The IRS Finally Did Something Right

If you’re not putting money into a retirement account, you might as well be throwing it in the trash…

Taxes are a major drag on building wealth.

For example, take the median federal tax burden. It’s about 11%. That means for every dollar you make, you keep only $0.89.

What if every American could keep that 11% and combine it with a personal savings rate of just 4%? They’d be saving 15% a year.

And for those with above-median income, your taxes get much higher than 11%.

Plus, even after you pay income taxes… state sales taxes… property taxes… and add to your savings… you still have to pay additional taxes on your investments. Capital gains, interest, and dividends all create taxable events.

Many folks pay a third or even half of their earnings to the government in some way or another…

Retirement accounts are an easy way to avoid these onerous taxes.

And the IRS just announced it was going to let you put away a little extra money from its reach…

Earlier this month, the IRS increased IRA contribution limits from $5,500 to $6,000. In addition, contribution limits to 401(k)s, 403(b)s, and some government plans are also getting an increase – from $18,500 to $19,000.

This is good news for all the savers out there.

When you use a pre-tax income vehicle like an IRA or 401(k), you get to park your cash and compound your wealth, tax free.

From that point on, you won’t have to pay taxes on capital gains, dividends, or interest income for any stocks, bonds, or funds you hold within an IRA. (If nothing else, this makes for simple accounting come tax time.)

Even better, you make contributions to a traditional IRA with pre-tax dollars. For instance, say you make $100,000. With a marginal tax rate of 24%, you would owe roughly $18,289 a year in taxes (depending on a lot of other assumptions). So you’ll take home $81,711.

Let’s say that next year, both you and your spouse make the maximum allowable annual IRA contributions of $6,000. You’ll adjust your taxable income to $88,000 ($100,000 minus two $6,000 contributions). Your tax bill drops to $15,409. You end up taking home $72,591… but you also set aside $12,000. So instead of $83,143 of net worth, you’ve got $84,591. That’s an extra $1,448…

Another way to look at it: You get $12,000, but it only cost you $10,552. That’s an immediate 13% return on your investment, which you then compound for decades.

And, as an added bonus, the IRS also raised income phase-outs on the Saver’s Credit.

This credit matches a portion of what you put into your IRA up to $2,000 (or $4,000 if you’re married). The credit amount is based on your household earnings. For example, in 2019, a married couple earning between $41,501 and $64,000 earns a tax credit equal to 10% of their IRA contribution.

The tax credit gets bigger for lower income levels. If a married couple makes less than $38,500, the credit is 50% of their contribution.

Remember that ultimately, how much you save will be the difference between a lifetime of poverty… or one of wealth.

With two 401(k)s and two IRAs, a married couple interested in saving aggressively can save $50,000 a year without paying income taxes. That’s a savings of tens of thousands of dollars that you earned and get to keep, and that you can spend later in life on whatever you’d like. And by investing that money, you can compound your earnings quickly. Before you know it, you’ll have wealth and riches to enjoy in your retirement days.

If you have someone that you care about, please forward this letter to them immediately. Encourage them to start saving today. The math is undeniable.

Editor’s note: Our offices are closed for the Thanksgiving two-day holiday this Thursday and Friday. Expect your next Health & Wealth Bulletin issue on Monday, November 26.

What We’re Reading…

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

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
November 21, 2018