By Jared Dillian via Iris.xyz
Uncle Sam doesn’t give out too many freebies when it comes to tax time, except in the form of retirement plans.
Surprisingly, not many people take advantage of them. Only 41% of people contribute to a 401(k) when they have the option to do so. A 401(k) allows annual contributions up to $19,000. If you maxed out your contributions, you could save thousands of dollars on your taxes.For the people who ran out of cash during the government shut down, that money would have come in handy.
Why do more people not contribute?
- They say they don’t have the money. Wrong—everyone has the money. This is what saving is all about.
- They don’t know about it. Sounds hard to believe, but I have met people who don’t know about the existence of these tax-advantaged retirement plans.
- Taxes are too hard to figure out.
That is a lot of money to leave on the table. You know what? If you make $100,000 a year, you can max it out. I guarantee you can do it. You can still have a cup of coffee once in a while!
At a 25% tax rate, you will save almost $5,000 a year in taxes. That is a lot of money to a lot of people. People don’t really view it as money, because many things feed into your income taxes. But let me tell you, if you contribute zero one year, and max it out the next, you will notice a big difference on your taxes.
Smart investors save as much on taxes where they can. Warren Buffett saves pretty much all of his taxes. He hardly has any tax liability at all. We can’t all be Warren Buffett, but the least we can do is take advantage of very obvious tax breaks where we can.
The SEP IRA
The one retirement plan that goes completely overlooked is the SEP IRA. The SEP is for self-employed people, sole proprietors, single-member LLCs, etc. With a SEP IRA, you can shield a massive $56,000 a year from taxes. If your tax rate is 30%, that’s almost $17,000 in tax savings.
I have been taking advantage of the SEP IRA for years. 50-odd thousand goes into my retirement account every year. You don’t even need any growth in your retirement funds for this to add up quickly. If you do this over the course of your career, you’ll have over $2 million, with no investment gains. Not to mention the tax savings.
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