Taxes on Brokerage Account - YouTube

If you've got different types of accounts, maybe like a Roth IRA or a traditional IRA,

well, then you know how they get taxed. But what about non-IRA accounts, brokerage accounts,

are there tax strategies that you can use? Well, by the end of this video, you're going

to gain clarity and learn strategies so that you can have a secure retirement.

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and happy retirement. Now it's your turn, let's dive in.

Welcome to our retirement in action. Today we're going to be talking about a topic that

Murs and I have come up quite a bit, and that's taxes. Taxes are always a big topic, but this

is really an issue for non-IRA accounts. Now I say it's an issue, it's a different kind

of issue. Taxes are an issue for IRA accounts, but for non-IRA accounts, that's what we're

talking about is cash in the bank, or we're talking about a brokerage account that we're

investing.

So, we're really going to talk about some tax strategies specifically for that non-IRA

type of account. We're going to just kind of walk us through how they affect those kind

of accounts and then a strategy for how we can be able to deal with that. It's not going

to say that it's all-inclusive, just that it is a strategy.

So first of all, Murs, can you kind of break down for everyone how a brokerage account,

let's say it's at Charles Schwab, TD Ameritrade, Fidelity, it doesn't matter, how it's taxed?

Yeah. Yeah, and I think to get a good understanding, I think we bring in the different types of

accounts that you have. So, the whole purpose of this episode is to really talk about the

brokerage accounts, but I want to give you some way of comparison. So you've got your

IRAs, your 401(k)s, that's all pre-tax money, and you don't have to really worry about what's

going on inside the account, the taxes come due when you start taking withdrawals. So

when you're in retirement, you start taking withdrawals. That's fully taxable as ordinary

income on the IRA, 401(k) money.

On the flip side, you've got Roth accounts that are going to be on withdrawals are tax-free,

which is very nice. Then in the middle, we have these brokerage accounts. So, maybe you've

got some extra cash laying around and you said, "I need to put this cash to work, it's

not really making any money in the bank, so let me go invest this money, this cash that

I've saved up."

You've already paid taxes on the cash that you'd saved up, whether it's just been through

savings through your earnings or whatever it is, you've already paid taxes on that money,

so how do you get taxed on it again? So you put it into the brokerage account and you

invest in some stocks, ETFs, mutual funds, whatever it is, and those start to make some

money, right? So, you've got gains now in this account.

Now in an IRA, we're not so worried about gains, we're worried about the withdrawals.

In the Roth account, we're not worried about gains, because all of that is withdrawn tax-free,

but in the brokerage account, more specifically a non-qualified account is what the technical

term is, taxes are treated a little bit differently. So, you've got gains that you have not paid

any taxes on.

So, let's just make an example. Let's say you put $100,000 into this brokerage account,

you've already paid taxes on the $100,000, and now it has grown to $200,000. The $100,000

of gain is taxable. When do you actually have to pay taxes on that? Well, there's a couple

things that can happen there. Let's say that mutual fund or that ETF or that stock, it's

paying you some dividends and maybe you're reinvesting the dividends, so you don't actually

take the dividends in your pocket, but you are going to get a 1099 essentially that says,

"Hey, you received dividends this year, you have to pay taxes on that this year, even

though you reinvested it."

So that's one way that you get taxes, by dividends and maybe some interest in the account from

just sitting in cash. Well, let's say you own that stock and it got you up to $200,000

and you decided to sell that stock and buy another one. The act of selling a stock in

a brokerage account, that is what's going to generate, in this case, the taxable gain.

You could also have taxable losses as well, but we're going to focus on the gain side.

Now, there's two major categories as far as how it's going to be taxed and I'll make it

pretty simple. You've got short-term and you've got long-term. If you held that stock for

under one year, then it is in short-term capital gain. So that $100,000 that you made on that

stock, you sold it within less than a year, you're now in a short-term capital gain category.

Which means the gains that you realized are going to be taxed at your ordinary income

levels.

Now if you make it a year and a day, all of a sudden you're flipped into a different tax

category, which is long-term capital gains. Which is favorable right now, at least it

is favorable, in that you get a bit of a tax break on that, because you've held it longer.

The IRS says that you will get less of a ... it's in a different category, a long-term capital

gains type of tax category, which is not ordinary income.

So, you sell that position and then you owe some tax on it. That's essentially how the

taxes are generated in the brokerage account. So now the question kind of comes up of, "Well,

I've held this stock for such a long time, and I know I don't like this stock anymore,

but I've got so many gains and I just don't want to realize any of the taxes so I'm just

going to hold onto it. If it loses money, it loses money. I just don't want to pay the

taxes."

So that's kind of the headache that we start to see with these brokerage accounts, and

I think it's always important to bring it back to there's positives and negatives to

every single thing when we're talking about investments, when we're talking about retirement.

Really anything that you can think of has positives, pros and cons.

So I've just given you how the account is taxed, now I think it's good, let's talk about

the positives and negatives when it comes to the investment management. Obviously, yeah,

we want to take taxes into account in every single way that we can. We want to be the

most tax-efficient, but you can't evade taxes altogether, so we have to come up with some

options, some ideas, some different strategies that ultimately you have to be comfortable

with. So, Radon, let's run through some of the positives and negatives.

Well, I think you just talked about, I think we have to kind of consider what type of money

management that you want to have. If you've listened to this podcast for any time, you

know that Murs and I believe in actively managing the account, making sure that we protect from

significant losses. There is the other side of this, and this really does come down to

a tax scenario, is that people say, "Well, I want to hold it for as long as possible

so that I get the long-term capital gain."

Now, so what you end up doing is you either end up saying, "I want to manage risk or I

want to manage taxes." Sometimes people will hold a stock and let it go down in value with

this idea that I don't want to pay tax. Murs and I, our belief system is we would rather

protect from significant losses, because if I have a significant loss, that is far worse

sometimes than just paying the tax, but it still doesn't make the conversation very fun.

We have clients who go, "Oh my goodness, man, I've got this brokerage account and I appreciate

the growth, I appreciate the protection, but I don't like seeing that tax burden." So,

Murs and I are constantly trying to battle this idea with clients and talk about what

do we want to do here? Are we trying to protect for taxes or are we trying to protect the

account's value?

Now that has created a scenario where we have done a lot of looking, a lot of research,

a lot of trying to figure out a way that we could actually have some benefits, some shelter

of taxes, but also be able to protect the account. So we want to just talk about a solution

that we have found, or at least a strategy that we have found that fits within the criteria

or the goals of what we have put forth when it comes to an account.

Now if I bring up this topic, I need you to hang in there with me for a second, because

you're going to think that there's a huge discrepancy in some of our podcast to this

particular one, so I need to give you context. But an option or a place that we can get tax-deferred

growth is using a variable annuity.

Now you're probably listening and going, "Oh my goodness. I know he did not just say variable

annuity." Because if you've listened, we did a whole series on annuities, and if you listened

to that, you heard Murs and I talk about variable annuity saying that we don't like them, we

don't want to be a part of them. If you go back and listen to that, you'll realize the

reasons why, and I'll just repeat them for you.

In a variable annuity, a lot of times you've got high fees. If they are a commission product,

we've seen fees in the average range of 3% to 5% a year of whatever you have in there.

You also have liquidity problems, meaning I put my money into the variable annuity and

then I've got surrender charges on top of this idea that I have to pay these fees. You've

got to also wonder is the advisor giving me the best advice to use this variable product?

You got at least understand that they're getting commissions.

So when you looked at all that, it was not a place that Murs and I would say put money.

I can tell you today, we would never put IRA money in a variable annuity, it doesn't make

sense. But the benefit I get is when I put money into an annuity that's not an IRA, I

do get tax deferral. Meaning I can buy and sell, I get no capital gains, I get no benefit

or have to pay no taxes until I pull the money out.

So, now here comes the question. Why in the world are Murs and I saying that there is

an option within the variable annuity world when we just kind of gave you a bunch of negatives?

Well, we found a positive and that's how this works. We found a positive that we think fits.

So Murs, can you kind of run through maybe in all this searching that we found why we

think this is a good option for non-IRA money and what made us change our minds on it?

Yeah, so it all comes back to the why or the purpose or the goal. If the goal is I've got

this bucket of money, this brokerage account that is annoying me, because I've got some

taxes that I'm dealing with every single year, I don't like dealing with it. We hear it all

the time, by the way. Even if the account is growing well, it's very tough to say come

April every single year to see that you have to pay extra because of this brokerage account

that has some gains in it.

So going back to the why, what we're looking for is how can we alleviate some of that tax

pain and still have a way to grow an account, still have a way to protect it from significant

losses like we do in our other portfolios? The answer became this variable annuity. I

know that's a tough word to hear, especially coming out of our mouths. Like Radon said,

we've kind of made it a negative in a lot of situations, but we did find that one positive,

and it is a very simple plan. All it is is to answer that one question, how do we get

tax deferral? How do we alleviate that tax pain every single year?

So we're putting it into a tax sheltered product, which happens to be a variable annuity. So

you put money into it, and it's very simple as to how it works. If you've heard us talk

about annuities, there are surrender charges that you should be aware of. That's not the

case here. There's typically commissions that are paid to an annuity, that's not the case

here. So, it is completely liquid. So you put that $100,000 into it, it is completely

liquid. You could withdraw it all the next day, no penalties, no surrender charges.

There is one tiny little fee in there. There's no commission that's paid to the advisor,

there's just that one tiny little fee to be in the product. It's $20 a month, it is a

flat fee. Whether you put in $100,000, whether you put in a million dollars into it, it's

a flat fee of $20 a month to be in the product to earn you that tax shelter that we like

about it.

Now, what does that give us? That gives us the ability now to trade the account like

we would on a normal and say in an IRA. We can trade the account, we're not worried about

realizing any capital gains, and the only time that we have to think about anything

is once again here in withdrawals. So withdrawals are where taxes come into play, but you may

go 10, 15, 20 years without taking any withdrawals, and now you don't have to worry about that

constant annual 1099 that says you've made this much in gains and so you have to pay

this much in taxes, or you've received all these dividends, and so you have to pay taxes

on this money, even though you didn't put it into your pocket.

So, we see this as a huge positive. For someone that's trying to alleviate that tax burden

that they have on their brokerage account, we do at Charles Schwab, we can do everything

that we do at Charles Schwab in this variable annuity construct. It just works beautifully

if we're looking at it from the right perspective, which the only perspective is to gain tax

deferral and alleviate that tax burden.

Yeah, so, I mean, just to reiterate that. We found a solution that took away the negatives.

Now by the way, if you worked with someone like Murs and I, we charge a fee, it's a percentage

of whatever we're managing. If we use Charles Schwab, we deduct that fee quarterly. The

same thing happens here in this particular product. We're still going to deduct our fee

every quarter, but we do it no different than if it were at Schwab. You do incur a $240

... and we are talking about a specific plan here. There's a couple of different variances,

this is the lowest cost one we could find. $240 a year to be able to get that tax deferral.

That's it, that's the only fee for us to do that. There's no trading fees, just like at

Charles Schwab, there's nothing like that at all, but we get tax deferral. So we're

100% liquid, no commission, there's no surrender charge. I mean, it's very, very, very clean,

and we get rid of that annoying short-term capital gain problem all the time. We don't

have that to worry with, we only have to worry or think about taxes when we take the withdrawals.

It passes to the next generation through beneficiary designation, so it's efficient that way.

Nothing is going to be perfect, nothing is going to solve every problem when it comes

to taxes, but it gets rid of it and lets us control it on an annual basis. We can defer

and we can wait to a time that's the better time to take it, and we can take any amount

that we want. So we believe that this is a strategy or it's a solution. It will not work

for everyone, meaning it'll work, it just might not be the one you like. You might like

a different strategy, but we have found it to be a very, very good option when we weigh

all the pros and cons.

So if you're listening to this and you're thinking, "Hey, I would like more information

about this, how this works, does it apply to me? Is it something I should look at?"

Then contact us. Now the easiest way to do that is to go to our website, which is pomwealth.net,

and at the top right-hand corner you're going to see a button that says schedule a 15 minute

consultation or phone call.

When you click on that, our calendar's going to pop and you can schedule it right there.

Get on our calendar, Murs and I would love to be able to talk to you just for a few minutes

and explain this and see if it would work, and give you more information about it if

there's things you want to read about it or anything like that. It's pretty simple. There's

not much that you have to read, it's just an account that you open up. But it'll have

it all there if you want to look at it.

But we hope this has been helpful, we hope this has provided you with a strategy that

might work for your non-IRA brokerage accounts. So, let us know if you have any questions.

We hope you have a great week, we'll talk to you next time.

We hope this video has given you some confidence and clarity as you plan for a worry-free life

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