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3 Ways to Build Wealth: Taxable, Tax-Deferred, and Tax-Free Accounts?

January 31, 2018

 

Have you ever been in a restaurant that has a menu that is a thick as a novel with hundreds of different things that you can choose from? I have, and every time I go to this restaurant and I sit down, and I try to choose something, and the waitress ends up coming to take my order. I never have any idea what I want to order. It’s just simply too many things to choose from.

 

In contrast, when you go to In-N-Out Burger, there are three things that you can choose from. They have a hamburger, a cheeseburger and a Double-Double. That's it. Every time you go to an In-N-Out, it doesn't matter if it's 2:00 in the afternoon or 2:00 in the morning, there is a huge line of people waiting to order their food. But no matter what, you can always get your food quickly. Because when somebody steps up to the counter, they know exactly what they want because there are only three options.

 

In the world of financial planning and picking right investments, the same dilemma is presented to most investors. You see, if we go out there and try to pick individual investments, there's literally a million different products that you can choose from if we go to individual products. But for most people, they're going to get bogged down in analyzing all the different choices that they have. And it stops them from doing the thing that they need to do, which is actually save for retirement!

 

So, what I want to show you is simplify things and just give you three different places that you can put your money, three different buckets where you can put your money.

The first bucket is a taxable account, the second bucket is a tax-deferred account, and the third is a tax-free account. I am going to show the pros and cons in each account, and what is the ideal amount of money that you can put into each account as you save for retirement.

 

Taxable account

So first off, the first bucket that we have here, this is th