Tax Attorney Explains: The 5 Most Critical Financial Accounts You Should Have

 

 Hey, guys, Toby Mathis here, and today we're going to dive into the five most critical investment accounts you can have. And so we're going to really be diving into understanding financial matters, and it's critical that you understand how to organize your money, so I'm going to reveal those five must-have accounts that are the building blocks of a solid financial foundation. So stay tuned, we're going to dive in, ready? Number one, your checking account. Surprise, surprise, it's your everyday go-to account for managing money.

It's where your income lands, and it's where your day-to-day expenses are paid, but it's really just the convenience. But it's not where your money grows. This is not where we want to stockpile our cash. So really here, what we're doing here is putting in about three months of money. We do not want to miss opportunities.

In fact, tops three months. And why? Because you're making nothing on that money. It's literally melting. So not only are you not making money on your money, spoiler alert, the bank is, but inflation is making the value of your money go down.

So the same with cash. Just stop hoarding it, right? Thinking of your great-grandpa who saved a fortune at the time, $50,000 under his mattress, would've bought three houses. Now it wouldn't even cover the down payment on a house, on a median home. So yeah, your money is being depleted if you leave it in a checking account.

Not to mention there's only $250,000, FDIC insurance it's not the safest place to start stock, you know, to start stockpiling cash. So it's going to be our convenient account. Everybody needs to have one. But understand you're keeping it fairly bare. Three months of expenses.

Number two, the savings account. Now, these are becoming more important now because interest rates are higher. When the interest rates go down, they go down.

But just kind of think of it as a safety net. It's critical for emergencies, short-term saving goals.

And while it doesn't offer significant growth, it's accessible, and the security it provides really are unbeatable. Aim for about three to six months worth of expenses here. Just remember that traditional banks absolutely love to rip you off when they're dealing with savings accounts, and they might give you like half a percent. So make sure you're looking at the high yield savings options. Usually right now it's four to 5%.

Inflation has been pretty high as of recent. So depending on when you're listening to this. So the what happens is the fed rate goes up, so interest rates that the banks can give you go up, when they go down, it also goes down. And so you're just going to want to shop around and look for a high yield savings account. But a traditional bank might give you half a percent.

So you got to be looking around. Again, right now, you're probably looking closer to four and a half, five and a half.

It depends on really what the Federal Reserve is doing 'cause the interest rates do fluctuate. And you just remember, with low inflation probably is going to come lower interest, higher inflation equals higher interest. But that's the point.

We just don't want our money melting. And if the interest rate's really high, then your, excuse me, if the federal rate of inflation is high, if the rate of the CPI is high, then the fed's going to start to combat it as well. But usually, interest rates are high at that time, and then they're like, "Oh my gosh, it's really high, You know, so we're going to keep raising interest rates until they start going low, and then they're going to lower." But here's the thing, checking and savings both come with $250,000 FDIC insurance in case the bank fails, and we have had bank failures as of recent, so it's important not to have too much money.

Again, I'm looking at about a max of six months expenses, six to nine between the two.

Realistically, with a savings, maybe max of six months of expenses. And that leads us to where we really should be building, where we should be building our wealth, and that's an investment account. So that's number three is investment accounts. And these are more exciting waters, obviously, because this is where your money starts working for you, offering growth through stocks, bonds, mutual funds, ETFs and more. And, but remember, with higher rewards come higher risk.

So it's vital to approach this with knowledge and a fair degree of caution. Let's start with the brokerage account. Think Schwab, Fidelity, Robinhood, Raymond James, Morgan Stanley. There are a ton. And there's something called a money market fund that you could absolutely put money into.

It's kind of like a big old mutual fund that's going to make a little bit more than your friend, the savings account. And here's the thing, even with brokerage accounts, they have a different type of coverage, SIPC, which usually is about $500,000 of coverage, and it can go up to a million, depending on which institution.

I think like Schwab, for example, has a million, they have additional insurance in case there's failure. But here's the thing about brokerage accounts and investment accounts. Realistically, it's your money, it's just, it's kind of like this, let's say that you had a large garage, and you gave your car keys to an attendant who then took it into the garage and parked it in with all the other cars, and it got intermingled, and you might get your car back or you might get somebody else's car.

At the end of the day, it became the parking lot's car versus "Hey, I have my own garage." And in a investment institution where they're just trusteeing your money, you have your own garage, or better yet, you know, let me give you a better example. If you went into a bank and you had a safety deposit box, that's your money that whatever you put in there is yours, they're just helping oversee it.

That's really what's going on at an investment institution, when you're doing a Schwab, or Fidelity, or one of these others, you have your own account. So when you have these types of coverage, FDIC and SIPC, I kind of think of it on the investment side as not being totally necessary.

And the reason being is because unless you're dealing with somebody like a Bernie Madoff, where it's just crazy where they were self trusteeing, most institutions have a third party trustee, your money's fairly safe. If the institution goes bankrupt, for example, you have shares in your name, 99.9% of that time, right? Where you actually have your own investments, and it's not something that's all mixed up.

So I kind of look at it and say it's not the same thing when we're comparing a savings and a checking to to an investment like a brokerage account 'cause it's really different.

But here's what we're doing. We're combining kind of the power of both the checking and the savings in a money market fund. There's going to be debit card check writing abilities on many of these accounts, but you're going to be earning a slightly higher rate, which it's also going to require probably a slightly higher balance. But the key here is that we want to break away from the traditional bank and invest in brokerage account. And money market accounts are great.

I mean, I'm going to call it a money market fund 'cause there are some money market accounts at banks, too. The vernacular gets mixed up. I always think of money market, I think of the financial institutions like brokerage houses, but I believe that they might have a cohort over there in the banking world, although I don't use that. But what we want is a little bit better return as a default than a savings, but we want to be able to put it into things like stocks, 'cause if you're just getting started, ETFs are probably the way to go.

Just get SPY.

I have a ETF that I like that's Kevin Simpson who does a really good job with covered calls in his ETF called D-I-V-O, DIVO. But it's entirely up to you. I will say that you should pay attention to companies that pay shareholders something called a dividend. That's why I like that DIVO. There are companies that have been paying their shareholders, the people who own the stock, higher amounts each year.

They're paying them out profits every year for over 60 years. In other words, "Hey, last year they gave me a buck, this year, per share. Now they're giving me a dollar 10, now they're giving me a dollar 20." Every year it goes up for 60 years.

It's crazy, right?

But you're actually getting the cash that you can actually spend. In fact, there's a list of these companies that are paying, that have been paying, increasing our returns for over 50 years, it's called a Dividend King. And it's kind of like investing in a relative's business. Let's say your nephew says, "Hey, I want to open up a pizza shop." Well, you want to get paid for helping out your nephew.

You don't want to just give them the money and say, "I hope that the pizza shop's worth more someday and let's sell it." You want to say, "Hey, as it's running, I'd like some cash." And the stock market's no different, you should get paid. But we really are getting ahead of ourselves. So that's just one of the accounts.

What's important about investing is two things.

First, the longer you invest, the less likely you're going to suffer loss. So yes, there is more risk-reward, but the longer you do it, that risk goes down to literally zero. In fact, statistics show that over any stretch of 15 years in the market, like a market fund like SPY, VOO, or some other bucket of stocks, they're stocks that represent the market. They've never yielded a negative return over that 15 years.

In fact, on average for example, the SPY has returned over 10% a year.

You don't have to be a pro. In fact, a large annual study revealed that investing in the SPY, which is just the S&P 500, the biggest 500 companies, gives you a better result just investing in that one little ETF, so just a bucket of stocks give you better results than 92% of the investment professionals out there. Whoa, right? So you don't have to be investor genius, you don't have to take crazy risks.

You just start putting money in that investment account and give it time, and then statistically, you're going to do fantastic. It just, you got to be patient, and it's not something you're going to do in and out, in and out, like we don't advocate for that. The longer you're in it, the lower your risk.

But you might just want to get a good return by investing. What if you just want an immediate 20% return like that?

How do you do that? Well it depends on your tax bracket, but that's by investing in a different type of account called a retirement account. And this is where you get a tax benefit for investing in it. So the last two types of accounts I'm going to touch on give you tax benefits. Number one is the retirement account.

There's different flavors, but the best sort of return in investing in my experience, I'm a tax lawyer, so I'm just going to be biased as I'll get out, is when you get a big return just for investing. So let's say that I'm in the 22% tax bracket, and I can invest $100 in a tax-deductible account like an IRA, a 401(k), a DB plan, 457, etcetera. Well, you can get an immediate return of 22 bucks on that investment of a hundred thousand dollars. How? Because you do not have to pay tax on that a hundred dollars.

In the meantime, that a hundred dollars continues to grow tax-free. That's pretty massive, depending on the type of account you'll likely need to pay a tax on the money and its growth at some point in the future. So this is called a tax-deferred retirement account. It's your traditional, like, if you had an employer, your 401(k), right? Maybe they're doing a match, and you're getting a huge return, and you're just waiting, and someday you're going to start taking the money out.

Like, maybe when you get over 72, for example, you're going to be required to in most of these accounts.

And then you start taking that money out, and you may pay a tax at that point, but it's going to be a much lower tax bracket than what you're sitting at now, at least statistically. Everybody's situation's a little different. But if we look at the median, you tend to go down tax brackets when you retire, which means not only am I getting a nice tax break now, but the tax hit shouldn't be too bad in the future. And then if you invest that IRA when you reach the age of 72, you're going to start taking that money out, and all that growth that you never had to pay tax on eventually it's just continues to compound and compound and compound, and then you start drawing it out.

It's usually about 4% a year that you're taking out. It's stretched out over your lifetime, so it's not like you have to take the whole thing out when you're 72, but it is a big pile.

So, for example, let's just say that I invest a hundred dollars at 25 and I let it grow until I'm 72. Statistically speaking, if you just followed the SPY, you're going to be close to $11,000. So remember, I put a hundred bucks in, I got a $22 tax benefit.

Your situation's going to be different, it might be 37, it might be closer to 50, depending on what state you live in and how much you make. But you're going to have this money, and now it's compounded for years and years and years. And again, just using the SPY, statistically, you're going to be close to 11,000 bucks.

Yeah, it's that powerful. And that's what you want to be looking at.

So whether you're using a 401(k), an IRA, or any other type where you get that tax deferral, this is your ticket to a secure and comfortable retirement. The sooner you start, the better. And that's because of the magic of compound interest. There's even options where you don't have to pay a tax when the money comes out, but you lose the tax deduction in the beginning. So for those of you who are in the zero, 10%, 12% tax brackets, you definitely want to use a different type of retirement account.

In other words, remember when I said you get that 22% or that 20% bump? Well, what if you're at zero? What if you're making below the standard deduction? You know, maybe you're 17 years old, you're making $10,000 a year, you should use something called a Roth.

And the reason being is you didn't pay tax on it at all, but now that a hundred bucks, let's say we put a hundred bucks in that Roth, and for years it grows.

So you're 72 years old, and it's going to be well over 11,000 bucks because you got an extra 10 years. So that money will never be taxed when it comes out to you.

And I just want to kind of go over this, it's called a Roth, you know, R-O-T-H, and you're going to hear about a Roth IRA. And there's individual accounts, and it has limits, and how much you can put in, and there's some set amount, for example, 2024, it's $7,000 a year, or 8,000 depending on your age, and it goes up. But the growth is tax-free and the withdrawals are tax free so long as you hold that account for at least five years and you wait until you're at least 59 and a half years.

Now, you can always get the money earlier, you can always take out the money you put into it without penalties.

So if I put, say again, I save up $5,000 in there, and it gross to 10, I can always take my 5,000 out. That's never an issue. But again, if you also have to use it in retirement, or if you have emergencies or things, there's other routes to get some of that money out without getting hit with any penalties. But if you have it for five years, you're over 59 and a half, you'll never pay tax on that.

It's just that powerful. Now, there's a second flavor, I mentioned the IRA, there's also a Roth 401(k), but you need to get that through your employer. But that allows you to put substantially more money, over 20 grand a year, into that account. And again, depending on your tax bracket, you may say, "Hey, this is the lowest tax bracket I'm ever going to be at. And I know that in the future I'm going to be making a lot more money, and I'm going to be in a higher tax bracket when I retire," then that Roth would be a way to go.

But in either case, no matter whether it's a traditional or a Roth, the point is using an investment account and investing in stocks, bonds, mutual funds, ETFs. And I think Warren Buffet has actually said the same thing, if he was doing it again, if he ever giving advice, he would just put money in the market and let the market do its thing. Now, this last section, number five, and I say last, but certainly not the least, this is a health savings account, or HSA, you've probably heard about it. Probably don't know too much about it, but it's basically a health savings account that if you use that money that you put into it for health reasons, for, you know, it could be health, dental, I believe vision even gets covered, but health expenses, you'll never pay tax on it, and you get a deduction upfront.

So I call it a triple threat, because you're putting money in there, you get a tax deduction for it going in, it grows tax-free, and then as long as you use that money for health, you never pay tax on it.

There's even a way to convert it to a Roth account at some point in the future if you don't have the health expenses. But here's how it works. It's called a, basically, to be eligible, you have to have a high deductible health plan. It will be almost all due. I think it's $1,800, single person deductible to qualify.

But this is, let me just give you the basics of this thing 'cause it really is a triple threat. It gives you a tax deduction, it allows tax-free growth, and then tax-free withdrawals for health. There's nothing else out there like this, guys, where you actually get a deduction. Remember a hundred bucks we're getting in, you're in the 22% bracket, you get immediate $22 tax relief, that's great.

That's exactly what you get with an HSA.

And then any unused funds just keep rolling over, and here's the cool part, you can invest these in SPY, ETFs, mutual funds, stocks, bonds, whatever. It's really, really powerful. And on average, you're going to have health-related expenses, probably about $200,000. I think that's the average American when they get older.

So if you're a qualifying individual, it just means you have to have a high deductible insurance plan, which right now I think it's more than 1600 deductible with a maximum amount of out-of-pocket of $8,500, which is almost all plans nowadays.

You can contribute and deduct. Get this, right now, it's 4,100, 4,150, excuse me, $4,150 that you can contribute, if you have a family, $8,300 per year. And it's adjusted for inflation, so check what it is when you're watching this video, in 2024, that's the amounts, 4,150 and 8,300. But it just keeps getting better 'cause once you got that money in there, let's say like I use a Fidelity account, you just invest that money and let it grow tax-free. You don't actually have to use it to reimburse yourself right now.

But here's the cool part, any expense that you incur once you set this up, you can reimburse in the future. I didn't misstate that. You keep track of the expenses that you're owed, that you need to be reimbursed for, you can keep a monster list, and eventually it's going to come back.

And as long as that money is used to reimburse medical, dental, or vision expenses, guess what? No tax.

"Wait, so I can contribute $4,000 in 2024 and I get a tax deduction on the entire amount?" Yes. "And I let that grow and it becomes worth $200,000? I don't have to pay tax on that if I reimburse my medical expenses?" Correct.

"But what if I don't have $200,000 of medical expenses?" Well, you can reimburse all the years the plan was in place, all of them. But yeah, if you don't, then there's a way to convert it when you get older into a Roth and you can still get that money out tax-free. So hopefully you learn something. I'm just going to say you have five accounts that we've gone over.

It should give you a good arsenal to contribute to your financial health and peace of mind. Each plays a unique role in building and protecting your wealth. There's no one size fits all, but those are five really good accounts that everybody should have.

If you're missing any, consider taking steps to open and fund them. And for more detailed advice, always just kind of reach out to us.

If you ever have questions, you want to reach out and have a consult, it's absolutely free. And I just want to say thank you for watching. If you like this type of information, you find it valuable, please, like, share, and subscribe. I'll catch you later..

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