Pandemic or Not, Uncle Sam Wanted to Be Paid

Doc's note: It's a famous saying from Benjamin Franklin...

"Nothing is certain except death and taxes."

And it's true, especially when it comes to the IRS. There are few (legal) ways of escaping the government's tax collectors. And today, as we continue our series on taking control of your wealth in 2025, we'll show you some of the best ways to – legally – stiff the taxman.

Even in the middle of a pandemic, Uncle Sam didn't forget about the money he was owed...

In March 2020, the Department of the Treasury and the IRS announced that the tax filing and payment deadline would be moved from April 15 to July 15. Even with that postponement, millions of returns hadn't been filled or even processed by the end of 2020.

But even with the coronavirus, an economic shutdown, and protests all throughout the country... the government expected folks to pay up what they owed to the government. There's no way around it. 

Let's face it, filing taxes is never fun. And they're a burden for most. But at the end of the day, you have to pay them...

However, taxes are one of the few things you have control over. So make sure that whatever check you end up cutting the government is for the least amount of legal obligation that you owe...

401(k)

A 401(k) allows you to sock away pretax money to save for your future. Employers often match contributions up to a certain level, which makes using this account a no-brainer. Here at Stansberry Research, the company offers a 3% match. That means employees earn an instant 50% on the first 6% they contribute. It's the best investment my team and I make every year.

For example, take someone earning $4,000 a month before taxes... She can contribute $240 on her own (6%) and receive $120 from her employer (3% match). As a result, she'll save $360 a month.

Even if her employer didn't match contributions, she'd still get the additional tax savings since her 401(k) contributions come out of her paycheck before taxes. So if she's in the 22% tax bracket, she effectively increases her net worth by another $52.80 (her $240 tax-deductible contribution times her 22% tax rate).

Yes, her gross pay is still reduced by $240. But because of that tax savings, it's as if only $187.20 was taken out. That works out to a 56% return. Plus, it grows tax-deferred as well. No other investment can make that kind of money so fast (with so little risk).

You will pay taxes when you withdraw money from your 401(k). And if you take money out before you're 59 and a half, you'll have to pay an additional 10% penalty (with some exceptions).

But having a 401(k) is one of the easiest ways to grow your net worth and create nearly instant wealth.

IRA

A traditional IRA is a type of retirement account that doesn't require an employer to set it up. In 2024, individuals under 50 can contribute $7,000 to an IRA. If you're older than 50, you can do a catch-up contribution of an extra $1,000 for a total of $8,000 (or $16,000 for married couples older than 50 using two IRAs).

When you put money in a traditional IRA, you get a tax deduction for the initial deposit and can defer taxes on the money until you withdraw it – typically sometime between ages 59 and a half and 70 and a half.

Deferring taxes saves more than you think...

If we take two people, each with $10,000, and one invests in an IRA while the other invests in a trading account and pays taxes, the power of not paying taxes over time is huge. After 30 years, the tax-deferred account will be worth $996,964. The taxed account will be worth $791,347. That's more than $200,000 extra just by avoiding taxes.

Putting money into an IRA is also a way to earn a big tax credit.

The Saver's Credit matches a portion of what you put into your IRA up to $2,000 (or $4,000 if married). The credit amount is based on your household earnings. For example, in 2024, a married couple earning between $50,000 and $76,500 is entitled to a tax credit equal to 10% of their IRA contribution. If they put $4,000 away, they get a tax credit of $400.

The tax credit gets bigger for lower income levels. If you make less than $23,000 (or $46,000 for couples), your credit is 50% of your contribution.

Roth IRA

A Roth IRA is sort of a flipped version of the traditional IRA. While you don't get a tax break on your income when you contribute, you don't have to pay taxes when you make withdrawals from your future nest egg.

Unlike a traditional IRA, Roth IRAs have no age restrictions. But they do come with income restrictions... Individuals making more than $146,000 aren't eligible to contribute to a Roth IRA in 2024. And a married couple filing jointly can't contribute if their household income is more than $230,000.

A traditional IRA most benefits people who expect to be in a lower tax bracket when they have retired than when they were working.

A Roth IRA best works for people in the opposite situation. If you expect that your taxes will be higher as a retiree than as a working person, a Roth IRA is perfect for you.

A 529 plan is a great way to pay for college. Money that you put into the account is not tax-deductible. But like IRAs, the earnings are exempt from federal taxes, they compound tax-free, and withdrawals made for qualifying college costs (like tuition, fees, and room and board) are also tax-free.

Anyone can contribute to a 529 plan. If you want your children or grandchildren (or nieces, nephews, other family members... or even yourself) to attend college, this is one of the best ways of ensuring that they'll do so.

529 plans have no income limits, age limits, or annual contribution limits. There are lifetime contribution limits, but they're in the six-figure range.

And you can use the plan for different types of education... Your beneficiary could attend a trade or vocational school or participate in a career-training program. And you can also name yourself as the beneficiary and take cooking classes at Le Cordon Bleu or any other interesting school...

It can even be a backdoor estate plan...

Because you can switch beneficiaries among qualifying family members at any time, you can start the plan by naming yourself or your child as the beneficiary... then switch generations to your grandchild.

For example, a Maryland resident contributing to a Maryland 529 plan can deduct up to $2,500 per beneficiary. That equals a $190 tax savings per $2,500 contribution, based on a 7.6% state and local income tax rate.

But you're not limited to your state's 529 plans, which means you have a ton of options to choose from.

One place I'd recommend you look at is Morningstar's Gold-rated plans. These plans rank the highest in terms of safety and cost. Savingforcollege.com shows you Morningstar's 529 plan rankings. You can also look at plan options state by state. A lot of plans have conservative options. Some are even backed by the Federal Deposit Insurance Corporation ("FDIC"), which offers greater protection for your principal.

No matter your age, it's important to understand the best ways to plan for and improve your retirement. And that's what I do every month in my Retirement Millionaire newsletter.

From advice on how to instantly increase the power of your retirement savings by 200% to a generational retirement guide that tells you what you should be doing with your life decade-by-decade, Retirement Millionaire has everything you need to live a wealthier – and healthier – life.

If you're not already a subscriber, click here to learn more.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
December 31, 2024

Editor's note: Our offices are closed tomorrow, January 1, for New Year's Day. You'll receive your next issue of the Health & Wealth Bulletin on Thursday, January 2. Have a safe and happy new year!