If you had asked ten random people on the street two years ago whether tax rates were likely to go up or down…100% would have said up.
Before COVID, before Trillions of dollars in relief were handed out, our national debt was growing at an alarming pace. Couple this with the uncertainty of a new administration and you have a perfect storm. Much has been said about the decreases in personal, corporate, capital gains, and estate taxes over the last few years, but the country sits and waits while there is no end in sight of the pandemic, nor any mention of paying for it.
The good news is there are three ways to act now to lessen the impact of future income tax increases.
Taxpayers must understand first that there are two tax systems in place in the U.S. and always will be!
The two tax systems are not one for the rich and one for everyone else. Rather there is one system for the informed and one for the uninformed. Or another way to think of it is a voluntary tax and an involuntary tax. When have you ever heard of IRS agents going door to door preaching the good news about how to pay them less? NEVER. It is up to you and me to figure out how to reduce the impact of taxation. An informed person understands all the ways they can legally pay less tax now and in the future, and exploits those opportunities to their advantage.
There are only three ways to accumulate tax-free cash and generate tax-free income.
1. A Roth IRA
2. Real Estate Equity, and
3. Cash Value Life Insurance.
Roth’s may be gone soon but people who make over a certain amount are not eligible to participate in them at all (due to AGI limitations). If you are eligible you may only put up to $6,000 to $7,000 per year away. Real Estate Equity is a form of cash that accumulates tax-free and can be withdrawn tax-free. You can avoid taxes on the gain when you sell the property by doing in exchange for another property. You can borrow out your equity on investment property or a primary residence tax-free. The cash invested in a certain type of life insurance policy accumulates tax-free, is paid out at death tax-free, and may be borrowed tax-free.
When you put money into a 401k or traditional IRA you get an immediate tax deduction. This is why trillions of unpaid taxes now sit in these accounts. However, the government giveth with one hand and taketh away with the other. Someday, you (or your heirs)will pay taxes on every dollar in these accounts. Voluntary taxes are the additional taxes you would not have paid had you shifted some of this money into one of the tax-free buckets just mentioned. Besides being in a higher tax bracket than you anticipated at retirement, there are stiff penalties if you need the money early, and worse – your social security may be taxed along with higher Medicare premiums. This is, in effect a penalty for providing for yourself.
The bottom line: The person with $1.5M in IRA/401K at retirement is sitting in a completely different position than the person with $500K in IRA/401K and $700k in tax-free cash. The one with $1.5M has an unpaid tax liability of $500K and the other $150K. The person with the stack of tax-free cash who live a number of years without touching their IRA.