What can we do then with all this qualified money? First, we can only do things incrementally since we’re walking a fine line between paying too much now and too much later. Two tactics help; both involve Roth IRA’s. First, Roth Conversions. If done correctly, a Roth Conversion can help. It doesn’t always work and sometimes even makes things worse, as in an IRMMA year. But the RC is something we should investigate. Secondly, if you’re in an off-year income-wise or your taxes are very low to begin with—add to a Roth instead of a regular qualified plan. Especially for young adults or newly retired part-time workers—a Roth is on-point for saving for the future.
Income Tax
Pre-tax money means you postponed paying income tax on the money that went into those accounts. This is a great way to save on income taxes while working, at the same time stashing some income for retirement. The US has a “progressive income tax,” meaning that the more income you earn, the higher the tax rate you pay (from 10% to 37%). Deferring part of that earned money from the highest tax brackets makes perfect sense.
When we invest in an ETF or Mutual Fund that tracks the S&P 500, we’re not just buying the market—we’re buying into the profits (and losses) of the world’s largest and best-run private companies. You must be asking, if these super companies are so well-run, why did I lose money investing in them this year? Well, as investments, the returns they generate will fluctuate. As I wrote in the second paragraph, nothing in the market rides up a straight line.
Wealth Management
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