Taxes & Retirement – Do You Know How To Lower Your Taxes While You Save?

There is nothing sinister in arranging one’s affairs as to keep taxes as low as possible for nobody owes any public duty to pay more than the law demands. – Judge Learned Hand

The legal right of the taxpayer to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits, cannot be doubted. – Supreme Court in Gregory v. Helvering, 293 U.S. 465

When it comes to your retirement, there are vehicles you can use to lower your taxes…

IRA

As of this year (2006), if you’re aged 49 or below, you can contribute up to $4,000/year into an Individual Retirement Account. If you’re 50 or above, you can contribute up to $5,000/year. Whatever amount you contribute is deductible off your taxable income, which reduces the tax you will pay. Plus, as the money grows in your IRA, it is not taxed until you pull it out at retirement age. This is called tax-deferred growth.

Roth IRA

This works similar to a traditional IRA described above but with two major differences. First, you can’t deduct your annual Roth IRA contributions from your taxable income. However, this leads to the second difference between a Roth and traditional IRA: When you take your money out of your Roth IRA after you retire, it comes out tax-free. Your financial planner should be able to calculate whether you’ll save more with a deduction now or with tax-free withdrawals at retirement time.

401(k) Plan

This is an account set up through your employer. The advantage here is that you contribute to your 401(k) plan with before-tax dollars. As with the Traditional IRA, this will lower the amount of money you are taxed on. As of 2006, the maximum annual contribution you can place in a 401(k) plan is $15,000. As with a traditional IRA, your investment grows tax-deferred and is then taxed as you make withdrawals in retirement.

There are other types of retirement plans you can utilize (SEP’s, SIMPLE plans, etc) to lower your tax basis, but these are three of the most popular. If you’re not using these types of vehicles to lower your tax requirement, you should talk to your financial planner or employer about them. As the quotes I gave you at the beginning of the article show you, it’s your right to set things up to legally lower your tax basis.

You should also know that you may be exempt from tax altogether. Here is a quote from a certain Mr. Avis during an Internal Revenue Investigation hearing heard before a subcommittee of the Committee On Ways and Means House Of Representatives, 83rd Congress, First Session On Administration of the Internal Revenue Laws, Part A in 1953: “… Let me point this out now: Your income tax is 100 percent voluntary tax, and your liquor tax is 100 percent enforced tax. Now, the situation is as different as night and day…” [emphasis added]

Hmmm. This may be something you need to investigate further. It just may be worth your time and effort (and MONEY) to do so.