Tax-Advantaged Investment Opportunities
It’s not what you make, but what you keep that counts! Consider the strategies I have been using for years to minimize my taxable income.
I’m overwhelmed by all the tax I pay (income, real estate, sales, etc.) so I try not add to my tax burden by choosing investment strategies that minimize taxable income. We control our investment decisions and can reduce or alleviate this taxable income. In some cases my strategies lower my current tax bill, others are tax-free at distribution. I’ve invested in these vehicles for years, watched the account balances grow and grow (plenty of declines along the way) and not had to pay any income tax on the growth.
Some of the strategies I use are geared toward minimizing income tax today, others help down the road in retirement, and some do both. As I look at my income tax return I see the following:
1. $6,650 federal income tax deduction for my contribution to my Health Savings Account (HSA)
- No income limitation for tax deduction
- The money in the plan grows tax deferred – that means that as my account grows in value I do not receive a 1099 because there is no tax due
- If used for approved medical expenses (including Medicare premiums) it is not taxed when withdrawn. TAX-FREE WITHDRAWS!!!
- The money can be put into a brokerage investment account and invested in stocks, bonds, mutual funds, etc.
2. $10,000 contribution to Bright Directions 529 College Savings Plan shows up on my Illinois tax return
- I get an immediate tax deduction saving me $375 in IL state income tax
- The first $20,000 of contributions per year is Illinois tax-deductible, no income limitation
- The growth of the account is tax deferred and again I do not get a 1099 because I do not owe tax on the growth
- When I take the money out of the account and use it for qualified post high school costs, I won’t owe tax either as this is the main benefit of a 529 college savings account
3. My life insurance policies
- No immediate tax deduction, but the $10,000+ in cash value growth (my cash value has been accumulating/growing for many years) is not taxed
- No income limitation
- Tax-free death benefit for my heirs
4. Roth 401k
- No immediate tax deduction
- No income limitations for contributions so I can put $18,000 per year of earned income every year, plus an extra $6,000 for those 50 years of age
- Tax-deferred growth (like your traditional 401k) this means no annual 1099)
- Tax=free withdrawals available after age 59 1/2 – this means my 401k balance is all mine, not to be shared with the government at whatever the tax rate is when I go to take it out
Using these strategies, my accounts have grown by many thousands of dollars over the past twenty plus years without me owing a dime in additional income tax.
Take a look at your tax return and decide if you are paying more than you would like from taxable investment income, interest or capital gains. You may benefit from these same strategies.
Disclaimer: I am not saying these are all best for your situation and of course you should consult with your Certified Financial Planner and Accountant to find out which make the most sense for you.
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