The Money with Katie Show Rich Girl Roundup: What You Should Know About Tax Drag (and a Wild Money Story)
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Apr 8, 2024 Learn about the concept of tax drag and its impact on investments. Dive into a wild money story involving $90,000 of debt due to parental fraud. Hear about the emotional turmoil and challenges of coping with financial betrayal.
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What Tax Drag Really Means
- Tax drag describes small annual taxes that compound negatively and slow investment growth over decades.
- Those yearly taxes reduce future compounding and create a meaningful long-term gap versus sheltered accounts.
Same Contributions, Different Outcomes
- Investing the same dollars in taxable versus tax-deferred accounts can yield dramatically different long-term balances.
- Over 40 years the example showed nearly double the balance in a tax-deferred account versus taxable.
Model Taxes With A Professional
- Work with a CPA or CFP to model how tax treatment interacts with fees, withdrawals, and your life goals.
- Evaluate long-term drawdown scenarios to see whether lifetime taxes might change your account strategy.