Our tax system is a mess.
It is a jumble of policies, exploits, and terminology that are designed to be confusing. The more confusing it is, the harder it is to take advantage of the system.
Companies like Intuit (The parent company of Turbo Tax) spend millions of dollars a year on lobbyists. They convince law makers in congress to make the tax system as complicated as possible. This results in more customers for their online tax filing service. Turbo Tax then makes more money and uses it to hire more lobbyist, and the cycle continues.
Structures like these have led us to a system that is impossible to navigate on your own. The rich hires teams of people to help them navigate the tax maze to decrease their tax bill.
Most people do not have the time or resources to unravel the mess. The list of loopholes is endless and ever-changing resulting in an exhausting endeavor for individuals to do on their own. This system is clearly broken and unfair, but it is the only one we have.
Using every exploit and write-off may be impossible, but there are some easy ways that the average Joe can get a leg up.
Perhaps the easiest is opening and contributing to a Roth IRA
Open a Roth IRA Right Now
A Roth IRA is a powerful type of investment account that you can set up in minutes through a brokerage firm like Vanguard, Fidelity, or Schwab. If you already have a 401(k) match through your employer, reallocating part of your savings to a Roth IRA is simple.
Here’s how it works:
• You pay taxes when you contribute, not when you withdraw.
• Contribution limits for 2024 are $6,500 ($7,500 if you’re 50 or older).
• You can invest in a range of options, including stocks, bonds, ETFs, and even real estate or cryptocurrency with a self-directed account.
Why it matters:
A Roth IRA offers significant tax advantages. Unlike a traditional 401(k), where you’re taxed on withdrawals, a Roth IRA lets you enjoy tax-free growth and tax-free withdrawals in retirement. This is especially valuable if you’re currently in a lower tax bracket and expect to earn more as you age.
For example:
• If you’re in your 20s or 30s with a 12–20% tax rate, you’ll pay less in taxes now.
• By the time you retire, you may be in the 20–40% range, saving you tens of thousands—or even hundreds of thousands—of dollars over your lifetime.
Factoring in market growth (assuming a 7% annual return), saving $5,000 a year starting in your 20s could grow your account to over $1 million by retirement.
Time is your best friend for investing using a Roth. The sooner you begin, the more time the money will have to compound.
Saving 5k A year might make you a million dollars, but is that enough to retire? Try it out for yourself using my retirement savings calculator.
Retirement Savings Calculator
Disclaimer:
This article is for informational purposes only and does not constitute financial, legal, or investment advice. The content provided is based on general assumptions and may not apply to your specific financial situation. Always consult with a qualified financial advisor or professional to assess your individual needs and circumstances before making any investment or retirement planning decisions. Past performance is not indicative of future results, and all investments carry risk.
Recent Comments