Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
And by far, is income taxes. I know there are tremendous legal methods how to not pay income taxes, or to pay very little. Judge Learned Hand(his real name!) once said in a court case " it is the right of every American citizen to arrange his affairs in the best manner possible to pay as little in income taxes as possible."
What are some of your ways to accomplish this? If you can bypass or overcome this obstacle, you have a real chance of creating wealth in this country. Remember, income is not wealth. Think about it. This is the 4th obstacle. You can find the other 3 on the Blog page. I'll give my ideas on this subject at a later time. Lets' see some of the other ideas. Rich in Fl.
Great topic Rich. If there was an award for the best topic starter, you would be in the running!
One of the ways I have drasticlaly reduced paying Uncle Sam over the years is by being a business owner. I have always had a corporation (S Corp) which has allowed me to have many additional deductions that the average wage earner does not get. For iinstance, my personl vehicle, gas, repairs/maintenance, food, travel and entertainment all become write offs for me through the company. Those are just a few of the hundreds of items that can be deducted through a corporate entity.
Another is contributing to a traditional IRA. This also gives you a tax deduction (although upon withdrawal at age 59.5, taxes are paid then).
Look at the first sentence in the Notes to the table you reference. It says Bonds are designated "X" if taxable.
If you look at the second column titled "Other State's Bonds", you will see that every state with an income tax, has an "X" which means that the income from out of state bonds is taxable.
Look at the first sentence in the Notes to the table you reference. It says Bonds are designated "X" if taxable.
If you look at the second column titled "Other State's Bonds", you will see that every state with an income tax, has an "X" which means that the income from out of state bonds is taxable.
Hmmm...perhaps I missed it because it was so obvious... :)
I follow your reasoning but your argument does not consider the tax treatment on the withdrawals.
As Rich pointed out, this is his thread and I certainly do not want to hijack it. I did do a follow up thread of my own called "Retirement Secret" so please feel free to post your questions and concerns in regards to IRA's there, however I will give you a quick answer here:
I did take the tax inplications into consideration, I think you are just missing the entire picture.
Each IRA in the example gets the exact same rate of return, each has the same years invested. The ROTH of $100k to start gets taxed and thus you would only have $65,000 (not $100,000) when starting. I realize that the taxes are not "taken out of the IRA" but I am considering the fact that in order to make a $100k contribution to a ROTH (if that were even possible which it is not due to the $5k limit, 10k married), you would need to make $100k and that would be taxable at your marginal federal and state tax levels (which for example purposes were at 35%).
Now at the end of the period of 20 yeras, the $65k grew to X amount and the $100k traditional IRA grew to Y amount. Y was much greater than X but Y now gets taxed and X does not. At the end of the day, both values after taxes, are the same.
Will and I seem to be sharing this thread. He started a Retirement secret on this and I blogged and posted a couple follow ups to those- called the reirement secret part 2.
Here are a couple other thoughts. Retirement has different definitions for different people. Some want to sit on a hill in a rocking chair on a porch. This can be really cheap. Others want to travel the world. Very expensive. Most are probably somewhere in between.
Why not take the first few years of retirement, get a nice Rig and travel this country. Check it out. Go new places and meet new people and yes, new cultures. I assure you Provo, UTah is different than Eugene, OR which is different than McAllen TX. I've lived in all of them and they ARE different cultures.
This travelling is inexpensive, flexible and fun. Stay as long or short as you want. Thousands do this every year and they eventually find THE place. Then you can keep the old homestead and have 2 locations. Buy a small condo in the new place. It really isn't expensive. Then domicile in S Dakota and you're all set.
I've been there and done that , and it is great. Rich in Fl, home of a million SNOWBIRDS!!!
I did take the tax inplications into consideration, I think you are just missing the entire picture.
Will,
Your picture is based upon two faulty premises.
The first is the value of the initial Roth contributions. You say that if you have contributed $100K to your Roth, the value of the ROTH will only be worth $65K after taxes, assuming the 35% tax bracket. Since the tax on the Roth contribution is calculated AFTER the contribution is made, there is no way I have less than $100K contributed to my Roth over the same period of time that you are making identical contributions to your Tradtiional IRA.
For most, the taxes on Roth IRA contributions are already paid to the IRS as withholdings on salary income. It is the after tax income that is contributed to the Roth. The full contribution to the Roth IRA is available to grow tax free without any reduction for taxes that have already been paid.
So, in your example, it is not true that the Roth only has $65K to start with after $100K in contributions have been made. I will agree that your spending power over the time you are contributing $100K to your Roth is reduced by the amount of taxes you will have to pay on the contributions, but I do not agree that this is reflected in a reduction of the value of the Roth contributions.
The second fault I have with your example is the taxation on the Traditional IRA. You seem to base your comparison on the taxation of only the $100K contributed to the Tradtional IRA. For the Traditional IRA, all withdrawals are taxed regardless of whether the withdrawal comes from principal or income.
Consider this example. Starting at age 25, make identical $5K annual contributions to a Roth and to a Traditional IRA for the next 15 years. After 15 years you have contributed $75K to each IRA and since each has experienced the same rate of growth and suffered the same effects of the recent market downturn, let's say each IRA is worth $100K today.
You do not make any additional contributions for the next 20 years. Let's say your IRA investments average 7.2% annual return over 20 years so that each IRA is now worth $400K and you have reached a point in life where you decide that you want to start making withdrawals on a schedule that will deplete the IRA by the end of your life expectancy.
If your tax bracket stays at a constant 35% for the rest of your life, withdrawing $400K from the Traditional IRA will leave you just $260K after taxes. The total tax bite on the $400K withdrawn from the Traditional IRA will be $140K in this example, whereas, $400K withdrawn from the Roth IRA is tax free. Since only the initial contribution to the Roth is taxed, the $75K in Roth contributions incurred only $26250 in taxes.
For the parameters of this example, the question is whether you would rather pay $26250 in taxes now to have $400K to spend later, or would you rather pay no taxes now and have only $260K to spend later.
Again- This thread was about the 4th obstacle to creating real wealth in this country. As a review, they are
1.Spending habits
2.Procrastination
3.Inflation
4.Taxes
It is up to you. Here is simple way to get RICH. Eliminate the above obstacles
1. Seriously study and CHANGE the ones that are holding you back
2. Get off your as_, start a plan and then do it.
3.BUY BUY BUY real estate and have inflation work for you
4.Convert your expenses to DEDUCTIONS on your tax return. There are previous ways mentioned on threads of how to do that.
It is very easy to make money in this country. That is not the thing. It is more difficult to KEEP the money and have it work for you. Good luck.