The Best Option to Invest $1 Million Dollars

What Does $1 Million Seem Like to You?

For individuals earning a living and making less than $100,000 a year, a million dollars probably sounds like winning the lottery — enough money to last a lifetime, or at least it used to. For a 65-year-old today with a million dollars earning 6% per year, that would provide around $75,000 a year for 25 years.

For a billionaire, $1 million dollars may not even be worth his or her time.

Regardless of how much money a person makes, living within their means is a better definition of wealth than the amount of money listed on a tax return. So what is the best way to invest a million dollars?

Three Investment Approaches

After-Tax Investment: To invest $1,000,000 after tax, you must gross $2,000,000. At a 50% tax rate, you pay $1,000,000 in taxes up front, leaving a net of $1,000,000.

Pre-Tax Investment: A $1,000,000 pre-tax investment defers the tax. At 50%, you eventually pay $500,000 in taxes, leaving a net of $500,000.

Option 3: A $1,000,000 investment at a deferred 25% rate means you pay only $250,000 in taxes, netting $750,000.

Purpose and Intent Matter

Certainly purpose and intent play into every investment decision. In comparing investment options, one good option does not make another option bad. Maximizing the benefits of each option and how those options work for you is most important.

For example, participating in a company-sponsored 401K plan is a great option for maximizing the benefits of tax deferral and utilizing free money through company matching. While on the other hand, purchasing life insurance with after-tax dollars maximizes the dollar as the investment provides multiple benefits both immediate and long term.

Key Facts to Recognize

• Tax is tax. Whether tax is paid up front or deferred, for high net worth individuals the timing of the payment is very relevant — however they most likely will pay the highest tax regardless of pre-tax or after-tax strategies.
• The challenge with after-tax investments is purchasing power — having to gross twice as much as the investment itself, which is costly.
• The challenge with pre-tax investments often includes lack of flexibility, not being able to invest as much as desired, having to wait until age 59 1/2 to utilize, or being required to distribute funds at age 70.

Why Option 3 Stands Out

• Control and flexibility of your assets
• All the pre-tax benefits including deferment, interest on interest, principal and tax
• Pre-tax assets may purchase other assets
• There are definite boundaries and regulation
• Involves frictional expenses
• Valid business owners or operating companies qualify
• Payments may be quarterly, semi-annually, or annually
• Converts future tax from ordinary to long-term capital gains rates

It's not a debate — each option has purpose and value. Individual circumstances should determine how and when each investment is utilized. Diversity is good, and maximizing benefits of each investment vehicle is maximizing your dollar. Any time that investment serves multiple purposes, it provides even more value. 1 + 1 = 3 or more.