What Are Tax Advantaged Accounts? (Do They Make Sense For You!?)

Summary

This video script delves into the concept of tax-advantaged accounts, explaining two main types: tax-exempt accounts, where you pay taxes now and avoid them later, exemplified by Roth IRAs; and tax-deferred accounts, which allow you to defer taxes until withdrawal, like traditional IRAs and 401(k)s. The script also introduces the Health Savings Account (HSA) as a 'super account' offering triple tax advantages, allowing tax-free growth and withdrawals for qualified medical expenses. The presenter, Zach, encourages viewers to subscribe for more personal finance insights and hints at a secret wealth-building strategy revealed in the video's conclusion.

Takeaways

• 💼 A tax-advantaged account is any account that saves you money on taxes, either now or in the future.
• 🌟 The two main types of tax-advantaged accounts are tax-exempt and tax-deferred accounts.
• 📉 Tax-exempt accounts, such as a Roth IRA, are taxed now and not taxed later, beneficial if you expect future tax rates to be higher.
• 🔄 Tax-deferred accounts, like traditional IRAs or 401(k)s, allow you to defer taxes now and pay them later, useful if you anticipate lower future tax rates.
• 🤫 There's a 'secret' super account that combines the benefits of both tax-exempt and tax-deferred accounts: the Health Savings Account (HSA).
• 🏥 HSAs require a high deductible health plan and offer triple tax advantages: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
• 💉 After a certain age, HSA funds can be used for non-medical expenses, similar to a traditional IRA, but withdrawals for qualified medical expenses remain tax-free at any age.
• 💰 The distinction between an account and an investment is important; an account is a place to store money, while a tax-advantaged investment offers tax savings.
• 🚫 Non-tax-advantaged accounts, like individual brokerage accounts, do not offer tax benefits on contributions, growth, or withdrawals.
• 📈 Investments within non-tax-advantaged accounts are subject to taxes on capital gains, dividends, and interest.
• 👍 The video encourages viewers to like, subscribe, and watch additional content for mastering personal finance and achieving financial independence.

Q & A

What is a tax-advantaged account?

A tax-advantaged account is any account that allows you to save money on taxes, either by reducing your current tax liability or by deferring taxes until a later time.

What is the basic principle of a tax-exempt account?

A tax-exempt account is one where you are taxed now and not taxed later. It's beneficial if you anticipate that your tax rates will be higher in the future than they are currently.

How does a tax-deferred account differ from a tax-exempt account?

A tax-deferred account allows you to defer taxes now and pay them later. This is the opposite of a tax-exempt account and is preferable if you expect your tax rates to be lower in the future.

What is the advantage of using a tax-deferred account?

The advantage of a tax-deferred account is that you can invest money now without paying taxes on it, and only pay taxes when you withdraw the funds in the future, potentially at a lower tax rate.

Can you give an example of a tax-exempt account?

Examples of tax-exempt accounts include a Roth IRA and a Roth 401(k). These accounts allow for tax-free growth and withdrawals after meeting certain conditions.

What is a traditional IRA, and how does it relate to tax deferral?

A traditional IRA is an example of a tax-deferred account. Contributions to a traditional IRA are typically tax-deductible, and taxes are paid upon withdrawal during retirement.

What is the difference between an account and an investment in the context of tax advantages?

An account is a place to store money, which may or may not have tax advantages. An investment, on the other hand, is an asset you purchase with the potential for profit and can have tax advantages regardless of the account type it's held in.

What is a health savings account (HSA), and how is it tax-advantaged?

A health savings account (HSA) is a special account that combines features of both tax-exempt and tax-deferred accounts. Contributions are tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses.

What are the eligibility requirements for opening an HSA?

To be eligible for an HSA, you must have a high deductible health care plan with a deductible that meets or exceeds certain minimum thresholds set by the IRS.

How does an HSA differ from a traditional IRA or 401(k) after a certain age?

After reaching a certain age, an HSA can be used for non-medical expenses without penalties, similar to a traditional IRA or 401(k), but the withdrawals are taxed as ordinary income if not for qualified medical expenses.

What is the potential benefit of using an HSA for long-term savings?

An HSA can be used for long-term savings as it allows for tax-free growth and withdrawals for qualified medical expenses, providing a triple tax advantage and a potential source of tax-free funds for health-related costs in retirement.

Outlines

00:00

💼 Understanding Tax-Advantaged Accounts

This paragraph introduces the concept of tax-advantaged accounts, explaining that they are financial vehicles that can reduce tax liabilities. The speaker clarifies two main types: tax-exempt accounts, where taxes are paid upfront and not on withdrawals, suitable for those expecting higher future taxes; and tax-deferred accounts, where contributions are made pre-tax and taxed upon withdrawal, beneficial for those anticipating lower future taxes. Examples of these accounts include Roth IRAs and traditional IRAs/401(k)s. The speaker also hints at a 'super account' that combines benefits of both, to be revealed later in the video.

05:01

🏥 The Power of Health Savings Accounts (HSA)

The second paragraph delves into the Health Savings Account (HSA), a type of tax-advantaged account linked to high-deductible health plans. HSAs offer triple tax benefits: contributions are tax-deductible, investment gains within the account are tax-free, and withdrawals for qualified medical expenses are also tax-exempt. The speaker highlights the HSA's unique advantage as a 'super account' that can be used for medical expenses tax-free at any age, or for other expenses post a certain age, subject to income tax but without penalties. The paragraph concludes with a call to action to watch another video on achieving financial independence and a reminder to like and subscribe for more personal finance insights.

Keywords

💡Tax-advantaged account

A tax-advantaged account is a financial account that offers certain tax benefits to encourage saving for specific purposes. In the video, the term is central to the theme, as it is used to describe accounts that help save on taxes either now or in the future. Examples given include Roth IRA and traditional IRA/401k.

💡Tax-exempt

Tax-exempt refers to income that is not subject to taxation. In the context of the video, a tax-exempt account is one where you pay taxes on contributions now but not on withdrawals later, anticipating that your tax rate will be higher in the future. The script mentions Roth IRA and Roth 401k as examples of tax-exempt accounts.

💡Tax-deferred

Tax-deferred accounts are those where taxes are not paid on contributions or earnings until funds are withdrawn. This type of account is suitable for individuals expecting their tax rate to be lower in the future. The video script uses traditional IRA and traditional 401k as examples of tax-deferred accounts.

💡Health Savings Account (HSA)

A Health Savings Account (HSA) is a special type of tax-advantaged account designed for individuals with high-deductible health plans. The video highlights the HSA as a 'super account' because it offers tax benefits for contributions, growth, and withdrawals for qualified medical expenses. It also mentions the potential for penalty-free withdrawals for non-medical expenses after a certain age, similar to a traditional IRA.

💡Roth IRA

A Roth IRA is a retirement savings account where contributions are made after-tax, and qualified withdrawals are tax-free. In the video, it is presented as an example of a tax-exempt account, emphasizing its benefit for those who expect to be in a higher tax bracket during retirement.

💡Traditional IRA

A traditional IRA is a retirement account where contributions are tax-deductible in the year they are made, and taxes are paid upon withdrawal during retirement. The video script positions it as a tax-deferred account, illustrating the concept of deferring taxes until a later date.

💡401k

A 401k is a retirement savings plan sponsored by employers, with contributions often made on a pre-tax basis. The video discusses both Roth and traditional versions of the 401k, emphasizing their tax implications and how they fit into different tax-advantaged strategies.

💡Taxable account

A taxable account is an investment account that does not offer any special tax benefits. The video script contrasts this with tax-advantaged accounts, noting that gains, dividends, and interest earned within a taxable account are subject to taxes.

💡Qualified medical expenses

In the context of an HSA, qualified medical expenses are expenses that meet the criteria set by tax regulations for withdrawals from an HSA to be tax-free. The video script explains that withdrawals for these expenses are not taxed, highlighting the triple tax benefit of the HSA.

💡Individual brokerage account

An individual brokerage account is a general investment account that does not offer tax advantages. The video script uses this term to illustrate a type of account where contributions, growth, and withdrawals are all subject to standard income tax rates.

💡Capital gains

Capital gains refer to the profits made from the sale of an investment or property. In the video, it is mentioned that in a taxable account, capital gains are subject to taxes, contrasting with the tax benefits offered by tax-advantaged accounts.

Highlights

Tax-advantaged accounts save you money on taxes by either deferring taxes or exempting taxes.

Tax-exempt accounts involve paying taxes now and not paying taxes later, beneficial if you expect higher future taxes.

Tax-deferred accounts allow you to defer taxes now and pay them later, advantageous if you expect lower future taxes.

Examples of tax-exempt accounts include Roth IRA and Roth 401(k).

Examples of tax-deferred accounts include traditional IRA and traditional 401(k).

Regular individual brokerage accounts are not tax-advantaged, and you pay taxes on gains, dividends, and interest.

A Health Savings Account (HSA) is a unique tax-advantaged account offering triple tax benefits.

HSAs require a high-deductible health plan to be eligible for contributions.

Contributions to an HSA are tax-deferred, investments grow tax-free, and withdrawals for qualified medical expenses are tax-free.

After a certain age, HSAs can be used for non-medical expenses without penalties, but income tax will apply.

HSAs are considered the 'super account' of tax-advantaged accounts due to their multiple tax benefits.

Differentiate between a tax-advantaged account (where money is stored) and a tax-advantaged investment (specific investments offering tax benefits).

Taxable accounts offer no tax benefits on contributions, growth, or withdrawals but are still viable options for some investors.

Understanding the type of tax-advantaged account to use depends on your current and future tax expectations.

Subscribe to the channel for weekly personal finance tips and become a master of your cash flow.

Transcripts

have you ever heard the phrase

tax-advantaged account well you probably

have because I mentioned it a lot and

just in case you don't know what that is

we're gonna discuss it today and I'm

gonna tell you everything that you need

to know about what the term tax

advantage account means and the short

answer to that is any account that you

can put money in that saves you money on

your taxes that is a tax advantage

account and that's it that's the end of

the video okay no it's not really the

end of the video there's a lot more to

know about it

but I'm gonna try to explain it the best

I can and as simple as I can because you

need to know the different kinds of

texts manage accounts so the first tax

advantage account that I want to talk

about is tax exempt so what tax exempt

means is that you are taxed now and you

are not taxed later so if you are taxed

now and you're not taxed later that is

the kind of account that you would want

to use if you anticipate that your taxes

are going to be higher later than they

are now so that is when you would want

to use a tax exempt account so you pay

taxes now and you don't pay taxes later

because you expect your taxes to be

lower now than they are in the future on

the complete opposite side of the

spectrum another tax advantage account

type you have is what's known as a tax

deferred account so with a tax deferred

account you don't pay any taxes now but

you actually pay taxes later and the

reverse is true is when you would want

to use this type of account if you

expect that your taxes are going to be

higher now then you should use a tax

deferred account and defer paying taxes

now don't pay taxes on a certain amount

of money now whatever amount of money

you put into that account and then later

when you go to withdraw that money that

is when you'll pay taxes on it because

you expect that your taxes are going to

be lower in the future those are the two

main types of tax advantage accounts but

there is one highly kept secret that can

be used to supercharge your wealth

because there's one like super account

that can pretty much do both at the same

time and you're gonna have to stay until

the end of the videos to learn what that

account is because there is so much more

to come but first let me just say if you

are enjoying this particular video so

far please give it a thumbs up give me a

lot

I really appreciate it and it really

helps me out well at the same time if

you want to become a master of your cash

flow every single week I am putting out

new information on personal finance and

I would really appreciate it if you

subscribe to the channel because I know

that there's something that I can help

you with but let's get back to the main

video so you need to keep in mind that

when I'm talking about a tax advantage

account you need to differentiate the

meaning between account and investment

so an account is just a place where you

can store money theoretically you know

say for example theoretically in a tax

advantage account you could just put

cash there and never invest in anything

and it's just in an account whereas you

can also have what's known as a tax

advantaged investment but it doesn't

necessarily have to be in a tax

advantaged account so any kind of

investment that offers you tax savings

that would be a tax advantage investment

but for the sake of this video we're

just talking about the actual accounts

that can save you money on your taxes

you know whether it be now or later

first getting back to the tax exempt

because a tax exempt that is where you

pay taxes now and you don't pay taxes

later so a good example of that would be

a Roth IRA a Roth individual retirement

account that is a tax exempt account at

the same time you have a Roth 401 K

version that is another good example of

that which is basically just a Roth

version of a employer sponsored

retirement account now with the other

example with the tax deferred account a

good example of that would be the

traditional IRA or a traditional 401k

because with the traditional accounts

you defer your taxes now and you pay

taxes later so those are tax deferred

accounts but you also have accounts that

are not tax advantaged

at all now just because an account is

not tax advantaged doesn't mean it's not

a good option for some people so a good

example is that would be just a

individual brokerage account you know a

regular investment account that you open

up you know maybe at an online broker I

myself use fidelity investments a lot of

people love to use Vanguard you know

Charles Schwab whatever your choice may

be if you have a regular individual

brokerage account at one of these places

then you could potentially not have any

tax advantages like you won't get a tax

advantage either when you put the money

in the account or when you take it out

or while it's growing

so that would be a just a regular

account and generally we call that

either like a taxable account or just an

investment account now the difference

with one of these accounts is that the

money that you put in is already taxed

and then while it's invested the money

grows and pays taxes so if you realize a

capital gain within an account you're

gonna pay taxes on it if you get a

dividend from that account you're gonna

pay taxes on it you know if you earn any

interest in that account you're gonna

pay taxes on it however while the money

is in that account you don't have to

repay income taxes on that amount say if

you would draw the amount you only pay

taxes on any amounts of gains that you

realize within the account and now for

the really secret big wealth builder

probably the best account because you

are able to save money on taxes when it

goes in while it's in there and when it

comes out possibly and this super secret

account is actually known as a health

savings account or an HSA maybe you've

heard of it because in order to have an

HSA you have to have a high deductible

health care plan and so your deductible

for your health insurance has to be at

or above a certain threshold before you

can become eligible to put money into a

health savings account and so with the

health savings account when you put

money in you get tax deferred

contributions so you put a certain

amount of money in your HSA you don't

pay income taxes on that amount that you

put within the HSA and then while it's

in the account you can invest in

something and then if you make any gains

on those investments you don't pay any

taxes on those gains while they're in

the account and here's where the real

magic happens because when you withdraw

for medical expenses for qualified

medical expenses the money that you

would draw you don't pay any taxes on it

as long as it is qualified medical

expenses no matter what your age is so

that's the power of the HSA because you

know at one point or another we're

probably gonna have some you know

medical expenses right and you can use

those funds in order to pay for them you

know tax-free in three different levels

but there's also another benefit to the

HSA and that is once you reach a certain

age you can actually use it for other

expenses without paying any kind of

penalties or anything but then it's

treated as a traditional IRA where you

just withdraw the money and if it's not

for a qualified medical expense then

you'll just pay income taxes on that

withdrawal now but if it is for

five medical expenses then no taxes and

no interest no fees anything like that

so the HSA really is the super account

of tax advantage accounts and speaking

of gaining an advantage one advantage

that you can do to gain in your

financial life is watch this video that

I created it is called how to achieve

financial independence in 10 years or

less and it is basically a blueprint to

becoming a master of your own cash flow

so if you haven't watched that video

already you definitely need to watch

that video and thank you so much for

watching this video don't forget to Like

and subscribe I'm Zach come on cashflow

calm and I hope to see you next time