Tax advantaged accounts: how account choice adds $200,000

0:00Two investors can put away the exact same $78 every single month, get the exact same market returns, but one ends up with $200,000 more and retires years earlier. The only difference, where they put their money. And I'm going to show you exactly which accounts make you wealthy faster and which ones keep you trapped at your desk longer than you need to be. When you invest just $78 per month into a regular brokerage account and you do that for your entire working life, 30 years, you're putting in $254,088 of your own money. And if we use historical S&P 500 returns, that grows to about $863,000. It's just the magic of the market doing its thing.

0:45To make this video even more valuable for you, I'm also going to give you a workbook, a guidebook that walks you through all of these steps and that you can download for free at felixprehn.org/resource. It's in our private free community. Grab this free workbook and then you can work through it and that way you really understand how this applies to you, how this changes your life so you get the most out of it.

1:10When you go and sell and actually use that money in retirement, the IRS knocks on your door and says, "Hello there. I know you've made all this money. We'd like some of it." 15% in capital gains taxes. That's about $91,000. I'm going to have to hit you over the head with a fair few numbers here. Apologies for that. So might want to take some notes or take some screenshots or download the free workbook and you can actually follow along.

1:35Out of that $860,000, $91,000, poof, gone, right? Gone to fund, I was going to say schools and roads, but it's more like debt. Interest on the interest on the interest of the government's extraordinary spending extravaganza to get themselves re-elected every couple of years. But politics aside, what's the better path?

1:55We're doing the same $78 per month. We're doing the same 30 years, but this time you're a little smarter because out of that money, you're going to put $583 into my favourite tax account, a Roth IRA. And then the other part, and I'm assuming here that you are gainfully employed, you're going to put $125 into a 401k up to the level that your employer matches it. So your employer matching the $125, what does that give you? It gives you a Christmas bonus every single month because they're going to give you a free $125 from your boss essentially. That is literally free money. So you've just made a 100% instant return on that $125. Doesn't sound like a lot, $125, but over 30 years that is $45,000. It's going to grow to over $100,000 in value with the market.

2:50So what's the beautiful thing with all of this set up? Just by splitting it, just by splitting it between a tax advantaged account, collecting a little bit of free money from your boss, you're going to end up with over $1 million. And the beautiful thing is when you cash out, you pay almost nothing in taxes. So what you actually have left, you will have $985,000.

4:04How much more than if you do what everybody else does? It is $213,000 more. You do the same thing. It takes you the same amount of time. You work the same years. You get the same returns. You just were informed about accounts.

4:13So if this video at this point is useful to you, would you please share this with people, especially younger people who have long periods ahead of them who have jobs? They understand just this, they are going to be significantly better off by doing absolutely no extra work. It's the freest, easiest money you could ever make.

4:35I always get that numbers are abstract. So what does $213,000 mean for your life? You have an extra $213,000. Money is one part of it. The other part of it is time. You could retire 3 to 4 years earlier. That's like 1,000 mornings you don't have to set your alarm. 1,000 days without a commute. 1,000 days without sitting through meetings you don't care about and quite frankly a waste of life. And it's 1,000 days where you can take your beautiful hound through the forest and have a bunch of fun between having energy to travel the world by being not too worn down by life. It's a difference between spending time with your grandkids while you can still keep up with them and watching them grow up through video calls or something because you're stuck in meetings and pointless work.

5:25My name is Felix Prehn. I'm a former investment banker. That back there was Winston who looks absolutely exhausted because he's had a wonderful hike this morning. One of the benefits of retiring early. Actually, he was retired at the age of 6 months. What we've also done together is we founded the Goat Academy where we've taught about 20,000 students so far how to manage their money better. We've also co-founded TradeVision.io where we provide news and data that's better than what most retail investors get, what all retail investors get. And we are dedicating our retirement, Winston and I, to teach you regular investors. This is what we used to be. How to protect your wealth from the shenanigans of the financial industry out there.

6:10Think about what $213,000 can buy for you. Now, if somebody says Lamborghini, that's one thing you could do with it. It could be a paid off mortgage, which would actually then reduce your expenses later in life and give you a better life. It could be the financial security for medical expenses. It could be leaving something meaningful for your children, actually making an impact and uplevelling the next generation. If you teach them this and you teach them compound interest, which we made a video on previously, maybe we can link to that here, wink wink to our editor. You've not just left them education and the means to get better, but you've actually given them a starting point, which is going to make it a lot easier.

6:55And remember, both of these investors saved the same amount of money. They got the same market returns. The only difference was which accounts they used. That's it. It's one simple decision. It's repeated consistently. It does change everything.

7:10Now, I should add here, I am not a tax attorney. I'm not a tax advisor. I'm not a licensed anything other than perhaps a licensed hiker, if that was a thing that they would ever licence. Talk to your tax advisor or whatever you use, because I can't give you specific advice, but I can just open your eyes to what is out there by doing the same thing and just collecting some free money.

7:35Going back to that free money, the employer match I mentioned, right? Every single month you put into the bucket $125 and your employer out of the goodness of his heart does the same thing because he's legally obligated to do that. So this is literally a free instant 100% gain on that investment. So show me any investment that legally guarantees you double your money immediately. Well, you can't, right? It doesn't exist anywhere else. And if you do find one, please report them to the FTC. It's likely a scam.

8:10So that match contribution, that part alone grows to about $300,000. That's money you would never have had if you just thrown everything into your brokerage account. It's literally sitting on the table and people just walk right past it. It's like you see a $100 bill on the floor and you're like, I can't be bothered to pick that up, and you do it every single month.

8:35People think the tax-free thing is, yeah, it's kind of okay. But look, taxes are only 15%. It's not that bad, is it? But here is what most people don't understand. You're not paying 15% on your contributions. You're paying 15% tax on all your gains. And when your money compounds for 30 years, the gains are huge. You remember that we put in $78 per month, and that itself will total up to about $254,000, right? The actual tax you're going to pay at the end will be $91,000. So that tax is not 15%, right? $91,000 out of $254,000 is how much? It's a 36% tax. You're paying 36% tax because of the gains that are just generously compounded.

9:46It is actually even more than that because the $91,000 that you were losing to the tax office, it's money that could have kept compounding, could have kept growing if you had left it in a tax-free account. Think about it. $91,000 at the beginning of your retirement. If you leave that invested for just 10 years and all you're getting is 7%, which is way below what the market's done on average, how much money does that become? Google compound interest and Goat Academy, which is our website, and then you'll find a compound calculator. But I'll tell you, that becomes $179,000.

10:30So now this is like an 80% tax after 10 years. You keep going, this becomes a tremendous task. So the real cost of doing nothing and just going, "Oh, I'll think about it later because it's Roth stuff and IRS is a bit complicated," you can't be bothered to talk to a tax consultant. Well, it's going to cost you hundreds and hundreds of thousands of dollars.

10:50So the beauty of a Roth IRA is simple. Yes, you pay tax on your income that you put into it, but all the gains after that are yours to keep and the gains will be tremendously larger than what you put in over a long period of time. And you plan to live a long life, don't you? So there it is, there is a long period of time.

11:08And then from age 59 and a half onwards, no idea how they came up with a half, some weird guy there at the IRS. From age 59 and a half, you can withdraw from your Roth IRA tax-free. Isn't that beautiful? See, my voice went up, that's how exciting that is. No forms, no calculations, no "how long did I hold it for?" None of that. You can just spend it. It's just a tax-free account.

11:35So to summarise how stupidly simple this really is, you need two accounts. You need a Roth IRA. You need a 401k. Every month you want to max out your Roth IRA. In our example here, it's $583. Fidelity, Vanguard, Schwab, any major brokerages will give you one. Takes you 15 minutes, you can do it online.

11:55And then inside the Roth IRA, in my humble opinion, you just put it into a really low-cost index fund. S&P 500 will do fine and you're good. Life's easy, right? And then you put the extra $125 in our example here into the 401k or whatever amount gets you to your full employer match. You're going to want to max that out.

12:15Don't go beyond it because they're not brilliant instruments, these 401ks. What are employer matches? It's 50% up to 6% of your salary. Sometimes it's 100% up to 3% of your salary. Varies. Just talk to your employer, talk to HR, right? They surely have to do something useful occasionally.

12:35And then what do you do inside that account? You do the same thing as the other account. Keep it simple, right? Keep it really simple. Something like VOO or something like that, one of those low-cost ETFs. If you want to dabble in some individual stocks, you can do that, but you need to be educated on that subject first, I would argue. Otherwise, you're probably going to underperform the market.

12:58The S&P has since 1926 given us 10% per year on average. And literally there's a comment in one of my YouTube videos from the last week and someone said, "Oh, to get 10% is really hard." I'm not saying that past performance guarantees future performance, obviously. But since 1926, I believe it's been 10%, so it's actually been insanely easy. All you had to do was do the simple thing. So don't pay the fund managers 1 or 2% to underperform the market. That's definitely not worth it.

13:30What happens when you actually want to withdraw money? Say you are now 59 and a half. How do we withdraw our money? I think people have this fear that they're going to burn through the money. Don't cash out everything when you retire. Withdraw what you need each year.

13:45Ideally, and this is the rule of 4%, ideally you withdraw 4% of your portfolio a year. And it means that your money keeps compounding, your portfolio will keep growing even though you are living off 4%. So say you have the million dollars in those accounts, you can withdraw $40,000 a year and your account will keep going up. It won't just last until you die, it'll last forever after and it'll be a tremendous nest egg for your offspring or wherever you leave your money.

14:15Now, again, I'm not a tax adviser. I'm not a financial adviser. I'm not telling you what to do specifically. I'm just giving you the basis of your research here. But if you do this and you do this right, and if you're a higher income person, you might be thinking, what do I do with the rest of the money? Have a look into this little concept here. We're not going to walk through that here, but it would make the video too long.

14:38But there is something called backdoor Roth IRAs and there's a backdoor conversion to get a lot more money into the Roth IRA. There's a chap called Peter Thiel. He's a PayPal founder, he's a Palantir co-founder and so on. I believe he's got about $12 billion inside of his Roth IRA. So there is actually no limit to it. You just have to understand a little bit, be smart about it, you might want to get some tax advice on that. Something to look into if you are higher income.

15:10If you got some value out of this, if you think your children can get some value of this, people you know, people you work with, anybody, forward it to them. Send it to as many people as you possibly can because it literally is like winning the lottery. It's literally like giving people an extra $200,000 for free, no work. Download the guidebook, the workbook at prehn.org/results. Links down below in the description.

15:43I wish you beautiful.