This is serious business right here and now. Can you imagine what it would mean for you not to pay any income tax? As you read and implement the information in this post, you will be well on your way to a tax-free environment. I’ll treat the basic methods in this blog, then dig deep into the specifics in future posts.
FACT: Three areas that keep you from paying Federal Income Tax.
- Life insurance cash values
- Tax-free bonds.
- Converting your qualified 401(k) or IRA’s over to a Roth IRA.
First, know that as long as you play by the rules, there will not be income tax on the gains within a properly structured whole life policy. There are many advantages to owning such a policy; I will elaborate more in upcoming posts.
Second, a tax-free bond has long been known as a safe place to save money and avoid taxes. Many stock market investors park their money in these bonds when they don’t have an appetite for risk. Bonds can be held to maturity and earn tax-free interest, or can be sold when there is a nice gain on the face amount. Check specifics with your registered investment adviser.
Third, convert a traditional tax-deferred retirement account to a Roth IRA. Of course you must pay taxes now on the current balance, but as you continue to deposit funds into the account (that you have already paid tax up front on) there will be no further taxes due at the time you withdraw. The principal and the gain are all tax-free at withdrawal. I ask: “Do you want your money to double and then pay tax?” Why not convert to a Roth IRA and only pay the tax due today, then allow the money to double over time and not pay tax ever again? This is not rocket science. Remember the key question: “Would you rather be taxed on the seed or the crop?” And don’t be fooled by the idea that you will be in a lower tax bracket when you retire. That isn’t going to help you much at retirement, especially when you will be living on more of a fixed income and possibly dealing with higher cost of living issues.
What about your concern that tax rates might decline? They could. Anything is possible. But consider our current government expenditures doubling the national debt in just eight years! What about that? What does it mean when our government has to borrow money to pay just the interest on that debt? If you are a betting person, our income taxes are likely to go up, not down or even level out. Plan for up, just to be safe.
Concerns also swirl around about taking money out earlier than age 59.5 from your 401(k) or IRA. This creates a 10 percent penalty plus you pay tax on the amount withdrawn. I am sure this is designed to stop early withdrawals because so few people have adequate savings for their long-term retirement years. However, you may use Section 72(t) and just retire the account early and not pay the 10 percent penalty, even though you are age 48, or 52. I will offer these details in subsequent posts.
The government can change the tax rules at anytime, sure. But usually when they propose a change, they allow grandfathering back to the old law, for anyone who has already been using the old law.
Most people do not pay much federal income tax right now, (the real gouge is FICA tax) so why should you be concerned? The reason is everything is constantly changing… soon your children will grow up and the child tax credit will be gone. If you get a personal exemption and have three children, this gives you five exemptions! This provides is a ton of savings. But those tax credits won’t be around forever. In addition, if you are managing your money as you should be and getting out of ALL debt, including your mortgage, any mortgage interest expense will decrease, as it should, along with the tax benefits this provides. As you get older, the tax credits you have relied upon will go away. Like my 68-year-old client, “Richard” who recently told me that he has never made so little income and had to pay more in tax in his lifetime. Your tax CPA will tell you how much their older clients pay in real money, and then as it relates to their income. It will shock you, hopefully, into making better plans to protect your money now from taxes that will act upon you later. Don’t wait to take advantage of whole life insurance, Roth IRAs and tax-free bonds. These three strategies will reduce your taxes a great deal, and if you plan correctly, you could pay zero income tax. At retirement you may be able to file using standard deductions, along with personal exemptions and this totals $30,000 of income that you can have before you rely on tax-free income.