“Are you a smart investor?” This is a question I get asked often when I mention taxes and investing. The simple truth is that while there are some smart tax sheltered investors, there is a huge difference between the smart investors and the ordinary, run of the mill, investors. You see, regular folks like you and me (and maybe you) do not necessarily make money from investments.

In order to be able to get rich (or at least set up a decent savings plan) you must make money from somewhere. So in this case, I would say that taxes and investing take my exam for me. Now, there are many ways to make money from home, but if you are a regular Joe trying to start off with a few hundred dollars each month, it really does not make sense to get someone else to do the heavy lifting for you.

Let’s take a look at one scenario. Joe wants to invest in a particular mutual fund. Joe and Mary have an accountant that is an excellent expert at creating the tax codes that will allow them to save a sizable amount of money from their mutual funds each year. They are looking forward to year-end profits from their mutual funds and so they decide to invest some of that money into a particular stock. In order to take my tax and investing test for me, Joe and Mary will need to find the tax code that will let them write-off Mary’s share of the stock as being a capital gain.

There are a couple of ways that they can do this. They could spend time researching each tax code as it applies to their situation, which would obviously take them more time than they have. Or they could invest in some kind of software package that does all of the legwork for them, which is obviously much faster and much less expensive. So which way would these two people choose?

They could invest in the software and let it do the work for them, but the problem with that is that it is a one time expense. It costs them money up front to use such a program and then they will have to pay for it each year when they take my tax and investing test. Now you might say, “What about if they just outright invest the money?” That would work too, but it would also involve the same time investment.

Instead, what these two people should do is invest the money themselves. That way, they can write-off the gain on their tax return each year and just invest what they would typically save each month. This is the smart play. It works in the short-term as well as the long-term. You save by investing the money and it continues to grow over time. So as long as you don’t reinvest the profits, you are in effect always gaining cash.

The problem with that is that the longer they hold on to the money, even though they are saving money, they are paying taxes on that money. The more they invest, the more they will pay in taxes. You are trying to get away from that, so don’t do it! Instead, write-off the money that you are saving and invest that money in CDs or high interest savings accounts. That way, when the time comes, you are actually in a place where you can take my tax and invest it in something else.

There is no reason why you cannot take my tax and invest it in an IRA, or some other tax advantaged account. Once you get there, you are basically set for life. Your taxes are already paid and you can take your retirement and retire knowing that you have paid all of your taxes. What could be better? There is nothing better than that.