Overall tax rates are going to continue creeping higher in the years ahead so I strongly urge you to consider taking advantage of every legal means you can to shelter your wealth and watch it grow with as little interference from Uncle Sam as you can. Here are 4 such ways to do just that – pay less taxes!
In further edited excerpts from the original article* Nilus Mattive (moneyandmarkets.com/) goes on to say:
Three Cheers For These Four Ways to Pay Less Taxes
#1. 401(k) plans
Most employers offer these retirement accounts and they’re a great way to keep money away from Uncle Sam because whatever you contribute is taken out of your pre-tax earnings. Not only does that mean you are deferring taxes on the amount contributed, but you also might be bumping yourself into an overall lower tax bracket…
Meanwhile, your investments grow tax-free until you cash out during retirement. Add in the fact that many companies are willing to match some of your contributions and you can see why I think 401(k) participation is a complete no-brainer.
I would also note that self-employed folks should take a serious look at a special class of these accounts, called Solo 401(k)s. They carry MUCH higher contribution limits.
#2. Individual retirement accounts (IRAs)
Whether you have access to a 401(k) or not, you can also contribute to an individual retirement account every year. The only provisions: You must have earned income and it must fall within a certain threshold (see the table in the original article* for the details)…
Just note that you cannot max out both a regular and a Roth IRA in the same tax year. Your total contributions to all IRA accounts (not counting rollovers and such) must fall within the ranges I just cited.
Which is the better choice — a Roth or a regular IRA? Only you can decide based on your eligibility, age, goals, etc. but I will say that the Roth IRA has a few advantages including no required withdrawals, no age restrictions, and no more taxation of any money earned in the account … EVER!
#3. Coverdell Education Savings Accounts
If you have a child or grandchild you’d like to help out, this type of account is a nice little tax-shelter for them. You can put in $2,000 every year for the minor’s education (up until their 18th birthday).
Coverdells operate much like Roth IRAs (they were formerly known as Education IRAs). As long as later withdrawals go to qualified education expenses, your original contributions and any investment returns are not taxed.
The beneficiary of the account has until age 30 to use the funds. After that point, they must either withdraw the money and pay taxes plus a 10 percent penalty or roll the funds into a new Coverdell account for another beneficiary.
#4. 529 Plans
Again, these are great for parents, grandparents, or anyone else looking to help put a child through college. Like Coverdell accounts, they allow contributions to grow tax deferred. Plus, distributions will be tax free as long as they go to qualified education costs (in this case, it’s only post-secondary education purposes).
In addition, depending on the plan, the future student is not the only one who reaps tax benefits … the contributor can too! 529 plans are sponsored by individual states and some will allow residents to write-off the money they put into a plan against their income taxes. Considering that some 529s accept as much as $300,000 in contributions over the life of the account, your tax benefits can be extremely significant.
Also remember that dividends will still get you a major tax break through 2010! Most dividend payments continue to get taxed at a much lower rate than other investment earnings because of the Jobs and Growth Tax Relief Reconciliation Act of 2003.
For most people, the tax rate on qualified dividends is now just 15 percent. Investors in a lower income bracket actually pay no tax on their dividend income and both these advantages will remain in place at least through this year.
The advantage of this tax break to a taxable income portfolio can be considerable. Say you have $100,000 invested in dividend-paying stocks with an average yield of 4 percent. That’s $4,000 in dividend income every year. If those payouts were taxed at your ordinary income rate, you could end up giving back as much as $1,400 in taxes (based on the highest bracket of 35 percent). In contrast, under the lower rate, you would owe only $600. That’s an additional $800 in your pocket! Based on our country’s current fiscal condition, I won’t guarantee that this unique advantage will continue beyond this year.
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