It's not what you make that counts but what you keep. True enough.
Said in context to modern taxation, keeping more of your earnings depends upon keeping taxes low. That also means reducing taxable income.
I have owned RE over the years and have clients and friends who use Real Estate as a means to control taxable income. The gift of Depreciation plays into this for rental properties as does the use of borrowed funds. When borrowing to pull out equity you get the cash by raising debt but that cash is NOT income. A lifestyle does not much care about where it comes from. Income or Tax free loans both spend the same. The difference of course is that income must begin at a higher number then gets whittled down by taxes. In contrast, loan proceeds are 100% available to spend as you see best. Using rental properties allows for cash flow to cover the loan repayments and the interest is an expense. You might enjoy learning more about this approach. I suggest you view a few of the Rich Dad, Poor Dad videos for a primer. You don't need fancy course to do this because it all available right in the IRX=C and I can guide too. But if you want exert advice from someone who has succeeded in great fashion. Kiyosaki is the man.
The average Joe might own a house and get some occasional benefit from this tax advantaged set up. But in my practice, I see this maneuver happening most often to consolidate out of control credit card debt into a lower interest rate improving cash flow but elongating the debt. At times, I have seen the pulled out equity used for a car purchase or even a luxury vacation. I won't comment on the right or wrong of such decisions. I will state though, that some attention to one's future well being is a good idea.
The 401K and the IRA
In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of their paychecks, and may be matched by the employer. This legal option is what makes 401(k) plans attractive to employees, and many employers offer this option to their (full-time) workers.
There are two types: traditional and Roth 401(k). For Roth accounts, contributions and withdrawals have no impact on income tax. For traditional accounts, contributions may be deducted from taxable income and withdrawals are added to taxable income. There are limits to contributions, rules governing withdrawals and possible penalties.
The benefit of the Roth account is from tax-free capital gains. The net benefit of the traditional account is the sum of (1) a possible bonus (or penalty) from withdrawals at tax rates lower (or higher) than at contribution, and (2) the impact on qualification for other income-tested programs from contributions and withdrawals reducing and adding to taxable income, minus the consequences of capital gains being taxed at regular income rates.
Managed 401K plans have the liability of poor performance from its managers. A key point to remember is that these funds are stable in nature, but not guaranteed. Although the chance of losing money in one of the funds is relatively slim, they should not be categorized with CDs, fixed annuities, or other investments that come with an absolute guarantee of principal. The Traditional type of 401K tax savings inure regardless of account performance so that is worthwhile in and of itself. It accomplishes to a degree "how much you keep". If the investments of your 401K funds advance through capital gains, so much the better. The presumption is that tax rates will be lower at retirement age. That is not a guarantee, just a common presumption.
Though I have some reticence about a 3rd party managing an employer sponsored 401K plan, they seem to be fine in bull markets. They also seem to fail miserably in bear markets. There is one alternative to get control and that is to convert to a self directed IRA. This has some required steps and I'll offer this well written article for those who want more data:
https://www.investopedia.com/articles/investing/072916/how-buy-gold-your-401k-fsagx-iau.asp#:~:text=401(k)s%20and%20Gold%20Investing&text=In%20fact%2C%20the%20vast%20majority,of%20your%20retirement%20plan%20portfolio.
This is not exhaustive but the main ways to keep more is to reduce income (use loans pulling out equity on rental properties etc.) increase capital gains as part of your strategy, maximize your 401K and/or IRA accounts especially if an employer match is available and Itemize deductions using Sch A to beat the standard deduction for your filing status.
Note: In 2021 and 2022, the capital gains tax rate is 0%, 15% or 20% on most assets held for longer than a year. Capital gains taxes on assets held for a year or less correspond to ordinary income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% or 37%. I have a few professional traders as clients and this group is in and out of trades which then gets treated as ordinary business income with the benefit of running expenses against it. This is unlikely for most so holding for periods of one year or more is the norm. To be clear, capital gains taxes apply to non sheltered savings invested. 401K and IRA gains are tax delayed until withdrawn, hopefully at retirement because early withdrawal penalties hurt.
These and other strategies are part of tax planning. If you don't have a tax plan you're planning to be taxed.
I am always available to help in reviewing and recommending improved tax approaches that will help you keep more of what you earn. Even without a tax advantaged plan, saving is still a good idea. It's funny how fast the future arrives. Make it a good one with a good tax plan.
Best,
Donn Marier
DM-Your Own CFO