by Simon Black
Legally lowering your tax bill is the best risk-free return on investment you can get.
Investing in a completely legal tax strategy means keeping 10, 20, even 30% more of your own income.
And in many cases the solutions are not particularly exotic. For example, if you live in California, you can lower your taxes simply by moving to Nevada. Doing so eliminates the California state income tax, which is 9.3% for income over $61,215.
Going further, from Nevada to Puerto Rico, means eliminating not only the state income tax, but also the US federal income tax.
Puerto Rico’s tax incentives they allow you to pay absolutely zero US federal tax. Instead, you’ll pay a low tax rate of 4% on qualifying business income and 0% capital gains tax on qualifying investment income.
Or you can move abroad and take advantage of it Exclusion of income obtained abroadwhich in 2022 allows Americans living abroad to earn up to $224,000 (if you’re married) without being taxed by the federal government.
But for many people, moving is simply not possible, due to family, work or other factors.
Luckily, there’s another powerful tax-reduction strategy that doesn’t require a relocation: tax-advantaged retirement accounts.
first, you can significantly reduce your taxable income by making pre-tax contributions to a traditional 401(k) retirement account.
In 2022, you can reduce your taxable income by up to $20,500 by contributing that amount to your 401(k). And if you’re 50 or older, you can contribute another $6,500 as a “catch-up” contribution, for a total of $27,000 a year.
That means your taxable income drops by $27,000, potentially saving you thousands of dollars in taxes.
It’s worth noting that setting up a 401(k) is fairly inexpensive. Therefore, this strategy offers an extremely high return on investment, with the added benefit of saving more for retirement.
People who are self-employed or earn income from a side business can do this further increase this tax-free contribution using a 401(k) only.
This option applies to business owners with no employees, anyone who is self-employed, and even those who just earn a little income on the side: consulting, selling on eBay, driving for a car sharing or rental service of rooms on Airbnb, for example. .
In this case, your total tax-free contribution limit for 2022 increases to $61,000 (or $67,500 for those age 50 and older).
And there are other benefits of using a self directed 401(k) only.
Most typical employer-sponsored retirement accounts give you a very limited range of investment options.
But with a Solo 401(k), you can invest in a much wider range of assets, including real estate, foreign investments, private equity and more.
Finally, you’ll still have to pay taxes on the money you put into retirement accounts. This usually happens when you take money out of your 401(k) after retirement.
But because most people’s smaller retirement incomes put them in a lower tax bracket, the overall tax burden is low.
I cannot overstate the benefit of taking steps to lower your taxes. And here is a simple example.
Let’s say you have $50,000 in income each year to invest. If you didn’t set up a tax-advantaged retirement account and simply invest that money through your personal brokerage account, you’ll owe, say, 20% in taxes first.
So realistically, you would be left with $40,000 per year to invest.
Assuming you average 12% per year, after 25 years, the original $40,000 would be worth about $680,000. That’s a pretty cool comeback.
But now let’s imagine you put the money into your Solo 401(k) instead. In this case, the money is tax-deferred, so there is no upfront tax. You can invest the ENTIRE $50,000.
Assuming the same return: 12% per year, after 25 years, the original $50,000 invested would be worth $850,000.
Bottom line, you saved $10,000 in upfront taxes because you invested through a Solo 401(k). And that $10,000 tax deferral resulted in an additional $170,000 return on investment.
So you can see how powerful this strategy can be.
Remember, this isn’t some exotic tax break that’s only available to the rich and powerful. This is a completely legitimate retirement structure that has been enshrined in law for over 50 years.
The government wants you to save for retirement. Shit, the government needs you to save for retirement. They know Social Security is running out of money, so they’ve made it as lucrative and compelling as possible for you to put your own money toward retirement.
There are so many options available and it’s definitely worth considering and learning more about these types of structures.
(If you are a member of our premium service, Sovereign Man: Confidential, we discuss these strategies, along with helpful contacts, in a recent alert that you can access here.)
