I’m hearing it more every week. High income earners are looking for ways to reduce their taxable income. With the Bush Tax Cuts set to expire at year-end, and Washington not willing to do anything about it, people are searching for some alternatives. This is especially true for those of you that make $250,000 per year or more, since the President’s proposal doesn’t extend the Bush Tax Cuts to individuals above that amount.
Check your employer for a Roth 401(k). Some plans will have this option. I’m not sure why this did not catch on with businesses that had existing retirement plans. It can easily be added usually at no cost to your employer. Just like the Roth IRA, you will be able to make after-tax contributions that can grow tax-free after age 59 1/2.
A Roth 401(k) might make sense if:
1. You are in a higher tax bracket once you retire. Yes, it can happen if you are saving enough and find yourself without many of the exemptions you had while you worked.
2. Tax rates might (might, I even chuckled as I wrote that), correction, will go up. Somebody has to pay for all that debt we’re racking up!
Roth IRA Contributions with a twist. The ordinary Roth IRA can help shield your future your investments from future taxes. However, the catch 22 is that high income earners get phased out once your AGI exceeds $110k as an individual or $173k filing jointly.
Ah, but never fear. I have a solution! The work around comes from the fact that there is no longer an income limit to covert a traditional IRA to a Roth IRA. So make that non-deductible contribution to the traditional IRA, then immediately convert it into a Roth IRA. To avoid tax issues with the traditional IRA, I suggest opening a brand new traditional IRA and keeping this money separate from existing traditional IRAs that you may have deducted in the past.
Cash Value Life Insurance is overlooked. With a cash value life insurance policy, part of your premium goes into a cash account that can collect interest or be invested. Once you have a nice pile of money, you can then borrow from the cash value anytime…tax-free. You can do this whenever you want for whatever purpose you want, including retirement. You don’t have any requirement for paying the funds back. If you decide not to, then the money owed gets reduced from the death benefit.
If you are a high income earner, your taxes are likely headed higher. Thankfully, there are some strategies that can help you protect you from the devastation taxes can inflict. You already know how much I hate taxes from a previous article. This is not a complete list by any means. If you own a business, there are some additional things you can do. For a complete list, write me at firstname.lastname@example.org, or call me at (859) 225-2596.