{"id":22101,"date":"2025-10-23T15:01:49","date_gmt":"2025-10-23T15:01:49","guid":{"rendered":"https:\/\/finderica.com\/?p=22101"},"modified":"2025-10-23T15:01:49","modified_gmt":"2025-10-23T15:01:49","slug":"tax-me-now-later-or-never","status":"publish","type":"post","link":"https:\/\/finderica.com\/?p=22101","title":{"rendered":"Tax Me Now, Later or Never"},"content":{"rendered":"
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\u00a0<\/p>\n

Benjamin Franklin said there were only two things certain in life: death and taxes.<\/p>\n

And while you can\u2019t avoid taxes, you can choose when you want to pay them when it comes to certain accounts and savings.<\/p>\n

To explain how the growth in your investments is taxed, consider that there are three tax buckets: \u201ctax me now,\u201d \u201ctax me later,\u201d and \u201ctax me never.\u201d<\/p>\n

We want to focus specifically on how the growth in your accounts is taxed, because you don\u2019t put money into an investment for it just to stay level. You want your money to continue to grow.<\/p>\n

The growth on your Thrift Savings Plan (TSP) and other investments will either be taxed now, taxed later, or even not taxed at all!<\/p>\n

The Three Tax Buckets<\/h2>\n

The first bucket is the \u201ctax me now\u201d bucket, or what we refer to as taxable money. As you continue to invest, you\u2019re taxed along the way.<\/p>\n

The second bucket is the \u201ctax me later\u201d bucket, which is probably what you have in your TSP account. That\u2019s called \u201ctax deferred.\u201d On accounts in this bucket, you know you\u2019re going to pay taxes, you\u2019re just choosing to pay them later.<\/p>\n

The third bucket is the \u201ctax me never\u201d bucket, which of course, sounds great. Remember, we\u2019re only talking about the growth on accounts, not the principal. This is our tax-free bucket.<\/p>\n

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The \u201cTax Me Now\u201d Bucket<\/h2>\n

Let\u2019s break down each of these buckets more clearly:<\/p>\n

In the \u201ctax me now\u201d bucket are accounts that you probably use on a regular basis: your savings account, your checking account, and the interest that grows in each of those accounts. Also, money markets, CDs, bonds, and normal mutual funds that are not in an IRA.<\/p>\n

The growth in these accounts is taxed each year. You need to fund these accounts with after-tax money, so you don\u2019t get any tax advantage in the beginning. In fact, you\u2019re not given a tax advantage at all in some of these accounts.<\/p>\n

You\u2019ll know that you have growth in a taxable account if each year you get a 1099. That\u2019s the tax form that tells you what the growth is in your account and what you will need to claim. You claim that money as income on your taxes.<\/p>\n

While it\u2019s great to know that you have, say, a mutual fund that made substantial gains that year, you\u2019ll need to pay taxes in that year on the gain. Despite this drawback, it\u2019s still better than spending all of your money throughout the year and not having anything to show for it.<\/p>\n

The \u201cTax Me Later\u201d Bucket<\/h2>\n

The second bucket is the \u201ctax me later\u201d bucket or tax deferred. In this bucket are accounts like a traditional IRA, a traditional 401(k), a traditional 403(b), or a traditional Thrift Savings Plan. These accounts are funded with pre-tax money, meaning that you get to contribute to these accounts without paying tax on that money right now. You get an immediate tax advantage and do not need to claim that contribution as income in the current year. This is great, because it feels good to not pay taxes.<\/p>\n

When we\u2019re thinking about tax deferred, we know we get that immediate tax advantage, but the tax trains will come in later. And we won\u2019t really know what the taxes due are going to look like then. We want to be sure to be in a lower bracket at that point to get the advantage of not having to pay a lot of taxes later.<\/p>\n

The \u201cTax Me Never\u201d Bucket<\/h2>\n

As a last step, let\u2019s talk about the \u201ctax me never\u201d bucket, or the tax-free bucket. In this bucket are accounts like a Roth IRA, a Roth 401(k), or Roth 403(b), or a Roth TSP. Other accounts you might be familiar with include the Coverdell Education Savings Account, the 529 College Plans, muni bonds, and life insurance proceeds.<\/p>\n

You do pay tax when you contribute to those accounts initially. These funds are contributed to with after tax money, meaning you need to claim the contribution that you\u2019re making to these accounts as income in the current year.<\/p>\n

Where the tax-free scenario comes in is how the growth is taxed later. We\u2019ve taken care of the taxes on the principal, that\u2019s the contribution that you made, but later the growth will also be tax free.<\/p>\n

Consider this if you have all of your money in the first two buckets, either in the taxable bucket or the tax deferred bucket, which would be like your savings account (in bucket one) or traditional TSP (in bucket two). This would mean that in retirement, you won\u2019t have any choices to maximize the opportunities to minimize your tax obligations in retirement. So consider putting at least some of your money in the third bucket.<\/p>\n

The Roth TSP<\/h2>\n

As an example of an account that is in the \u201ctax me never\u201d bucket, consider the Roth TSP.<\/p>\n

When your money goes into the Roth, you pay the tax today on that principal that you\u2019re using to fund the Roth. When that account grows and you go to take the money out, both the principal and the growth will be tax-free, as long as you meet the normal IRS rules. All of the money you take out is tax-free. Many federal employees and retirees don\u2019t realize that there\u2019s tax-free growth in the account, which can make the Roth so attractive.<\/p>\n

Which bucket is right for you?<\/h2>\n

The best way to divide your assets based on your tax status will vary for each person. As with so many financial planning topics, there is ultimately no single \u201cright\u201d answer for how to allocate your savings into these three buckets.<\/p>\n

What I can say is that you should have some percentage in each. This will allow you greater flexibility when producing income in retirement and offer you greater opportunities to use different financial planning strategies.<\/p>\n

This is also a conversation you\u2019ll want to have with a financial advisor, who can help you navigate which buckets are right for you. To find a local qualified financial professional in the ProFeds network, go here<\/a>.<\/p>\n

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\u00a0 Benjamin Franklin said there were only two things certain in life: death and taxes. And while you can\u2019t avoid taxes, you can choose when you want to pay them when it comes to certain accounts and savings. To explain how the growth in your investments is taxed, consider that there are three tax buckets:<\/p>\n","protected":false},"author":2,"featured_media":22102,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"rank_math_lock_modified_date":false,"footnotes":""},"categories":[348],"tags":[97],"class_list":{"0":"post-22101","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-retirement","8":"tag-tax"},"_links":{"self":[{"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/posts\/22101","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=22101"}],"version-history":[{"count":0,"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/posts\/22101\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/media\/22102"}],"wp:attachment":[{"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=22101"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=22101"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=22101"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}