The world is changing, see why your life insurance should too.
Let’s face it–no one likes paying tax, but it’s something we all have to do. And look, we get it; taxes help pay for vital things that help keep America running. It’s just that, you know, paying a little bit less would be nice, especially when it comes to savings accounts. Still, there are ways to be smart with your tax planning strategies so you can save more and pay less. How, you ask? That’s what we’re here to tell you with this guide to helping you keep your savings safe.
We're sure you are familiar with tax and everything it entails. But just in case you need a little refresher guide, income is taxed at the deferral, state, and local levels, with earned income subject to additional levies that help fund Social Security and Medicare, amongst others.
Taxes are unavoidable unless you're ready to face the consequences of possible jail time, though who wants to go to prison for owing money? When it comes to your savings, you often need to pay tax on the money accumulated throughout the years. But there are some ways to build tax-free savings.
Here’s what you need to do.
When you purchase a municipal bond, you're basically lending money to a state or local government for a set number of interest payments over a specific amount of time. Now, you're most probably thinking, "why would I do that?"
However, once the bond reaches its maturity date, you will get back the full amount invested. On top of that, you’ll also receive interest, which is exempt from federal taxes and possibly even state and local levies. Therefore, tax-free interest payments make municipal bonds an attractive investment type for anyone thinking about their future.
Municipal bonds also tend to be a safer bet than corporate bonds, as history shows them to have lower default rates. There is a catch, though: they also have lower interest rates, which may not appeal as much to some investors.
Ok, so starting a business with the sole purpose of saving a buck on tax might not be the best approach. But if you’re thinking about doing your own thing anyway or already own a business, there could be some tax relief coming your way.
You can deduct a ton of expenses, which ultimately reduces the amount of tax you need to pay. If you’re self-employed, it also means you can claim your health insurance premiums, though not your life insurance ones–worry not, however, as we’ve got some good news about life insurance in a bit.
As a business owner, you may also be able to deduct part of your home and office expenses. Just make sure you follow the IRS guidelines, as you don’t want any nasty surprises from the taxman when it comes to doing your returns. And while the deductible amount doesn’t impact your savings accounts directly, you can use the money saved on income tax and use it with different investment concepts to save your money wisely.
As of 2021, you can reduce taxable income on contribution in your 401(k) or 4013(b) plans up to $19,5000. Plus, if you’re 50 or older, you can add a further $6,500 to the basic workplace retirement contribution. For example, if you earn $75k per year and contribute $19,500 to your 401(k), you can reduce taxable income to $55,500.
Just remember that even though contributions are deferred, you will still need to pay taxes on them when it comes to withdrawing your savings later in life. So in one sense, you can save on your income tax, but you’ll need to cough up during your retirement when it's time to access all of those savings.
Individual Retirement Accounts (IRAs)
You could also invest in an Individual Retirement Account, which could help you save on taxes in a multitude of ways. Traditional IRAs allow you to deduct the amount you contribute from your income, lowering your tax burden for the year in the process.
The money in your traditional IRA account also grows tax-free, so you don't pay taxes on the interest it earns. Sounds great, right? Well, it’s not too bad at all, but there are some drawbacks. When you take the money out, you will have to pay income tax at your current rate on your deposits and the money earned while it was in the account.
In a Roth IRA account, on the other hand, you put in after-tax dollars that then grows tax-free and you don’t have to pay taxes on all the gains. However, there are other considerations, including income and contribution limitations. If you make more than $125,000 as an individual taxpayer then you will start phasing out your ability to contribute to a Roth IRA. Additionally, if you are under that income level you can only contribute up to $6,000 a year.
There is also the option of taking out a permanent life insurance policy. Now, you’re probably asking yourself, “what’s life insurance got to do with tax-free savings? Isn’t it related to when I die?”. The answer is yes, and no. Allow us to explain.
Sure, a permanent life insurance policy has a death benefit that looks after your loved ones when you pass. But it also has a cash-value element that allows you to build wealth while you’re still alive. Essentially, that means it’s a form of savings account, and it’s tax-free.
When you pay into a perm policy, you’re covering two pots: death benefit and cash value. These both grow each month when you pay the premium. When it comes to withdrawing your cash value, you can do so in the form of a 0% loan to yourself.
Because you’re loaning from yourself, the tax owed is zero–you can’t pay tax to yourself. Then, when you pass away (hopefully many, many years later), your death benefit pays off the loan. However, because the death benefit also grew every time you paid the premium, you should still have plenty left to leave something behind for your loved ones.
In a nutshell, all of this means that you can grow your wealth and tap into savings tax-free. Now that’s what we call smart tax planning strategies that help you win.
It’s one thing paying income tax on your daily earnings; it’s another having to do it for the money you worked so hard to save. However, with a permanent life insurance policy, you can enjoy tax-free savings while also protecting your loved ones against unforeseen circumstances. You’re covering all bases and enjoying greater financial freedom for you and your family.
The world is changing, see why your life insurance should too.