From Kendall Bauer
Dear Investor,
As we celebrate our nation’s 250th anniversary this summer, I’ll likely be spending much of it chasing toddlers, making sure their sparkler technique is picture-worthy but not so picture-worthy that we end up in urgent care.
Still, the milestone is a fitting moment to reflect on an issue that helped shape the country’s founding: taxes.
Taxes may not spark quite the same dinner-table debate today as they did in 1776. But they remain a central part of financial planning. More importantly, understanding how taxes affect your investment accounts can hand you something every investor values: flexibility.
When the Founding Fathers designed our government, they were wary of concentrating too much power in one place. Checks and balances, separate branches, divided responsibilities. None of that was built because any one branch was inherently bad. It was built for balance, resilience and flexibility.
The same idea applies surprisingly well to investing.
Most investors focus on diversifying what they own: stocks, bonds, real estate, cash. But diversification isn’t only about the investments themselves. It’s also about where those investments are held.
Traditional IRAs and 401(k)s offer a tax break today, letting you defer taxes until retirement. Roth IRAs flip that approach, asking you to pay taxes now in exchange for the potential for tax-free withdrawals later. Taxable brokerage accounts sit in their own lane, offering flexibility and accessibility without many of the restrictions that come with retirement accounts.
None of these is inherently better than the others. They’re just different tools.
The challenge comes when all of your savings sit in a single bucket.
It’s entirely possible to build a successful retirement using only one account type. But doing so can limit your options later in life and, when it comes to taxes, options matter.
A traditional IRA may help reduce your taxable income during your working years, depending on your income and whether you’re covered by a workplace plan. A Roth IRA can be especially attractive early in your career, when your income and tax rate tend to be lower. A taxable brokerage account can help fund major goals before retirement: a first home, a business, a wedding.
Each account solves a different problem.
Here’s the piece that’s easy to overlook: None of us knows what future tax rates will look like, what tax laws will exist 20 or 30 years from now, or what our income will actually be in retirement. Required minimum distributions, for example, eventually force withdrawals from tax-deferred accounts whether you need the income that year or not. That kind of uncertainty is exactly why flexibility is worth building in now, while you still have the choice.
Just as diversification helps manage investment risk, tax diversification helps create more choices down the road.
That’s really what financial freedom comes down to: having options.
As you review your finances, look past your investment holdings for a moment and consider your account structure. Are you using more than just your employer-sponsored plan? Could a Roth IRA make sense for you right now? Would a taxable account help you work toward a near-term goal while still building long-term wealth?
The goal isn’t to collect every account type you can find. It’s to understand the tools available to you and use them with intention.
Two hundred and fifty years ago, the country’s founders built a system designed to spread out risk and preserve choice. It’s not a bad model for your retirement accounts either.
Diversification isn’t always about what you own.
Sometimes it’s about where you own it.
Until next time,
Kendall