FFR 284 – Smart Accumulation

FFR # 284 – Smart Accumulation: Building Flexibility Into your Plan

Welcome to this week’s Financial Flash.

When it comes to saving and investing, most people focus on how much they are saving. But just as important is where you are saving it. I’m Bradford Aylin, Private Wealth Manager here at Stiles Financial and today I want to introduce a concept we call “smart accumulation,” and why building your savings across different types of accounts can make a big difference over time.

There are three primary buckets to think about. Taxable accounts, like brokerage accounts. Tax-deferred accounts, like traditional IRAs and 401(k)s. And tax-free accounts, like Roth IRAs and Roth 401(k)s.

Each of these buckets is taxed differently, and more importantly, each serves a different purpose in your overall plan.

Let’s start with the foundation.

Before anything else, it is important to have an emergency fund. Typically, this means three to six months of expenses held in cash equivalents like a high yield savings account, money market fund, or short term treasuries. This is your safety net and your first layer of liquidity.

From there, if you have access to an employer retirement plan, you generally want to contribute at least enough to receive the full employer match. That is essentially free money.

Beyond that, you have a choice to make. Should you contribute pre-tax or Roth? The answer depends on your situation, but it is important to remember that even if you choose Roth contributions, the employer match will still go in as pre-tax.

But here is where we see a common issue.

Many people focus so heavily on retirement accounts that they end up with the majority of their wealth tied up in accounts they cannot access until age 59 and a half.

While retirement accounts are incredibly valuable, this can create a lack of flexibility, especially if you want to retire early or need access to funds before that age.

That is why it is important to build a taxable brokerage account alongside your retirement savings. A brokerage account gives you access to your money at any time, without early withdrawal penalties, and can play a key role in bridging the gap before retirement.

At the same time, it is helpful to understand how each bucket is taxed.

Roth accounts are generally the most tax efficient over time, since they grow tax free and can be withdrawn tax free in retirement. Brokerage accounts are next, where only interest, dividends, and realized gains are taxable. And finally, pre-tax retirement accounts, where distributions are fully taxable as ordinary income.

Another important point is flexibility within Roth IRAs. You can always withdraw your contributions without taxes or penalties. It is the earnings that are subject to restrictions. That makes Roth IRAs a bit more flexible than many people realize.

The goal here is not to perfectly balance everything overnight. It is to be intentional.

You want to balance your savings, gradually increasing your retirement contributions as you can without compromising your cash flow, while also building up your brokerage account.

In many cases, your retirement accounts will still end up being your largest bucket, and that is perfectly fine. But having assets outside of those accounts gives you options.

And one final concept to keep in mind is asset location.

Not only does it matter which accounts you use, but also what types of investments you hold in each account.

Generally speaking, we want the more growth oriented investments, like equities, in the most tax efficient accounts. That often means prioritizing Roth accounts first, since those dollars can grow tax free over time.

On the other hand, more conservative investments like fixed income are often better suited for tax deferred accounts. Since those accounts will eventually be taxed as ordinary income, it can make sense to hold the lower growth, income producing assets there.

This helps improve overall tax efficiency and allows each part of your portfolio to work more effectively over time.

And in financial planning, flexibility creates opportunity.

So as you think about your savings strategy, ask yourself not just how much you are saving, but where you are saving it, and whether that aligns with your long term goals.

Thank you for joining me today. If you have questions about how to structure your savings across these different buckets, we are here to help.

Have a great week, and we will see you in the next Financial Flash.

Disclaimer:

Stiles Financial Services is an SEC registered investment adviser based in Minnesota. Information presented is for educational purposes only and does not constitute an offer or solicitation to buy or sell any securities or investment strategies. Investments involve risk and are not guaranteed. Past performance is not indicative of future results.