Today I wanted to talk about a concept specific to the placement of your investment accounts. By placement, I mean whether you own your investments inside of a tax-deferred investment account such as an IRA or 401k, those account types offered by Rocket Dollar, and/or a taxable brokerage account.
Let's take two individuals on the Rocket Dollar team (just for the fun of it): Ryan, one of our engineers, invests $100,000 earning 7% consistently year over year, for 20 years, versus Krista, another engineer for Rocket Dollar, who also invests $100,000 and earns 7% consistently over 20 years, too.The difference is, Krista has a tax-deferred account and will actually have a $136,874 increase in value over Ryan who owns the investment in the taxable brokerage account.
Even if Krista were to withdraw that money, sure she’s going to have to pay the taxes somewhere down the road, but it would still only be $90,000 in taxes. Krista's earnings, even with taxes, still offer a net of almost $50,000 better than what Ryan earned with the exact same investment in a taxable account.
This chart makes it easy to understand that investing with a tax-deferred account will always win out over a taxable brokerage account. You can take advantage of the tax savings with a Self-Directed IRA or Solo 401(k), and this way you can also invest in alternatives (real estate, private equity, peer-to-peer loans, etc.) should you choose to.