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A Tax Smart Alternative To Cash

Planning Matters Radio / Peter Richon
The Truth Network Radio
December 20, 2023 10:00 am

A Tax Smart Alternative To Cash

Planning Matters Radio / Peter Richon

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December 20, 2023 10:00 am

It’s been a long time since we’ve seen inflation-adjusted interest rates above zero. Since the Fed began hiking interest rates, investors can once again earn attractive returns on cash. But as Peter with Richon Planning explains to Erin Kennedy, you may be earning less money than you think after accounting for inflation and taxes.

Instead of socking your money away in CDs, treasuries, or Money Market accounts, Peter suggests you consider Buffered ETFs, which can offer full principal protection. Also, unlike cash and cash alternatives, Buffered ETFs don’t generate taxable interest. Instead, you get much more favorable capital gains treatment and only pay taxes when you decide to sell.

If you'd like to talk to Peter to determine your best cash alternative, feel free to call (919) 300-5886 or visit

  #CashAlternative #CDs #BufferedETFs #LazyMoney

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JR Sports Brief
JR Sports Brief
JR Sports Brief

Welcome back, everyone.

Peter, good to see you as always. Today we are talking through a tax-smart alternative to cash. As we've discussed before, following several rate hikes from the Fed, investors can once again earn attractive returns on cash. But after accounting for taxes, your investment may not even be keeping pace with inflation. So what are some of the questions that risk-averse investors should consider before buying CDs, treasuries, or other cash savings vehicles? Yeah, well, we have not seen these kind of interest rates for 15 to 20 years.

So they are once again in the realm where they are attractive. In fact, the interest rates in some cases that we can secure right now are as good, if not better, than the average annual compound return that the S&P has generated over the last 24, 25 years. So people are looking at cash, cash alternative, and interest-bearing kind of accounts right now as being attractive. But you do need to consider the vehicle.

Certain vehicles behave differently than others. There are some that when you invest capital, your cash, and then it grows, you will be taxed again on the growth. And then there are some options that can avoid that or defer it or mitigate that. You also need to consider the length and liquidity of the investment that you are making because there's a little bit of a double-edged sword right now. Longer terms may have some value and be attractive because they are locking in the now available higher interest rates for a longer period of time, but you are also potentially giving up some liquidity for a longer period of time. But if interest rates begin to fall, which they are predicted to do, in fact, we've already seen some downward movement in mortgage rates, that locked in higher rate may be very attractive a year or two from now. So yeah, a lot to consider there as with any decision with your money, Erin. Per the usual, you have to crunch the numbers, specifically though the rate of return, return after taxes, and as I mentioned, inflation.

Yeah, all of those are important. And maybe the most common and understood example is municipal bonds, tax-free municipal bonds, as they are often talked about. Well, if we are at a 15% tax rate, let's call it, and the tax-free municipal bond is yielding a 4% yield or interest coupon back to the investor. But a regular taxable bond is yielding six.

Even after we pay taxes on it, we're still better off with the 6% taxable bond. So you do need to look at and compare all of your options and see where the best return net on your investment is. But there are, again, a lot of different tools that have different tax implications. And you've got to understand that before you get into an investment. So now let's talk through then some tax smart cash alternatives, specifically buffered ETFs, some of which offer full principal protection.

Yeah. And there are different terms for these. More often than not, they are like a one-year term length in what they help you to define your outcome on.

The concept behind a buffered ETF, in fact, buffered ETFs in general, something that not a lot of investors have experienced firsthand, have a lot of experience dealing with or have even heard of. But a lot of people's investment projections or even their retirement projections are based on what's called a Monte Carlo simulator. Basically, they take every past return of the market, every possible scenario, and randomize them and tell you your potential outcome or your potential for success. Down here in North Carolina, sometimes we have hurricanes spinning off of the coast and they have the spaghetti map of where this thing could possibly travel, where is going to be impacted by the storm, and they call it the cone of uncertainty. Well, in your financial outlook, you may not want to have as wide of a cone of uncertainty.

You may want to narrow that cone or even define your outcome. And buffered ETFs are a tool to help do that. As you mentioned, they may be principal protected or they may hedge against or mitigate the first portion of the downside of the market. And there are different variations of this for conservative to more aggressive investors, but it may absorb the first 5 percent or 15 percent or even the first 30 to 35 percent.

But it better helps you to define your outcome. And then because these are inside of ETFs, if the market is up during the course of the year, those terms can be renegotiated. You can sell out of an older one if it's close to the upper edge of its cone of uncertainty, of its potential outcomes. And then you can purchase into a newer one and you can stave off the tax implications that would have been realized in alternative types of investments, ETFs and individual stocks. There are a number of different investments that don't realize a taxable event until things are sold. But because it's internal inside of this ETF, that can happen without the tax implication and hedge against that downside, which a lot of investors do find attractive both for the tax reasons and for the outcome of investment returns. All right, let's stay on the theme of taxes for a second. More cash, cash alternatives and bonds are all subject to income taxes, whereas buffered ETFs just don't generate that taxable interest.

Right. Yeah, again, there are different types of investment tools that we have access to and they may have very different tax implications. So we're not talking about IRAs or Roths here.

Those have their own tax qualities. And no matter what you put under that shelter, under that roof, it's going to maintain the tax implications of the shelter itself, of a IRA or of a Roth. But with after tax investment money that is not in a retirement account, but you have earned it, you've paid tax on it once and then you reinvest it. Technically, the growth after you invest is going to be a taxable event again. And and in some cases you can control or manage that because it may not be until there's a transaction that you buy or sell or realize a gain that you realize that tax taxable event.

But there are some investments that behave differently than others. For instance, mutual funds are specifically tax inefficient. Mutual funds in non-qualified accounts in an investment account can actually generate a taxable event if you lost money and if you didn't even sell the mutual fund. It's called phantom gains or phantom taxable gains that are that are kind of unique to mutual funds, whereas ETFs or individual stocks don't have that quality.

They do not generate a taxable event, a gain or a loss until you sell them. And then things like fixed annuities can defer taxation over the course of time. But money in the bank, interest, CDs, things like that, that you are you are looking at higher rates now.

Yes, which is attractive, but you also will receive a ten ninety nine at the end of the year for the interest that you've earned. And you've got to equate that into the true total return that you are achieving. So just understand the tax implications, consider the investment vehicle and consider the length of the time commitment where you are looking, especially at those taxable accounts. Well, Peter, I know you specialize in strategic tax planning. So if somebody has questions about where they should park their lazy money and any other tax implications, what's the best way to reach you? Yeah. And we also help to quantify the eventual tax liability, the lifetime tax liability that you may have on your retirement accounts and tax deferred accounts.

And sometimes that's really eye opening. But if you'd like to see that or if you'd like to look over options to take advantage of these higher interest rates and do so in a tax efficient manner, give me a call at Roshan planning nine one nine three zero zero five eight eight six nine one nine three zero zero five eight eight six. You can also skip the phone call, of course, always available online at Roshan planning dot com. It looks like rich on planning dot com. It's my last name, Roshan.

You can also email me, Peter, at Roshan planning dot com. All right, Peter, thank you. Yeah.

Always got to be concerned about taxes, don't we? It's not what you make. It's what you keep.

Exactly. Thanks, Peter. Thank you.

Hey everyone, Peter Roshan here. Hope you enjoy the content. As always, make sure that you like, subscribe, share the videos with others that may find this information helpful. And as always, you're welcome to be in touch or to submit questions or comments. You can comment below the video anything that you'd like to see or hear shared on our YouTube channel and in future videos. If you've got a topic that you've been thinking about or is of concern for you financially, be sure to let us know. We'd love to help you by discussing it on the channel. So appreciate the continued views and the likes and the subscribes, the shares, the comments, always helpful. We look forward to getting you the information that you need.

This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment tax or legal advice from an independent professional advisor. Any investments and or investment strategies mentioned involve risk, including the possible loss of principal advisory services offered through Brooke's own capital management, a registered investment advisor, fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.
Whisper: medium.en / 2023-12-20 12:15:00 / 2023-12-20 12:19:14 / 4

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