Investment Tax Categories

Last week I addressed tax-efficiency in your portfolios. Here I shall review the differences among those classifications of taxable, tax-deferred and tax-exempt to make tax-efficiency more readily understood. The following are simple explanations. For expert tax guidance please speak with your accountant or tax attorney.


Taxable: an account that holds money on which you have already paid taxes - e.g. bank checking or savings accounts or brokerage accounts. These accounts may have stocks, bonds, CD's, etc. Every year you receive a 1099 of all reportable earnings: dividends and interest as well as reportable proceeds: stock or bond sales. You enter these numbers on your tax return and pay taxes accordingly.


Tax-exempt: refers to bonds (loans) issued by municipalities (states, cities, towns, counties). These bonds are exempt from federal taxes. As an incentive to its residents to buy these bonds, which finance local projects, you pay no state taxes on the interest. As a NY resident, if you purchase a NY State bond, it will be double tax exempt as you will pay no state or federal taxes on the interest. However, NY reserves the right to tax the interest earned on other states' bonds.


Tax-deferred: means you pay no taxes now but when you withdraw the money both state and federal taxes are due. IRA, SEP, 401k, 403b all grow tax-deferred. Your 401k or 403b plan from work will take money from your paycheck before deducting taxes, deposit the money into your plan where it will grow tax-deferred (you will not receive a 1099 each year). Taxes will be paid when you start withdrawing money from these accounts later in retirement. The money will be taxed, as your income is taxed, both by the state and the federal government. Hopefully, in retirement you will be in a lower tax bracket and, consequently, pay less in taxes.


Tax-free: refers to a Roth IRA where money grows without paying taxes each year and is distributed without being taxed. Actually, the money contributed to most Roth IRA's is money on which you have already paid taxes; it is the earnings (growth) that are tax-free.


Be $ Smart - Learn about the impact of taxes on your investments. Position your assets effectively to pay less in taxes.

Social Security Estimate of Benefits - a valuable tool!

Many years ago, the Social Security administration did not mail benefit estimates. You had to visit one of their offices to learn what you might receive at retirement. Then in 1999 they began mailing them. With the advent of the Internet, they stopped mailing mid-2011 as a cost cutting measure. Now, by popular request, they will send the statements to those workers 25, 30, 35, etc. Every 5 years you will be mailed a statement until you are 60, then it will come every year.

What is so important about this statement?
It is a valuable financial planning tool that gives workers important information about their earnings, tax contributions and estimates for retirement, disability and survivor benefits!!

If your estimated benefits will pay you $1800 per month and you need $5000 a month to live, then you know you need to save enough to provide $3200 monthly.
It can be a real wake-up call to start saving! Every five years it can be a beneficial jolt to make you sit down and calculate if you are on track for retirement. The numbers may reveal that you must work longer than you planned.

You may view your benefits more frequently if you open a MySocialSecurity account online. Go to SSA.gov and input your SS number, mailing address and valid e-mail address. There will be security questions only you will know that match the information on file with SS.

With an online SS account you will receive an annual reminder to verify and update your information. It is critical to review your earnings as sometimes there may be errors. SS gives only a limited time to correct any earnings errors.

Be $ Smart - know your estimated SS benefits. Open a SS account online.