The Power of Tax Deferral on Your Investment Planning

In this video, Matt Blocki and Chris Pavcic from EWA emphasize the importance of placing your money in tax-efficient environments for long-term growth. They illustrate this concept with a comparison between taxable and Roth accounts using an example of a million-dollar investment over 20 years with an 8% rate of return.

They show that if the million dollars grows tax-free in a Roth account, it accumulates to $4,660,000. However, in a taxable account with a 24% tax bracket, the final balance decreases significantly to $3,200,000. This demonstrates the substantial impact of tax efficiency on wealth accumulation.

The speakers highlight the benefits of Roth IRAs, emphasizing the advantages of tax-free growth. They recommend maximizing tax-advantaged accounts like Roth IRAs before considering taxable accounts, which should primarily focus on equities with long-term capital gains to minimize tax erosion.

They invite viewers to reach out with questions and aim to ensure that financial plans are as tax-efficient as possible.

Video Transcript

Matt Blocki with EWA. Chris Pavcic with EWA. Today we are talking about the importance of putting your money in an environment where it says tax -efficient while it’s growing. Chris walk us through some numbers here. Why is it so important to make sure that your wealth is accumulating in the right place?

Great question Matt. So whenever we’re saving for retirement there’s generally a couple different buckets that we can put the funds into to grow for the long term. So up on the screen you’ll see now that there’s an example of taxable and the light blue and Roth and the dark blue.

So this is just an example assuming a million dollars was growing over 20 years with a rate of return of 8%. So if you had this million dollars over 20 years that would turn into 4 ,660 ,000 as shown on the right side of the screen.

If that’s in a Roth environment you get to keep that full balance. Conversely if it’s in a taxable environment and you’re in a 24% bracket that 4 .6 turns to 3 .2. So very important to look at where we’re putting this money with the end in mind.

Wow that’s almost a 1 .4 million dollar difference over you know growth of million dollars over 20 years just by having money in a Roth. So some of your fifth and nine and a half, something the five year rule has been followed you’re looking at everything tax -free.

And then on the 40% bracket it looks like it’s a 2 .1 million dollar difference. So great point we are big proponents of Roth IRAs. If your money can grow in a tax deferred manner it’s typically best to maximize these vehicles over a taxable manner.

Once these vehicles are exhausted the government does put limits on 401Ks, Roth IRAs, then that’s typically where a taxable account becomes very important to supplement those accounts. But the taxable account to stay on the 24% side we want to focus on equities that have long -term capital gains attached to it versus if you’re putting bonds that are subject to for example in the top tax bracket a 37% federal and a 3% state tax a total of 40% you can see the erosion of your growth even lower down to 2 .5 million over the 20 years.

Look forward to discussing any questions you have and to make sure that your plan is as tax -efficient as possible.

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