The following is a post by MPFJ staff writer, Derek Sall. Derek is the owner of the blog, LifeAndMyFinances.com, where he teaches people how to get out of debt, save money, and become wealthy.
Don’t you just love paying taxes?
Of course you don’t. Nobody does. Sure, some of the taxes we pay are for the good of the community, but it seems that much of the funds are spent for products and functions that we could care less about. Often times, I figure it would be best if I could just avoid as many taxes as possible, which is how this article came about. If you are interested in keeping your money, rather than gifting it to the government, you may want to keep reading.
1) A Low Income During Retirement
Just like when you’re working, your tax bracket is dependent on how much you earn each year. If you can live off of very little, then you will land yourself into a very low tax bracket and only owe the government a miniscule amount.
I know this might not sound like a great solution (since you might be assuming that you have to live an unhappy life just to avoid paying taxes), but if you have absolutely no debt then how much do you really have to spend to survive? You’ll need some money for food, clothing, insurance, and gas. That’s pretty much it. A happy life can be had for less than $1,000 a month (believe me, I’ve done it, and that was with a mortgage payment!).
If you plan to retire before the age of 59 ½, don’t sweat it, this plan will still work for you. According to Section 72(t) of the tax code you may withdraw a set amount each month from your 401k and receive no penalty. So, if you have no debts and are able to live off of very little, then this tax avoidance method should work fantastically for you.
2) Contribute to a Roth IRA
If you are worried about paying taxes during your retirement, then why not just get them out of the way now while you have a consistent income? By investing in a Roth IRA, you will be putting money away for your retirement and paying tax on it, but when you withdraw it in your retirement years you will not need to pay any tax whatsoever!
3) Contribute to Your Health Savings Account
If you currently have the high-deductible insurance plan through your work, then you most likely have the option of contributing to a Health Savings Account (HSA). This is an excellent option and I would strongly recommend it as a way to both grow your money and to avoid paying taxes.
Your dollars are put into the HSA pre-tax and as long as you spend the money on medical products or services (this includes vision and dental as well), then you will never pay taxes on this money. Better still, if you have over $2,000 in your HSA account, then you can invest your money and grow it exponentially for your retirement years. And, if by the age of 65, you have not used the money on medical expenses, you can start withdrawing the funds for non-medically related purchases as well without penalty (although, you will pay tax at this point).
4) Invest in Your Home
As home prices are rising again, the strategy of buying a home, living in it for a while, and selling it for a profit is making more and more sense. If you are handy and have a knack for picking out properties that will increase in value, then this might be a great option for you.
All you have to do is find a foreclosure in an excellent neighborhood, move in, put your hands to work and restore the house to appeal to the masses. After two years you can sell the house for thousands of dollars in profits and pay absolutely no taxes on your earnings (up to $250,000). As long as home values steadily rise, this is an amazing opportunity for anyone to earn some tax-free money, not just retirees.
5) Draw From Social Security
If you earned an average wage throughout your working years, then your Social Security checks will not be taxed. As long as this program continues, this is a great way to earn a non-taxable income in your retirement years.
6) Earn Capital Gains, Not Income
If you have a large income and often pay many taxes because of your high tax bracket, then you might want to earn more of your money through capital gains where the standard tax is just 15%. Capital gains are paid on the money earned through the buying and selling of assets. This phrase is often used in reference to stock earnings, but could be used for any asset that is bought and sold for more than the purchase price. If you have the ability to buy low and sell high, then the cap on your tax payment is 15%. Not a bad deal.
How about you all? How are you going to avoid paying taxes in your retirement years?
Share your experiences by commenting below!Â
