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Growth & Taxes

We aim to establish a clear foundation by explaining the fundamentals of how money grows and the various tax treatments associated with different savings vehicles. This approach enables our clients to make informed decisions about their financial strategies, while we help them plan every step of the way.

*Great Northern Financial and its representatives are not tax professionals unless otherwise explicitly stated.

Money Grows in Three Ways:

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Fixed

A fixed growth option gives you a set, guaranteed rate of return. Your money grows steadily, you know what to expect, and you don’t have to worry about market ups and downs. Great for people who prefer certainty over surprises, but typically doesn't do much to grow wealth over time.

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Variable

When it comes to variable growth, your returns are directly tied to market performance. It means more potential upside, but also more risk. If things do well, you'll have significant growth; if not, you could see losses. This is usually  best if you’re okay with balance fluctuations.

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Indexed

Indexed growth combines the best of fixed and variable growth. Your returns are linked to a market index (like the S&P 500) but with protection against losses. Typically, there's a participation rate and cap involved, but there’s also a safety floor so you won’t lose anything. It offers market-linked growth without the risk.

Money is Taxed in Three Ways:

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Now

Examples:

  • A regular savings account or checking account: you deposit after-tax dollars; interest earned is taxable.

  • Certificates of Deposit (CDs) or money market accounts: after-tax dollars in; interest each year is taxable.

  • Taxable brokerage/ investment account: you invest after-tax dollars; you’ll pay tax on dividends, interest, capital gains as they occur (or when you sell) rather than having a special deferral or exemption.

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Later

Examples:

  • Traditional 401(k), 403(b), TSPs, and other employer-sponsored retirement plans: contributions are often pre-tax, growth is tax-deferred, and is taxed as ordinary income when withdrawn.

  • Traditional IRA: contributions may be tax deductible (depending on situation), but growth is tax-deferred until withdrawal.

  • Non-qualified annuities: typically, you invest, growth is tax-deferred, and taxes are paid when distributions occur.

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Advantaged

Examples:

  • Roth IRA / Roth 401(k) etc.: You contribute after-tax dollars now, growth accumulates tax-free, and if the rules are met (time, age, qualified withdrawals) you withdraw tax-free.

  • With a permanent life insurance policy (i.e., a policy that accumulates cash value), the cash-value growth is tax-deferred while it remains inside the policy, but is accessible tax-free through policy loans and withdrawals.

This is not a comprehensive list of all existing savings or investment vehicles, simply examples based on popular financial products.

With this foundational understanding, we are uniquely positioned to assist our clients in maximizing growth, protecting against market downturns, and re-evaluating traditional investment approaches—all tailored to their individual needs and financial objectives.

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