00:00:00
Because anybody who knows anything about
00:00:02
investing understands that you get the
00:00:05
most benefit through that compound
00:00:07
interest. One could invest $500 per
00:00:10
month and in 30 years they would have
00:00:13
about $1 million. Most of that money
00:00:16
comes from the compound interest, not
00:00:18
from the initial capital of you putting
00:00:21
money in. So we're starting to
00:00:22
understand the basics of what an ETF is.
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But before we go any further, we need to
00:00:27
understand where you can actually invest
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these ETFs within. There's three basic
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types of accounts that you're going to
00:00:34
be able to invest in ETFs. We have a
00:00:36
brokerage account or a taxable account.
00:00:39
Then we have two different types of
00:00:40
retirement accounts. There's a
00:00:42
traditional retirement account and then
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also the Roth version of a retirement
00:00:46
account. In all of these types of
00:00:47
accounts, you're able to buy and sell
00:00:51
ETFs. But there's different reasons to
00:00:53
be holding ETFs, specific types of ETFs
00:00:57
within different ones. And usually they
00:00:59
have to do with taxes, which we'll go
00:01:01
over later on. But for now, we need to
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understand those three types so that
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later on when you're figuring out where
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to put which type of ETF, you'll know
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which ones do what. So the first one is
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the taxable brokerage account. This is
00:01:14
like your basic account that has nothing
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to do with retirement, and it's just one
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where you can buy and sell daily if you
00:01:23
want to. Hopefully, if you're investing
00:01:25
in ETFs, you're investing with a
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long-term mindset. But you technically
00:01:29
could buy an ETF today. Say you want to
00:01:31
buy VU or QQQ today, it goes up $3, and
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tomorrow you sell it, and you make that
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$3 profit. You could do that. The pro of
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a taxable account is that you're able to
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sell that, make the profit, take the
00:01:45
profit out, and now you have that profit
00:01:48
that day, and there's no penalty for
00:01:50
taking your money out. The con with a
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taxable brokerage account is in the
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name. The idea that it is taxable, the
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capital gains that you make, so that
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little profit in between. So, like we
00:02:02
said in the example, if you made that
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$3, you'd be taxed on that $3 when you
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make the sale. The really good thing
00:02:09
about the taxable brokerage account is
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that you can access your money at any
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time if you absolutely needed to. And
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this is good for those of you that have
00:02:18
short-term or medium-term goals where
00:02:20
you're not trying to wait all the way
00:02:21
till 59 12 to actually access your money
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because in the retirement accounts that
00:02:26
we're going to talk about in a second,
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you can't touch that money until 59 12
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without a penalty. So then moving on to
00:02:33
the traditional retirement account. This
00:02:36
could be either your 401k, but probably
00:02:38
more likely going to be some type of an
00:02:40
IRA, a traditional IRA. At its very
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core, it's a retirement account, which
00:02:46
means you put money in, it's supposed to
00:02:48
grow until you hit 59 a half or later.
00:02:52
If you try to take any money out of it
00:02:54
before 59 12, you're allowed to, but
00:02:57
you're going to have to pay a pretty
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hefty fee. And so, it's not worth doing
00:03:01
it that way. If your goal is to take
00:03:03
money out before that age, it's just
00:03:05
going to be best for you to stick with
00:03:07
the taxable brokerage account. But
00:03:09
anyway, the traditional IRA or
00:03:11
traditional 401k, the idea is if you put
00:03:15
money into that, you get to take that
00:03:17
away from your taxable income. Let's say
00:03:20
you make $80,000 in the year, but you
00:03:22
put $5,000 of that into a traditional
00:03:25
IRA. on your taxes. What it's going to
00:03:27
look like is that you're only going to
00:03:29
have made $75,000 that year. So, you're
00:03:32
only taxed on $75,000.
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That extra $5,000 goes into that
00:03:38
account. It gets to grow in compound
00:03:41
interest until retirement age. And then
00:03:44
later at retirement age, 59 a half or
00:03:47
older, when you pull the money out, when
00:03:49
you sell the ETFs to make the money,
00:03:52
that's when you get taxed. So it delays
00:03:55
that tax till retirement time and until
00:03:58
you actually pull the money out. So it's
00:04:01
very very favorable especially for those
00:04:03
of you that are in a higher income
00:04:05
bracket because you get taxed more the
00:04:07
higher your income is. So a lot of
00:04:09
wealthy people will do this to offset
00:04:11
their income a little bit, put some
00:04:13
money away and delay the taxes for
00:04:15
later. Then there's the Roth version of
00:04:17
the IRA or even nowadays Roth 401ks. But
00:04:21
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00:05:18
like I was saying, then there's the Roth
00:05:20
version of the IRA or even nowadays Roth
00:05:23
401ks. Roth is the exact opposite. When
00:05:27
you put the money into the Roth, it's
00:05:30
being taxed right now. So, in that same
00:05:32
example, if you made $80,000 and you put
00:05:35
$5,000 into this Roth account, when you
00:05:38
do your taxes, you're going to be taxed
00:05:40
on $80,000, even though you have no
00:05:43
access to this 5,000 because it's in
00:05:46
this retirement account. So, you're
00:05:48
taxed upfront, but then it gets to grow
00:05:51
and compound interest and just get huge.
00:05:55
And then at retirement age, when you go
00:05:57
to pull it out, you're not taxed at all.
00:06:01
And this is huge because anybody who
00:06:03
knows anything about investing
00:06:05
understands that you get the most
00:06:08
benefit through that compound interest.
00:06:11
Like specifically somebody investing in
00:06:13
something like the S&P 500 or the total
00:06:15
US stock market with an average yearly
00:06:17
appreciation of over 10%, one could
00:06:20
invest $500 per month and in 30 years
00:06:24
they would have about $1 million. And as
00:06:27
you can see here on the chart, most of
00:06:30
that money comes from the compound
00:06:32
interest, not from the initial capital
00:06:35
of you putting money in. So if you're
00:06:37
making most of your money during that
00:06:39
time on compound interest and you don't
00:06:41
get taxed at all on any of that, that is
00:06:45
crazy and that is a huge, huge benefit.
00:06:48
So that's why the Roth IRA or the Roth
00:06:51
versions are so favorable for people,
00:06:54
especially with a longer time horizon.
00:06:56
If you have 10 years or more until
00:06:59
retirement age, it might be a good idea
00:07:02
for you to look into starting some type
00:07:04
of Roth account. In my opinion, I think
00:07:07
taxes are going to be much worse 10
00:07:09
years down the road, 20 years down the
00:07:10
road, just because if you look at the
00:07:13
history of most other countries that
00:07:15
have been around a lot longer than we
00:07:17
have, the taxation gets worse as we go.
00:07:20
And if you look at all the debt that we
00:07:22
have in the United States and from this
00:07:25
past couple years with the COVID
00:07:26
pandemic and other things, we have a
00:07:30
huge debt to pay off. And one of the
00:07:32
only ways to do that is going to be
00:07:33
through taxation. And so they're going
00:07:36
to up the taxes in my opinion. It's
00:07:38
going to be little by little, but 10
00:07:40
years from now, 20 years from now, I
00:07:42
think it'll be a substantial amount
00:07:44
different than it is today. And so if we
00:07:46
have a retirement account that makes it
00:07:48
so that you don't get taxed at all, zero
00:07:51
taxes whatsoever when you pull that
00:07:53
money out, that's really the only way to
00:07:55
protect yourself from those taxes down
00:07:58
the road. Like I said though, there are
00:07:59
pros and cons to each one, right? The
00:08:02
brokerage account, you don't really get
00:08:04
any tax sheltered in any way, but you do
00:08:07
get liquidity. You do get to be able to
00:08:08
use your money right away. Um, pull it
00:08:11
out whenever you'd like. It's almost
00:08:12
like an emergency savings account. With
00:08:15
the traditional IRA or traditional 401k,
00:08:18
you get a benefit right now. You get
00:08:20
taxed much less, but later on you'll pay
00:08:22
those taxes, but that's way down the
00:08:24
road. And then for the Roth version,
00:08:26
you're taxed up front. You don't get to
00:08:28
use that money up front. It's put into
00:08:30
the retirement account, but then down
00:08:32
the road, you can really, really gain
00:08:34
when other people are having to pay
00:08:35
taxes and you don't have to pay any. So
00:08:37
remember those three categories for
00:08:39
later on when you start figuring out
00:08:40
which ETFs you like the best because
00:08:42
there's going to be better places to put
00:08:44
certain ETFs within each one of those
00:08:47
Three.
