Adding insult to injury: Are your savings accounts being penalized?

I read recently that savers have to take 4 times more risk in 2017 than they had to in 1985 to make a 5% return on their investments. That's a whole lot of risk to take, due mostly to the fact the risk-free rate of return hovers near zero. Further, in what seems like a cruel twist of fate, each April taxpayers have to give a share of their paltry returns to the government.

So here's my question of the day.

Do you want to keep the tiny amounts of interest you’re currently earning in your savings and money market investments?

If you’re vigorously shaking your head and muttering “YES”, please keep reading. (Many savers are unintentionally sabotaging themselves by having too much money in taxable accounts. I’ll explain momentarily.)

Let’s assume there are 3 buckets where all your money goes. (I like simplicity!)

  1. Taxable Bucket - earnings taxable each year

  2. Tax-Deferred Bucket - taxable when you take it out

  3. Tax-Free Bucket - no longer on the IRS’s radar!

Financial experts don’t agree on much, however one concept for which there is uniform consensus is that you should always have 6 months available for life’s expenses and emergencies

Many people I run into have much, much more in their taxable bucket. Moreover, the money situated in these accounts is typically in low-interest investments. (Savings, Money Markets, conservative bonds, etc.).

[Though this is a column for another day; the more conservative your asset mix, the less likely your money will overcome the insidious effects of inflation...]

Enter the ROTH IRA.

Assuming individuals are eligible to contribute, (they have work wages but don’t make too much money - see this post for details) - it makes great sense to fund a Roth IRA.

(For 2016 - you have until April 17, 2017 to set up and fund a Roth IRA.)

There are several reasons why but, for the sake of brevity, let’s start with just a few for the time being.

One reason has to do with the tax-free nature of Roth accounts and the other with the (figurative) penalties associated with taxable accounts.

Let’s talk about these penalties first. Interest rates are rising, which is a good thing for savers but interest rates are still historically low. Let’s say for example that you have $100K laying around in a money market account. Even if you are only earning 1/2 of 1% or something similarly abysmal, you’re going to pay tax on that interest each year. This is the insult to injury part! (By the way, as rates are inching up in 2017, as we've seen, you’ll earn more interest, but you’ll also pay more tax just the same.)

So my advice is to start moving some of that money to the Tax-Free bucket. (Roth IRA limits and contribution limits are listed here.)

You’ll notice the allowable limits are nothing spectacular; however, by going tax-free, you’ll keep a bit more of your earnings - which is nice!

Coincidentally, I recently posted about a misconception that many have about Roth accounts. The myth is that the money isn’t accessible. Generally speaking, that’s incorrect. You always have access to your basis - or the amounts you contributed. I recently covered this topic in great detail and if you are unsure, please click

here for my analysis.

To a secure and tax-FREE retirement,


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Required disclosures: Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. BCM and (Strataxa Retirement Advisors, LLC) are independent of each other. Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents.

Information provided is not intended as tax or legal advice, and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional