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Standing In The Tax Line

    Given the option of earning more interest or less ,we are all in favor of earning higher interest rates on our investments. We have all been taught that investing money over a long time is a positive thing because of something known as the magic of compound interest. It is true that compounding your interest over time will cause it to grow however one of the things that is easy to miss is that as the account is growing, so are the taxes. Compounding interest in a taxable investment account creates an increasing tax. As your account gets larger from rolling the interest you earn back into the same account, your taxes grow proportionally.

    Perhaps the thing that makes the increasing tax burden go unnoticed is that most people pay the taxes due on taxable accounts from their lifestyle not the investment account. This can give the illusion that the account is growing faster than it actually is. Subtracting the tax due on the growth is known as netting which would give you a truer picture of how the taxable investment account is doing. Our experience is that few people do this in practice. Instead many pay their taxes from another pocket we call lifestyle.

    Remember you paid income tax on the money that you invested when you earned it. If you choose a taxable account in which to invest, you first stood in the ordinary income tax line to earn the money you are investing, then instead of finding a tax deferred line or tax fee line to take your money, you went to the back of the ordinary income tax line and got in line again to pay taxes on the growth of your investment.

    If you are interested in looking at options that could possibly get you out of the ordinary income tax line on the money you are saving and investing in taxable accounts, give me a call. You should consult your tax advisor concerning your individual tax situation.