How to Maximize Your Tax Benefits?

Tax and Death

“In this world, nothing can be said for certain, except death and tax.” Benjamin Franklin.

As savvy tax payers and entrepreneurs, we take any deductions and credits to lower our taxes. We’re not trying to avoid taxes, we’re just trying to minimize what we have to pay in tax legally so with the tax money we saved, we can use that to generate more wealth.

Related article: Wealth Building Strategies

Let’s start with the tax basics. Watch this video to learn how to calculate your taxes.

Tax Deductions vs Tax Credits

Tax Deductions are expenses that the US government allows to reduce your taxable income. For example, you make $70,000 a year, and incurred $10,000 in medical expenses. The $10,000 medical expenses are deducted from the $70,000. So instead of paying tax based on $70,000, your tax will be assessed based on $60,000 income.

Medical expense is only one of many allowed tax deductions.

Tax Credits are “free money” that the government gives you. Remember, back in 2008 when Obama was dishing out $8,000 tax credit to all new homebuyers? I’m a beneficiary of that credit.

Between tax deductions and tax credits, I’ll take tax credit anytime. It’s like free money, but, of course, you have to meet the criteria. And usually, it is a one-time deal.

Impact of Tax on Your Income

 

Tax and Inflation

As the above illustration shows, if you’re not careful, your income tax and inflation can eat up your savings like termites.
None of us can control inflation. But we can at least do something with our taxes to lessen the impact.

Tax now…

Brokerage account

Checking account

Certificate of deposit

Savings account

 

Tax now

Tax later…

401k/403b

Annuity

Pension

SEP IRA

Traditional IRA

Tax later

Tax free…

529 Plan

B.Y.O.B.

Coverdell

Health Savings Account

Life insurance

Roth IRA

Roth TSP

Tax never

Tax-Free Retirement Plan

As a financial advisor, it is my duty to provide my clients with information and strategies on how to accumulate wealth so their money grow safely and be protected from market volatility while maximizing tax benefits.

Impact of Tax and Inflation

I just don’t like sharing my wealth with Uncle Sam, who’s not even my real uncle.

By maximizing your tax benefits, you’re also maximizing your savings. US debt is currently $19 trillion, do you think tax rate will be up or down when you retire. So do you want to pay tax now or later or never?

TAX NOW…

Brokerage account

Certificate of deposit

Checking account

Savings account

TAX LATER…

401k/403b

Annuity

SEP IRA

Traditional IRA

TAX NEVER…

Health Savings Account

Life Insurance

Roth IRA

Roth TSP

 

Max out all tax-free retirement account to reap the biggest tax benefits.

There are many wealth-building vehicles with tax benefits that can be used for personal wealth accumulation, retirement planning, college savings, estate planning, etc. And there are a few that you should pay attention to because of their additional benefits.

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Let’s see how the common retirement accounts compared with the lesser-known indexed universal life insurance.

IRAs vs IUL

From the table you can see that both Roth IRA and Indexed Universal Life Insurance (IUL) offer great tax-free benefits, which is important when it comes to wealth accumulation.

If you have children planning to go to college, cash accumulation in both life insurance and retirement accounts are excluded as assets when calculating for financial needs.

The IUL insurance, by far, offers the most benefits. Seriously, it is life insurance on steroid. You have all the benefit of a traditional or Roth IRA but none of the restrictions.

You get to accumulate wealth in the cash account protected from loss (no market volatility to worry) with guaranteed growth earning a handsome rate of return up to 15%.

You can also access your money whenever you need during your lifetime tax-free as emergency fund, such as medical expenses, long-term care, vacation, invest in real estate, etc.

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Not only that, your young family will be taken care of financially if you passes too early. The death benefit pays out to your family tax-free.

It is also the choice for many who has a large asset portfolio and makes too much income to invest in an individual retirement account IRA. An IUL provides excellent asset and wealth protection and there is no limit on your contribution, but certain guidelines do apply.

One drawback of the life insurance is that you need to have good health to qualify. Therefore, start early when you’re still young and healthy.

The Individual retirement account (IRA) is great investment vehicle for retirement savings because of tax benefits.

The Traditional IRA allows you to deduct your contribution on your tax return for the year you made the contribution, reducing your taxable income that year. However, you’ll pay income tax when you withdraw from the account because your contribution is pre-tax money.

Contribution to a Roth IRA, on the other hand, is after-tax money, so you cannot deduct your contribution on your tax return. On the bright side, your money grows tax-free until distribution.

However, there is no guaranteed risk-free growth with the IRAs. Your money is usually invested in stocks, mutual funds or bonds and is exposed to market volatility with no guaranteed growth and requires specialized knowledge in the stock market to make a profitable investment.

Related article: Invest in Real Estate with a Self-Directed IRA

With both IRAs, there is a 10% penalty on early withdrawal before the age of 59 1/2. There are exemptions to the 10% penalty. You can make an early withdrawal if you’re using the money to pay for college tuition, medical bills or down payment for your first home.

Even though you escape the 10% penalty, but the income tax still applies for withdrawal from the Traditional IRA.
There is also contribution limits to the IRAs: $5,500 a year or $6,500 a year if you’re 50 and older.

How do you want to save for your retirement?