Taxable vs. Tax-Free Buckets

Nearly everyone is familiar with the “taxable bucket.” If an investment is in a “taxable bucket” then that means that any earnings on that investment will be taxable. Most people use these in the form of a tax-deferred IRA or 401(k). In those examples both the contributions and the earnings are taxable upon withdrawal at whatever the tax rate is at that time (likely much higher than it is today). Page 11 in my book “Banking On Yourself: The BIG Secret to Generational Wealth” touches on the dangers of this.

A savings account could also be an example because even the piddly amount of interest you’d earn in a savings account is taxable.

The “tax-free bucket” includes earnings that are NOT taxable neither now nor later. Unlike a tax-deferred account where you pay taxes on your earnings, in a tax-free account the earnings are tax-free! Examples of a tax-free investment are ROTH IRAs, ROTH 401(k)s, and “Infinite Banking” accounts.

ROTHs have limitations. With ROTHs you’re capped at how much you can put in each year, you can’t touch the earnings unpenalized until retirement age, and you have a 5 year period where you can’t touch the contributions either. With ROTH 401(k)s you may not even be able to touch your contributions after 5 years. It’ll be completely up to your employer’s rules.

With “Infinite Banking” accounts there’s virtually no cap on how much you can put into your account, you can use contributions immediately with no penalty, and you can use your earnings that grow tax-free whenever you want!

Although I like ROTHs and do think it’s a good idea to max them out (ONLY when using the proper investment vehicle within the ROTH), I’m not a fan of the cap and locked up earnings. You could potentially have higher earnings than in an Infinite Banking account IF invested properly. If not invested properly then you’re also subject to the risk of loss where an Infinite Bank doesn’t carry the risk of loss.

Infinite Banking offers so much more than the ROTH as you can see above and that’s why I favor them.

Be smart about your money. Put investments into your two buckets and at a minimum create the 𝗧𝗔𝗫-𝗙𝗥𝗘𝗘 one.

I provide my clients with the proper tools and investment vehicles that remove risk, promote growth, and reduce and/or eliminate taxes.

One of my law professors once told our class, “You don’t know what you don’t know.” That one statement was incredibly impactful and true. You owe it to yourself and your financial future to have a conversation to learn how you can set yourself up for a more prosperous future, retirement, and legacy.