The power triangle as I call it is three things that we want when you are putting your money to work. The first thing you want is “Tax Free”. When you invest or save you want your money to grow tax free. Not tax deferred but tax free. The next corner of the triangle that everyone wants is “High Return”. When putting your money to work you want it to get you the best returns you can.
Obviously risk and liquidity come into the return calculation, but all things being equal you want the higher return on your money. The third corner of the triangle is “Collateral”. This means you want to be able to borrow against your investment when you need money for your life or for another investment.
Now there is nothing that gives you all three of these at the same time, but there are things that get you two of these at the same time. The tool that gets you “Tax Free” and “High Return” is the use of a Roth IRA. The tool that gets you “Tax Free” and “Collateral” is the use of Cash Value Life Insurance. The tool that gets “High Return” and “Collateral” is the use of Real Estate/Business. Each of these have advantages in their specific area that other investments do not have. This does not mean that you should be putting all of your money in these or any one of these. But when you look at the purpose of your money, you need to consider these tools to maximize your results.
There are restriction and concerns with each of these so don’t assume that you can just start throwing money at them. The Roth has an income limit, RE takes some work to find a good investment, Cash Value LI required health qualification, just to name a few of the initial considerations. You also need to match your intent to the correct tool. So if you want to save for retirement and you expect to be in a higher tax bracket at retirement and don’t want to actively invest your money, and you also don’t need to use this investment as collateral for any future purchases, then you should consider a Roth IRA. If you want to actively invest your money for retirement and use the investment as collateral for a higher return or more flexibility and don’t mind having paying some taxes along the way or when you retire, then you should at least consider investing in Real Estate or in a Business. If you want your money to grow but be liquid to use for other investments or purchases and be usable tax free, but don’t mind a lower return while it is not being invested elsewhere, then you should consider Cash Value Life Insurance. These are simply guidelines and are not absolutes but it should give you a foundation to work from when you are planning your future investment directions.
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