Taking Advantage of IRS Tax Codes to Reduce Taxes in Your Portfolio: Do You Qualify?
Updated: Dec 21, 2022
The truth is that most average Americans have only been taught one way to plan for retirement -- which usually includes investing in the stock market. Mutual funds that used to provide large returns haven’t performed ideally in two+ decades. As we are currently seeing, many people have already lost approximately 25% of their retirement income, and it’s a scary proposition.
Basically, when we are in the market, we are gambling with our money, because we like that the deduction for putting money into a 401k or traditional IRA gives us a tax break for the current year. But this means the IRS gets to determine when they will get their taxes on the harvest-- years down the line when you are forced to take out Required Minimum Distributions. These RMDs are then taxed at whatever your current tax bracket is in the year you make your withdrawals.
If there was a strategy to structure your portfolio in such a way that you could eliminate some
or ALL of the taxes in your retirement, would you want to know how?
Strategizing with an expert who understands the IRS tax codes, (and sometimes this means
someone other than a traditional CPA working with your CPA,) can mean the difference
between achieving a tax-free status in retirement vs. running out of money in retirement.
It’s important to note that we generally have three “buckets” in which to place our money: taxable, tax deferred, and tax-free. What does this mean? First, and foremost, this means respective to the three buckets, you need to decide how much
money you are comfortable with in having available for emergencies, but that you will always pay taxes on when you receive a 1099 each year. This is usually an amount that will at least
cover six months of living expenses.
Next, how much money do you want to have in the market and how much risk are you willing to take with your retirement nest egg? This is the bucket where you have highs and lows based on current market performance in general.
Finally, how much do you want to be able to leave for your legacy-- whether heirs or with a charity of your choice?
Taxable buckets of money where you receive a 1099 from the IRS at the end of each year
should be minimal. Having large amounts of cash in these buckets is the least efficient way to manage your money.
In this scenario, your money is not working for you. The only real benefit is the liquidity for emergency needs. There are other options that grow your money and offer liquidity. I’ll address that shortly.
Tax deferred buckets of money are those “qualified” accounts that provide a tax write-off in the year you contribute, but you will be required to pay the taxes later when you retire on the
larger balance. If you are receiving a match or greater from your employer on these kinds of
accounts, it can be a good balance to have some money invested here. Things like 401k’s, IRAs, SEPs, etc., are all tax deferred accounts. It’s IMPORTANT not to have all your eggs solely in these baskets!
Tax-free buckets of money are accounts where money grows tax-free. You’ve paid the taxes on your money, and you contribute to an account like a Roth IRA. This is a great option, but there are limitations and not everyone can take advantage. The maximum contribution for 2023 is $6500, ($7500 if you’re age 50 or older,) and the maximum income for single filers is $138,000 to $153,000 and for married couples filing jointly $218,000 to $228,000.
There is another option for tax-free growth that many people may not be aware of, and it’s tied to the IRS Tax Code 7702.
This code says that you can contribute to a cash value life insurance policy and grow your
money tax-free in perpetuity. There are qualifications to invest your money this way, but it is
totally worth exploring to help protect your retirement. Another beautiful feature of this
investment is many policies have a zero-loss provision, along with bonuses, and long-term care, etc. I have these policies in place for my spouse, myself, and our children and grandchildren. I can’t stress enough that this tool is an invaluable option for many families.
Reach out to learn more and receive a fee waived diagnostic analysis. I also highly encourage you to read The Power of Zero by David McKnight. He teaches how to do what we do in a way that is easy to understand and provides some peace of mind.
Preserve your hard earned money and remove the fear and stress of a volatile situation.
Email us at email@example.com or call 775-365-9429 for a free consultation.