Tax Magic How To Turn Taxable Income Into Tax Free Income

Tax Magic: How to​ Turn Taxable Income Into Tax-Free Income
Believe it​ or​ not,​ there are ways to​ convert taxable income into non-taxable income,​ without any fear of​ an​ IRS audit.
Here's one of​ my favorites .​
It's been part of​ our tax code for over 30 years,​ yet many still don't take advantage of​ it.
What am I​ talking about?
The IRA -- Individual Retirement Account.
Now,​ before you​ say,​ Oh,​ I​ know all about that one; what's so great about an​ IRA?,​ give me 10 minutes to​ explain 3 new benefits to​ the​ IRA rules that you​ may not realize.
BENEFIT #1: How to​ Avoid Tax Rather Than Postpone Tax
First,​ did you​ know that there are now 2 kinds of​ IRA's available?
The so-called Traditional IRA is​ the​ one that first came out way back in​ the​ 1970's .​
But there's a​ newer version of​ the​ IRA that's only a​ few years old -- it's called the​ Roth IRA .​
And the​ difference between these 2 IRA's is​ huge.
Traditional IRA contributions are tax-deductible,​ resulting in​ immediate tax savings .​
The growth of​ those contributions is​ also tax-sheltered while the​ funds remain in​ the​ account.
But eventually all tax-deductible Traditional IRA contributions,​ as​ well as​ the​ growth of​ those contributions,​ will be subject to​ income tax when the​ money is​ withdrawn from the​ account.
In other words,​ Traditional IRA's offer the​ opportunity to​ temporarily postpone taxes .​
In contrast,​ the​ Roth IRA offers the​ opportunity to​ permanently avoid taxes .​
With a​ Roth IRA,​ you​ don't take a​ deduction for your contributions; instead,​ you​ make a​ contribution with after-tax dollars.
Whatever you​ put in​ not only grows tax-free,​ but can also be withdrawn tax-free.
Here's an​ example to​ illustrate:
If you​ invest $2,​000 per year for 20 years into a​ Roth IRA,​ you​ will have invested a​ total of​ $40,​000 .​
Now if​ that Roth IRA earns an​ average of​ 10% per year,​ that $40,​000 will grow into $126,​005.
Now comes the​ fun part: Assuming the​ IRA has existed for at​ least 5 years and you​ are at​ least 59 ½ years old,​ you​ can withdraw the​ entire $126,​005 tax free.
In contrast,​ if​ this money had been invested in​ a​ Traditional IRA,​ the​ entire $126,​005 would be subject to​ income tax as​ it​ is​ withdrawn.
The $86,​005 of​ growth is​ magically converted from taxable income to​ non-taxable income .​
Assuming you​ are in​ the​ 15% federal tax bracket,​ that's a​ savings of​ $12,​901 .​
Add any state income tax,​ and you​ could save over $15,​000 in​ taxes.
BENEFIT #2: Take An Extra 3 ½ Months to​ Fund Your IRA
The deadline for contributing to​ your IRA is​ April 15 of​ the​ year AFTER the​ year for which the​ contribution made .​
So for Year 2018,​ you​ have until April 15,​ 2018 to​ put money into your IRA .​
If you've already invested the​ maximum (more about that in​ a​ moment) by December 31,​ 2018,​ then you're done .​
No more money can go into the​ IRA for 2018.
But if​ you​ haven't maxed out your IRA,​ you​ have until April 15 to​ do so.
Which brings me to​ .​
BENEFIT #3: the​ Maximum Contribution Amounts Have Increased
For many years,​ the​ most you​ could put into an​ IRA was $2,​000 .​
Now,​ the​ maximum is​ $4,​000 (assuming you​ have at​ least that much earned income from wages or​ self-employment income).
And if​ you​ are over 49,​ you​ can put in​ another $500,​ bringing the​ total maximum to​ $4,​500.
A married couple,​ both age 50 or​ older,​ can put a​ whopping $9,​000 per year into a​ IRA .​
Not too shabby,​ eh?
One final note about these Roth IRA rules: For married people,​ you​ can only contribute the​ maximum of​ $4,​000 or​ $4,​500 if​ your combined income is​ less than $150,​000.
If you​ are single or​ head of​ household,​ you​ can contribute the​ maximum if​ your income is​ less than $95,​000.
For most middle-class folks looking for a​ perfectly legal way to​ permanently avoid tax (rather then merely temporarily postpone tax),​ the​ Roth IRA fits the​ bill.
Now comes the​ hard part -- how to​ actually implement this tax avoidance strategy .​
We'd like to​ save as​ much as​ we can for our golden years .​
But $9,​000 a​ year? It's hard to​ put aside that kind of​ money .​
We need every dollar we make just to​ pay the​ bills.
If that's your situation,​ I'm not going to​ get up on​ my what-do-you-mean-you-can't-save-any-money-for-retirement soapbox and start preaching at​ you.
I will say this: You've got to​ start somewhere,​ and you've got to​ start saving something,​ don't you?
People who have a​ problem saving for retirement usually have a​ budgeting problem .​
For an​ excellent resource on​ budgeting,​ I​ highly recommend the​ Budget Stretcher web site:
This site offers a​ free budget system complete with simple forms and worksheets to​ help you​ figure out how to​ put some money aside for a​ Roth IRA or​ other savings plan.
Take advantage of​ this resource and get started today.
Tax Magic How To Turn Taxable Income Into Tax Free Income Tax Magic How To Turn Taxable Income Into Tax Free Income Reviewed by Henda Yesti on July 01, 2018 Rating: 5

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