Mike is ever so helpful, always. And Mike has a wonderful blog called The Oblivious Investor. He's also the author of numerous helpful short books on single topics like social security and tax planning. His latest book is called More Than Enough, which I think is highly relevant to a lot of people at this conference, which is considerations if when you look at your finances you actually see that you have more than enough to do the things that you want to do within your own lifetime, thinking about things that you might want your money to do for you, for others in your life.

He is going to be doing a session on Sunday morning that I wanted to call attention to that's kind of a reluctant spouses conversation. And the idea is that we've spoken to attendees in the past who have said, "You know, I am the enthusiast in my family, my spouse is not into this stuff at all.

What's the bare minimum that he or she needs to know? How can I get him or her a little more enthused about this stuff?" So that will be the topic for Mike's discussion on Sunday morning. The thing we're doing that's a little bit different about that session is that your partner needn't be enrolled in the conference, so they needn't be registered, they can come and join us for breakfast and hear Mike's tips for getting the reluctant spouse along for the ride.

So I am so thrilled to introduce Mike, he's going to be talking to us about tax-advantaged accounts. Thanks, Mike. >> All right, so Alan and Rick both spoke with you about how to select different investments. And so now what we're talking about are the different types of accounts in which you might own those investments.

And we're going to be spending most of the time discussing tax-advantaged accounts. But before we can actually talk about tax-advantaged accounts, we have to spend just a couple of minutes talking about regular taxable brokerage accounts so that then, once you understand how those work, we can talk about how tax-advantaged accounts work differently.

Ah, okay, gotcha, thank you. All right, so a taxable brokerage account, this is anything that's not an IRA, not a 401(k), it's not a 403(b), it's basically just if you went on the Vanguard or Fidelity or Schwab website, you opened up a new brokerage account, it would be a taxable brokerage account.

That's what we're talking about here. And in these types of accounts, the interest that you earn every year is taxable at your ordinary income tax rate. And the dividends that you earn are taxable as well. The tax rate's a little bit lower, basically it only goes up to 20%, but they're still taxable.

And then whenever you sell something in a taxable account for more than what you paid for it, we call that a capital gain. And capital gains are also taxable, and the tax rate depends on how long you owned that investment for selling it. So if you owned it for one year or less, we call it a short-term capital gain.

And those are taxable at your ordinary income tax rate, whereas long-term capital gains, which is when you've owned the investment for longer than one year, those are taxable at the same rates as qualified dividends. So the summary of this whole slide is really just that we call these taxable accounts, because the returns that you earn in a taxable account are taxable.

That's the idea. That's the thing you need to know about a taxable account. And then in contrast, we have all of our tax-advantaged accounts. And tax-advantaged accounts includes IRAs, 401Ks, 403Bs, 457s, HSAs, and 529s, and probably some other stuff too. And in these types of accounts, you don't have to pay tax on the interest that you earn every year.

And you don't have to pay tax on the dividends that you earn every year. And you don't have to pay tax on the capital gains whenever you sell stuff in one of these types of accounts. And so the most important thing to know about tax-advantaged accounts is that they literally grow more quickly than a taxable account.

If you have the exact same investment in a taxable account and in an IRA, you're going to earn a greater return with that investment in the IRA because you don't have taxes taking a bite out of your return. And there are also tax consequences, either for putting money into tax-advantaged accounts or taking money out.

And what those consequences are depends on what type of account it is. And we're going to dig into all of that. But again, the single most important thing about tax-advantaged accounts is simply that you get the whole rate of return every year. They grow faster than taxable accounts. And that's a big deal.

So the first type of tax-advantaged account to discuss is the traditional IRA. An IRA stands for Individual Retirement Account. And with IRAs, there's a limit to how much you can put in every year. So the limit is the lesser of your earned income for the year or a fixed dollar amount for this year at 6,500 or 7,500 for anybody age 50 and up.

And with a traditional IRA, the money that you put into the account, the contribution you make, you get a deduction for that contribution if you don't have a workplace retirement plan. So that's if you don't have a 401(k) or a 403(b), which again, we'll talk about those in a minute.

But if you don't have anything like that, then you get a deduction for contributing to a traditional IRA. If you do have a plan like that, then there are income limits. And what that means is that if you have a 401(k) or something similar, and your income is above this limit, then you're still allowed to contribute to a traditional IRA, but you won't get a deduction for doing that.

And with a traditional IRA, just like every type of tax-advantaged account we're going to talk about -- all right, with a traditional IRA, there is no tax on the growth while the money stays in the account. So again, they grow faster than a taxable account because they're not paying tax on the interest and dividends every year.

And then when you take money out of a traditional IRA -- so when you take money out of a tax-advantaged account, we call that a distribution, and distributions from traditional IRAs are taxable as income, generally. And so we call these tax-deferred accounts because the idea is that you get some tax savings at the beginning because you get a deduction, and then you get some tax savings along the way because the growth is tax-free.

But then there's additional taxes at the end because it's all taxable when it comes out. So you've deferred taxes. You get savings at the beginning, but additional taxes at the end. So it's a tax-deferred account. And one last thing to know about traditional IRAs is that there's a 10% penalty for any money you take out before age 59 and a half.

And the idea here is that Congress made these to be individual retirement accounts. So they put that rule in place to discourage people from spending the money early, basically. And then we have the Roth IRA. In Roth accounts, Roth IRAs share a contribution limit with traditional IRAs. So 6,500 for this year, or 7,500 for anybody age 50 and up.

And it is a shared limit. So for instance, if you put 2,000 into a traditional IRA, the most you could put into a Roth would be 4,500 if you're under age 50. And the ability to contribute to a Roth IRA phases out based on your modified adjusted gross income.

Really all that means is that if your income is too high, you can't contribute to a Roth IRA directly. There is something called the backdoor Roth IRA strategy. Admittedly, we don't actually have enough time to go into the details of that today. But if your income is above those limits, that's something that you'll want to look up.

It's not quite as good as a regular Roth IRA contribution, but it's still, it's pretty close. And with Roth accounts, you do not get a deduction for contributing. So there's no tax savings immediately. But the account does grow tax-free. And the contributions to a Roth IRA, so the money that you put in, you're allowed to take it back out tax-free and penalty-free at any time.

You don't have to be age 59 and a half. Christine mentioned this earlier. This is a big deal. It means that Roth IRAs can kind of serve as a backup emergency fund. And this is a big advantage of Roth IRAs relative to all of the other types of retirement accounts.

And then the distributions of earnings, so that's all the growth in the account, that's also tax-free if you've had a Roth IRA for five years and you're at least age 59 and a half. If you don't meet those requirements, then the growth when you take it out could be subject to a 10% penalty and it could be taxable, although there are some exceptions.

The traditional 401(k) and 403(b), and these types of accounts, are tax-deferred. So they're a lot like a traditional IRA, just through your employer, in the sense that you get a deduction when you contribute, so you get some tax savings immediately. And then it grows tax-free, so you don't have to pay tax on the interest and dividends every year.

And then it's taxable when you take it out. So again, tax-deferred because you get some tax savings at the beginning, but additional taxes at the end. And the contribution limit for 401(k) and 403(b) plans is a lot higher than for IRAs. It's $22,500 this year, or $30,000 for anybody age 50 and up.

And some employers offer a matching contribution. And what that means is simply that if you put in at least a certain percentage of your pay into the account, then your employer is also going to put in a certain percentage. So for example, if your employer had a 4% dollar for dollar match, that would mean that if you put in 4% of your pay, or rather, at least 4% of your pay, you put in at least 4%, your employer will also put in another 4%, which means that you've basically doubled your money.

So it's 100% return without any risk, which is obviously a better deal than you get anywhere else. And really, the big difference between 401(k) and 403(b) plans is not the tax treatment or any of the complicated rules. It's really just who offers them. 401(k)s are offered by businesses to their employees, while 403(b)s are offered by educational institutions, so universities and things like that, as well as nonprofit organizations.

And then we have the Roth 401(k) and Roth 403(b), which is exactly what it sounds like. It's a hybrid between a Roth IRA and a traditional 401(k). So because these are 401(k) and 403(b) accounts, they share the same contribution limit. So it's $22,500 for this year, or $30,000 for people 50 and up.

And with any Roth account, you don't get a deduction for contributing to the account. So there's no savings immediately. But just like every tax-advantaged account, these grow tax-free, so you don't have to pay tax on the interest and dividends every year. And then the distributions from a Roth 401(k) or Roth 403(b) are tax-free if you're at least age 59 and a half, and your first Roth contribution to this particular plan was at least five years ago.

And lastly, for retirement accounts, we have the 457 plan, which is less likely that you're going to run into this during your career, because they're offered by a lot fewer employers, but they work differently than 401(k) and 403(b)s. So if you do run into this, it's important to understand the distinctions.

So first thing that's the same with 401(k) and 403(b)s is that the dollar amount contribution limit is -- it's the same for any given year, so $22,500 for this year. However, it's not a shared limit. So what that means is that if your employer offers a 401(k) and a 457, if you had enough income and enough cash flow, you could put $22,500 into the 401(k) and another $22,500 into the 457.

So if your employer offers both, and you've got enough cash flow to do this, you can contribute quite a lot of money. And 457 plans might allow for something called special catch-up contributions. This is a weird one, because the tax code doesn't say they have to offer it, and it has to work like this.

So there's a little bit of leeway, basically, to the company offering the plan. So if you have a 457 plan at work, you basically just want to talk to your HR department and ask about special catch-up contributions. And then 457 plans can be tax-deferred, or they can be Roth.

And if they're tax-deferred, they work pretty much how you would expect for a tax-deferred account, and that you get a deduction for contributing, the account grows tax-free, just like every tax-advantaged account, and distributions are taxable. And if it's Roth, again, more or less what you would expect, because you don't get a deduction for contributing, but it does grow tax-free, and the distributions are tax-free also, including all of the growth, if you're at least age 59 and a half and you've met the five-year rule.

Now, one thing that surprises people about 457 plans is that there's no 10% penalty, whether we're talking about the tax-deferred or the Roth. There just isn't one. So that's a nice feature of 457 plans. And then the last thing to know about 457 plans is that we break them down further into two subcategories.

The first is the governmental 457 plan, and then we have the non-governmental 457 plan, and that's basically based on who your employer is. If it's a government entity that employs you, it's probably a governmental 457 plan, and otherwise it's non-governmental. And the thing to know here, there's a couple of distinctions, but really the most important one is that with a governmental 457 plan, the assets are, quote, "held in trust" for the employees.

What that means is that the money in the plan in an account with your name on it is literally in an account with your name on it. So you don't have to worry that if your employer goes out of business or gets sued or there's, you know, files bankruptcy or whatever, you don't have to worry that the money's going to disappear because it's your money.

And by the way, that's also how 401(k) and 403(b) plans work. You don't have to worry that if the employer goes out of business, you'll lose the money because that can't happen. Non-governmental 457 plans don't work like that. With a non-governmental 457 plan, the money that you've contributed to the plan, which you're probably thinking of as your money because you get a statement, has your name on it, shows balance, it's technically the employer's money still.

And so what that means is that if the employer goes out of business, you can lose that money. And so that doesn't mean that you shouldn't contribute to a non-governmental 457, but it does mean that you need to understand that risk and really carefully weigh the pros and cons basically.

So that's it for retirement accounts. Now if we move on to 529 plans, these are a tax-advantaged way to save for college. And with 529 plans, there's no deduction for contributing to the account, but it grows tax-free just like everything we're talking about. And the distributions are tax-free if you use the money to pay for qualified education costs.

And that includes college tuition and a handful of related expenses basically. So these are kind of like a Roth IRA, but for college in the sense that there's no tax savings at the beginning, but you get tax-free growth, and it all comes out tax-free if you jump through the appropriate hoops.

But if you take the money out and don't use it for qualified education costs, then the growth, the earnings, that's going to be taxable, and it's subject to a 10% penalty. And lastly, we have the health savings account. And this is probably the most powerful account on the list, but the first thing to know about it is that you're not necessarily allowed to contribute to one.

Because in order to contribute to an HSA, you have to have what's called a high-deductible health insurance plan, and that basically means that the deductible for the year has to be at least a certain amount, which varies by year. And so really the easiest way to know is every year when your employer sends you the PDF or the link with all the health insurance plans that you can choose from, or if you're buying insurance on the exchange and you're comparing the plans there, it will tell you.

If a plan is HSA-compatible, it will usually just have HSA in the name, or it will say HSA-compatible somewhere in the bullet points. So that's the easiest way to know. And with an HSA, you get a deduction for the contribution to the account. So you get immediate tax savings, and then there's tax-free growth, and the distributions are tax-free if you use the money to pay for qualified medical expenses.

So these are called triple tax-free. They're the only account like this where you get a deduction at the start, it grows tax-free, and the distributions are tax-free. Nothing else works that way. So if you have access to an HSA and you would plan to use the money eventually for qualified medical costs, or as Christine mentioned earlier, to reimburse yourself for previous qualified medical costs that you had, then an HSA is the best deal around.

If you take the money out and don't use it for qualified medical costs, then the full distribution is going to be taxable, and if you're younger than age 65, there's a 20% penalty. And that's it for the different types of tax-advantaged accounts. A little bit later, we're going to be discussing the most tax-efficient way to use all of your accounts.

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