How to Amass the First $100,000

Income of less than approximately $100,000 per annum is subject to payroll taxes, consisting of government programs such as social security and medicaid. This payroll tax of 15.3% is paid half by the employee and half by the employer (if you are self-employeed, you are on the line for the full 15.3% on your own – that is, in addition to your regular income taxes, you are going to owe the Federal government $15,300 on that first $100,000 of income). The good news is that half of your payroll taxes are deductible from your income taxes, but the net effect is still that many American citizens pay far more than their stated income tax bracket would have them believe. As you get wealthier, the tax burden as a percentage of disposal income begins to decrease despite being higher in absolute dollars. In other words, if you make $800,000 and pay $300,000 in taxes, it’s not likely to hurt your standard of living but if you make $20,000 and pay $3,500 in taxes, it might mean you can’t keep the heat on during winter.

It is during this time in one's life – when they are struggling to pay bills and still subject to payroll taxes – that it is most difficult to build wealth. Congress has provided several ways to get ahead in the tax code, notably through Roth IRA, Traditional IRA, and 401k plans. In the case of the latter two, money paid in for investments is tax-deductible at the time it is invested. For example, if you contribute $5,000 to a 401k and you’re in the 25% bracket, you won’t have to pay $1,250 in Federal income taxes on that money because, for the time being, as far as the government is concerned, it never existed. That means that right out of the gate, you have $1,250 working for you. If you were to take that money in your paycheck to attempt to pay your bills, you would only end up with $0.75 on the $1 due to the income tax bite.