An illustration is in order. A physician earning $250,000 per year is going to get taxed heavily, probably paying $95,000 in taxes for a net income of $155,000. Yet, if he had earned the same amount from within a pension plan or IRA, he wouldn't pay a single penny in taxes. That's an extra $95,000 per year compounding for him. At 12%, over 30 years, that's an extra $23 million in wealth. That's right - $23,000,000 simply because the money is earned within a tax-advantaged account instead of regular labor. This is why you should do everything you can, within reason, to fully fund your retirement plans, as well as to focus on how your seemingly small decisions help or hurt tax planning. No decision is too small - you've already seen how a simple decision to title US savings bonds can have huge tax implications for your estate.
8 Secrets to Achieving Financial Independence
By Joshua Kennon, About.com Guide
Taxes Matter - A Lot
Taxes matter. By actively working to lower your taxes through IRAs, 401(k)s, real estate appreciation, or other legitimate means, you can add a few percentage points to your return each year. Over 50 years, an extra 3% per year is 3x the wealth.
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All income is not equal. The idea that where and how you hold your assets can mean the difference between being somewhat well off and obscenely rich was so important that I covered it in depth in an article entitled Tax Strategy: Asset Placement - Lowering Your Tax Liability Through Intelligent Allocation. The basic premise is that those with little or no wealth generate a lot of taxable income, while those who end up financially independent generate large unrealized gains in the form of real estate appreciation, unrealized capital gains, and profits made through tax-advantaged or tax-free accounts such as a Roth IRA or 401(k).
Prev
- 8 Secrets to Achieving Financial Independence
- Income Is Not Wealth
- You Must Have Surplus Funds to Invest
- Taxes Matter - A Lot
- True Wealth Is Control Over Your Time
- Grades Have No Correlation with Wealth & Financial Independence
- Financial Independence Takes a Complimentary Spouse
- Niche Markets Aren't Glamorous - But They Are Lucrative
- Support Your Productive Children - Not the Losers
Explore Investing for Beginners
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