This is part of our Big Six series. We're digging into the six big areas of money and financial planning.
This one is about taxes. Fascinating, I know!
Taxes. What can I say? We don’t like them, but we need to pay them. Don’t try anything illegal to avoid them.
Watch this video for a couple of ideas to reduce your taxes:
Like investing, taxes are a super broad subject.
But I'll give you two things to consider to help you out with taxes now and in the future.
First, use tax deferred accounts. That would be an IRA, Roth IRA, SEP IRA, 401k, 403b, etc.
Basically you put money into these accounts and it can grow and compound without taxes. So you can buy and sell, get dividends and interest and as long as the money stays in the account, no tax.
Plus, except for the Roth, you can often get an income tax deduction for your contributions. So if you make $70,000 in salary, but you put $15,000 in your 401k, the IRS only makes you pay income on $55,000.
That's super cool.
But here's the thing.
One issue I see a lot of folks run into later in life is that they have almost ALL of there investment money in a tax deferred account.
That's not bad. Unless you want to use the money for something else. Like buying a rental property, investing in a business, or paying off your mortgage.
Why is that a problem? Because to get that money out, you'll have to pay income tax on it. Plus a 10% penalty if you're under 59.5 years old.
My advice is to use tax deferred accounts, but also put money into a taxable brokerage account at the same time.
If you're worried about taxes, just buy some stocks that don't pay a dividend and let them ride for 20+ years.
Not only are you more likely to have grown your wealth more, but you also won't pay any taxes on those stocks until you want to use them.
Then it's a long term capital gain. Which is good.
And no penalty.
Super duper cool.
Use tax deferred accounts, but don't put ALL the money there. Have an "early retirement" or "entrepreneur fund" available.
Then you can use that money whenever you want with no penalty. Yay!
Tell me what you think in the comments below.