Finish First!
Excerpt from our e-newsletter:
Wealth Watchers:Timely Tips for Financial Freedom
Everyone knows that investments come with costs, and taxes are the sharpest bite! But cheer up, there's good news. There's a strategy called tax-efficient investing that can help keep your money growing by paying less to Uncle Sam. This is really important if you're in a high tax bracket.
Think of it like a race between two runners. Mr. Taxable has to stop frequently to tie his shoes, but Mr. Tax-Free keeps running without breaks. You can guess who'll cross the finish line first. Yes, it's Mr. Tax-Free!
This race is a perfect way to understand how your money grows in different types of accounts. In a tax-free account, like Mr. Tax-Free, your money grows without pauses, without taxes slowing it down. But in a taxable account, it's like stopping to tie your shoes every time your investment makes a gain - taxes take a slice of it.
The interesting part? Both accounts get the same return on investment, like the runners using the same amount of energy. But since Mr. Tax-Free doesn't stop, he uses this energy more efficiently, just like a tax-free account.
So how much faster does a tax-free account run? Well, the speed can change based on different things, but the fact is, it ALWAYS wins the race against a taxable account. That's why tax-free accounts can be super for making your money grow!
So, remember, the key to investing is to shrink taxes. Do this by holding tax-efficient investments in taxable accounts and less tax-efficient ones in tax-advantaged accounts. That's how to get your money to grow the fastest over time!