What Are Tax Advantaged Accounts? (Do They Make Sense For You!?)
Summary
TLDRThis 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
- ๐ผ A tax-advantaged account is any account that saves you money on taxes, either now or in the future.
- ๐ The two main types of tax-advantaged accounts are tax-exempt and tax-deferred accounts.
- ๐ 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.
- ๐ 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.
- ๐คซ There's a 'secret' super account that combines the benefits of both tax-exempt and tax-deferred accounts: the Health Savings Account (HSA).
- ๐ฅ 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.
- ๐ 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.
- ๐ฐ 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.
- ๐ซ Non-tax-advantaged accounts, like individual brokerage accounts, do not offer tax benefits on contributions, growth, or withdrawals.
- ๐ Investments within non-tax-advantaged accounts are subject to taxes on capital gains, dividends, and interest.
- ๐ 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
๐ผ 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.
๐ฅ 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.
Mindmap
Keywords
๐กTax-advantaged account
๐กTax-exempt
๐กTax-deferred
๐กHealth Savings Account (HSA)
๐กRoth IRA
๐กTraditional IRA
๐ก401k
๐กTaxable account
๐กQualified medical expenses
๐กIndividual brokerage account
๐กCapital gains
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
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