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Utilize retirement accounts to reduce taxable income from "summary" of The Tax and Legal Playbook by Mark J. Kohler
One of the most powerful tools for reducing your taxable income is utilizing retirement accounts. By contributing to retirement accounts such as a 401(k) or IRA, you can lower your taxable income while simultaneously saving for retirement. When you contribute to a traditional 401(k) or IRA, the money is taken out of your paycheck before taxes are withheld. This means that your taxable income is reduced by the amount you contribute to your retirement account. For example, if you earn $50,000 per year and contribute $5,000 to your 401(k), you will only pay taxes on $45,000 of income. In addition to lowering your taxable income, contributing to a retirement account can also provide long-term benefits. The money you contribute to a retirement account grows tax-deferred, meaning you won't pay taxes on it until you withdraw the funds in retirement. This can result in significant tax savings over time, especially if you are in a lower tax bracket during retirement. It's important to note that there are limits to how much you can contribute to retirement accounts each year. For example, in 2021, the maximum contribution limit for a 401(k) is $19,500 for individuals under the age of 50. For those over 50, there is an additional catch-up contribution limit of $6,500, bringing the total to $26,000. By taking advantage of retirement accounts to reduce your taxable income, you can save for retirement while simultaneously lowering your tax bill. This strategy can be a powerful tool for building wealth over time and maximizing your financial future.
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