The Taxable Bucket with David McKnight

The taxable bucket contains investments that you get to pay a tax on. Things like savings accounts, money markets, stocks, and bonds. You know your investment is taxable when you receive a 1099 from the IRS. These are not the most efficient investments in the world. You can have as much money as you want in your taxable bucket, as long as you recognize that there is a financial consequence for doing so. It may not seem like a big deal, but if you take those inefficiencies and amortize them out to a lifetime it can cost you several hundred thousand dollars. The ideal balance in your taxable bucket will depend on your marital status, whether both spouses working, or if you're a business owner. A good rule of thumb is if you have at least two steady incomes in your family, you should have at least three months worth of barebones expenses set aside. If you have one income earner or are a business owner, you should have around six months worth of expenses set aside. Your taxable bucket is where your least valuable dollars go. Take a look at the contribution limits that the IRS defines for certain accounts, the more limited the contribution amount the better that account probably is in terms of taxes. You have to be contributing to your taxable bucket in a very defined way and limit it as much as possible. If your taxable bucket grows every year, so does your 1099. Your taxable bucket has a purpose, primarily to meet your needs in an emergency. There are taxes in life that we pay, that we are not required to pay. Provisional income is the income that the IRS keeps track of to determine if they are going to tax your Social Security. You can lose up to one-third of your social security if you have too much money in your taxable bucket. There are a number of accounts and strategies that you can use to keep as much money out of your taxable bucket as possible. Don't let a year go by where you are not taking advantage of all of the tax-free investments that the IRS makes available to you.