4 Go Tax Free Ideas in 5 Minutes
It's the middle of the year, do you know how your retirement plan is doing?
Most importantly, how are your contributions? In a 401k, you can contribute up to $23,000 per year if you're over the age of 50, $17,500 if you're younger than that. These contributions really add up! Consider these ideas:*
1. Tax-deductible Contributions
If you're self-employed or a business owner, it's time to perform that mid-year check-up and see how your numbers look. If you're having a good year, consider reducing the tax burden with a larger contribution into your retirement plan. Every dollar you contribute reduces your taxable income by one dollar this year. Generally speaking, you must earn more than you contribute, so if you're already retired they don't let you contribute to your retirement plan!
2. Roth Contributions
If your business earnings and/or income is low this year, then consider tucking more money away in the after-tax Roth IRA or 401k. A Roth IRA or Roth 401k allows you to pay taxes today, at that lower tax rate, and accumulate money never taxed again!
3. Give your Grandkids a Tax-free "Match"
Grandparents, consider gifting money to your grandkids in Roth IRAs. If your grandchild has a job, you can "match" her earnings in a Roth IRA up to $6,000 this year--and she will never pay taxes on the gift!
4. Give Yourself a Tax-free Inheritance
Parents, and/or children of aging parents, consider paying your parents' tax bill on their IRAs and converting your future inheritance to a Roth IRA. Would you rather inherit that money tax-free or with an income-tax bill? Are your aging parents in a lower tax bracket than you are?
Gifting limits are $14,000 per giver and per donor. This means that a couple could pay $28,000 of taxes owed on mom's IRA and repeat the same miracle for dad's IRA. If mom and dad are in the 28% marginal tax bracket, you just gave yourselves $100,000 income-tax free. If they are in a lower marginal tax bracket, it could be almost twice that amount.
*These ideas are examples and do not constitute tax advice. Consult a qualified tax professional to obtain tax advice based on your specific situation.