Do you hate paying taxes? Most of us would rather keep 100% of what we earn and not have to worry about giving the government their share. But that is the cost of living in a country that provides services; we have to pay for those services somehow. But there are ways of getting around paying taxes on all the money that you earn. Im not talking about anything illegal here, but rather tax free or tax advantaged income that is available to anyone willing to take the time.
Invest in Municipal Bonds
Whenever there is a big project that a city or municipality needs to get done, they issue municipal bonds to raise the money. These bonds pay back interest over time to those who purchased them. The best part is that interest they earn is free from federal income taxes; and likely it is free from state or local taxes as well.
Consider this: you invest $10,000 into municipal bonds that pay 4% annually. Each year that you own those bonds (until they mature) you will receive $400 completely tax free (there are some caveats, so talk to your accountant to make sure). When the bond matures, you will get your $10,000 back, and you can turn around and reinvest that into more municipal bonds.
The cost of this tax free income, however, is a lower yield on the bonds. If munis are paying 4%, then corporate bonds are likely paying 6%.
Invest in a Roth IRA
The Roth IRA is one of the greatest breaks that the government gives us when it comes to investing in ourselves. You pay some tax on the money when you earn it, but anything that comes out of your Roth IRA is completely tax free.
The downside to the Roth is that you have to wait until you are over the age of 60 to have any access to your money. If you try to access it before that age, then you will likely pay taxes and be hit with a 10% penalty.
Invest Outside of a Roth IRA
It may seem counterproductive, but investing outside of your Roth can actually make great financial sense (this would be geared more toward those who havent maxed out their Roth, or dont qualify for one).
Suppose you are in the 25% tax bracket and you invest $100 into a 401k or traditional IRA. Over time that money grows to $200 and then you withdraw it. You pay $50 in taxes.
Now suppose you invest $100 outside of your IRA, and it grows to $200. As long as it has been over a year, then you pay $25 in taxes on the original money, and $15 in capital gains taxes on the growth. You only pay $40 in taxes.
Earn Money Tax Free
There are plenty of ways to earn money tax free or with minimized taxes. These are just 3 of the numerous methods. Of course before you set off on a tax saving adventure, you will want to talk with your accountant to make sure you are doing it legally. When you do start making money tax free, then you know that you have been successful.
How do you minimize your taxes?
