A Mad Fientist reader named Brian reached out to me and mentioned that he elevated his financial savings charge by using among the tax-avoidance methods I write about right here.
Not solely did these methods assist him to save lots of extra, in addition they allowed him to make the most of different tax advantages that he hadn’t beforehand been eligible for (which then lowered his prices much more)!
He requested if I’d be enthusiastic about a case research (together with his precise numbers) and I mentioned sure!
Take it away, Brian…
When you’re frugal and keen to study a bit bit in regards to the nuances within the tax code, it can save you a large proportion of your earnings yearly.
This may be carried out by stacking the advantages of tax-advantaged financial savings.
By maximizing tax-deferred accounts first, a average earnings earner drives down their adjusted gross earnings (AGI). This in flip, could drastically scale back and even eradicate a few of their largest yearly bills.
Easy methods to Cut back Your Adjusted Gross Revenue (AGI)
Cut back your AGI by contributing to the next accounts:
Advantages of a Decrease AGI
Reducing your AGI opens the chance for:
- Changing into eligible for premium tax credit for medical insurance
- Lowering or eliminating scholar mortgage funds
- Claiming extra tax credit (retirement financial savings credit score, and so forth.)
- Receiving stimulus funds or different one-time advantages
My Numbers
Right here is the technique I’ve applied for the previous few years…
My whole earnings was $58,070 for tax yr 2020.
After contributing the utmost of $19,500 to my Conventional 401K and $6,000 to my Conventional IRA, my AGI was lowered to $32,570.
Now, right here’s the attention-grabbing half. I bought my medical insurance by the ACA market*. I’m lucky to have good well being, so I all the time choose a excessive deductible well being plan (HDHP) that’s HSA suitable. I then maximized the HSA contribution ($3,550 for tax yr 2020). This resulted in a well being plan with a month-to-month premium of about $54 after the ACA Tax Credit score (because of my decrease AGI).
I’ve carried out this for the previous few years and it’s been an effective way to acquire low-cost medical insurance whereas increase what the Mad Fientist calls the Final Retirement Account.
One other bonus to accessing an HSA is that you should utilize it to decrease your AGI even additional. My already significantly-lowered AGI of $32,500 then turned $29,020, which allowed me to assert the Retirement Financial savings Contributions Credit score** for $200 (which in flip lowered my closing tax legal responsibility).
The top consequence was a federal tax invoice of about $1,607. Not dangerous!
Moreover, I dwell in a state the place most of my earnings would fall within the 9% tax charge, so decreasing state tax legal responsibility is one other perk to contemplate when decreasing your AGI. That being mentioned, I’ve excluded state taxes for the sake of simplicity.
Right here is an annual breakdown of my numbers in comparison with a decrease financial savings charge of 5%:
| Low Saver | Excessive Saver | |
|---|---|---|
| Revenue | $58,070 | $58,070 |
| 401k Contribution | $2,904 | $19,500 |
| Conventional IRA | $0 | $6,000 |
| HSA | $0 | $3,550 |
| AGI | $55,166 | $29,020 |
And listed below are my annual prices:
| Low Saver | Excessive Saver | |
|---|---|---|
| Well being Plan | $5,408 | $648 |
| FICA Taxes | $4,365 | $4,365 |
| Federal Taxes | $4,944 | $1,607 |
| Value Financial savings | $8,097 |
New Tax Modifications – ARPA
Because of the American Rescue Plan Act (ARPA handed in March 2021), individuals within the ACA market obtain extra subsidies on the identical degree of earnings for 2021 and 2022.
Additionally, increased earnings earners could now qualify for a subsidy. This opens the door to qualify for low- or no-cost medical insurance even with a slighter increased AGI. I’m at the moment exploring the choice of maintaining my month-to-month premium the identical, whereas changing a few of my conventional IRA to a Roth IRA, which might not have been potential previous to the ARPA.
AGI and Pupil Mortgage Funds
For these with federal scholar loans, decreasing your AGI can even considerably scale back or eradicate scholar mortgage funds, relying in your reimbursement plan.
I used to be lucky to graduate with a really modest quantity of debt, so I used to be in a position to pay the stability off in a few years. Nevertheless, I’ve identified others with giant money owed relative to their earnings that used this technique to convey their month-to-month scholar mortgage funds right down to $0 whereas increase wholesome retirement accounts. Some have even mixed this with Public Service Mortgage Forgiveness to wipe out their loans utterly after 10 years!
Conclusion
In abstract, it’s potential to save lots of a large quantity for retirement whereas minimizing or eliminating different bills. I encourage your readers to discover how they will stack the advantages out there to them with the intention to save extra for retirement whereas residing an ideal life throughout their working years.
I sit up for any responses within the feedback on different tax savvy methods to save lots of.
Cheers!
* My employer solely presents a low deductible medical insurance plan, which usually would exclude me from participating within the ACA market. Nevertheless, the premiums are increased than the minimal worth normal which permits me to decide into an ACA plan.
** See Retirement Financial savings Contribution Credit score qualification tables within the hyperlinks under.