by Damon Carr, For New Pittsburgh Courier
I need to find out strategies on how to lower my taxable income
That’s the easiest question that received trust to date. Here’s what you do: March down to your Human Resource Department and ask to meet with a Payroll Specialist. Inform the Payroll Specialist that in an effort to reduce your taxable income, you’d like a pay cut IMMEDIATELY! You don’t like that strategy, do you? I’m joking but here’s my point. You’re not looking to reduce your taxable income per se. You’re seeking tax advantage strategies to allow your money to grow and defer or avoid taxes. Here’s a couple of strategies that you can employ:
Maximize your 401k contribution: You can contribute up to $20,500 per year or $26,500 if you’re over 50-years old in a 401(k), 403(b), or Thrift Savings Account etc. Doing so will reduce your taxable income. More importantly, doing so increases your retirement savings so that when the paycheck stops coming in, you have a retirement nest egg you can pull money from.
Maximize your IRA or ROTH IRA contribution: You can contribute up to $6,000 per year to a Traditional IRA or Roth IRA. You can contribute up to $7,000 per year if you’re over 50. Certain rules apply to both regarding if you’re able to receive a tax deduction on a Traditional IRA or if you’re eligible to contribute to a ROTH IRA. Both are something to consider for tax advantage strategies.
Health Savings Account (HSA): If you have Health Insurance with a high deductible, you may be eligible to participate in a HSA. With an HSA, you can save or invest money in this account. For someone who only has health insurance on his or herself, you can contribute up to $3,600 per year in a HSA. You can contribute up to $7,200 per year for family coverage. There’s a triple threat tax advantage here. The money you contribute is tax deductible. The money inside the account grows tax deferred. The money you withdraw from this account for medical purposes is tax free.
Create a business: If you own a business, you can convert some everyday expenses into partially or fully deductible business related expenses. For example: You have a cell phone you use daily. You open a business and you continue to use the cell phone for personal and business purposes. The portion of the time you use your cell phone for business is deductible as a business expense.
Thanks Damon!! The first two, I am doing right now. I could contribute more but I am paying off some bills. I’m trying to come up with an idea for a business.
I started too late in life. I have been through so many situations that I have had to use my 401k from previous jobs to stay afloat but I did have one that converted into a Roth so I have that. I took your advice about having an emergency fund. So since January, I have saved $200 per month.
Steve, It sounds like you’re making the right money moves. Know this! We all have a story to tell. There’s no linear path to success ~ including financial success. The road is filled with roadblocks, obstacles, temptation and setbacks.
The key is to learn and grow from our own unique experiences. It’s never too late to start! Consider this: Most people never start. They work hard, make bad financial decisions, and wonder why they can’t get ahead. You’re taking the time to learn how to better manage your money. You’ve also learned what not to do from your mistakes.
Can you explain what a Roth account is?
There are two types of IRA’s: Traditional IRA and ROTH IRA. IRA stands for Individual Retirement Account.
Traditional IRA’s allow an upfront tax deduction but you’re taxed on both contributions and earnings when you withdraw money from it.
With a ROTH IRA, there’s no upfront tax deduction. When you withdraw money from it, both contributions and withdrawals are TAX FREE. This allows you to keep Uncle Sam’s palms off of your hard-earned money.
You can contribute up to $6,000 per year in an IRA—$7,000 if age 50 or older.
Aren’t there income limitations? You can’t contribute to a Roth if you earn more than a certain amount of income? Correct? Or has that changed?
Yes, there are some income restrictions with regards to using a ROTH IRA. For single filers, you can contribute up to $6,000 per year if you earn under $129,000. If your earnings are between $129,001 – $144,000, the amount you can contribute is phased-out (reduced). For married filing jointly, you can contribute up to $6,000 if your combined income is under $204,000. If your earnings are between $204,001 – $214,000, the amount you can contribute is phased-out (reduced). If your married filing jointly, you can contribute to a ROTH if your earning is $10,000 or less. Note: If you’re 50 or over, you can contribute up to $7,000 per year in a ROTH.
For those who are fortunate enough to earn too much money to contribute to a ROTH IRA, there’s a little known loophole called a backdoor ROTH IRA.
This strategy involves contributing money to a non-deductible IRA. This IRA has no income restrictions. Once you contribute money to the non-deductible IRA, you can immediately convert it to a ROTH IRA.
(Damon Carr, Money Coach can be reached at 412-216-1013 or visit his website at www.damonmoneycoach.com$)