Understanding Taxes: The Expense You Ignore

Key Takeaways

• The Impact: Taxes are likely your biggest lifetime expense (30-50% of income).
• The Buckets: Understand Tax-Now (Brokerage), Tax-Later (Traditional), and Tax-Never (Roth) accounts.
• Asset Location: Put high-growth assets in Roth accounts and bonds in Traditional accounts.
• HSA: The ultimate tax vehicle (Triple Tax Advantage).

Introduction

It's Not What You Make, It's What You Keep. You work from January to May just to pay the government. Most people spend weeks researching a $500 TV purchase but spend zero hours maximizing their tax strategy, costing them $500,000 over a lifetime.

Deep Dive: The Three Buckets of Money

1. Tax-Now (Taxable)

• Examples: Checking, Savings, Normal Brokerage Account.
• Rules: You pay income tax on the money before it goes in. You pay tax on interest/dividends every year. You pay Capital Gains tax when you sell.
• Use Case: Money you need before age 59.5.

2. Tax-Later (Tax-Deferred)

• Examples: 401(k), Traditional IRA.
• Rules: You get a tax deduction now (pay less tax today). The money grows tax-free. You pay income tax when you withdraw it in retirement.
• Use Case: High income earners who want to lower their current tax bill.

3. Tax-Never (Tax-Exempt)

• Examples: Roth IRA, Roth 401(k), HSA (Health Savings Account).
• Rules: You pay tax now. The money grows tax-free. You pay zero tax when you withdraw it.
• Use Case: Young earners. Decades of tax-free compounding is mathematically explosive.

The Strategy

• High earners: Prioritize Tax-Later buckets to lower current taxable income.
• Young/Low earners: Prioritize Tax-Never (Roth).
• Everyone: Maximize the HSA if eligible. It is triple-tax-advantaged (Tax-free in, Tax-free growth, Tax-free out for medical).

Summary

Don't evade taxes (illegal). Avoid taxes (smart). Use the code the government wrote to your advantage.