1. Should you contribute to an IRA or a SEP IRA to 'save taxes'?

It's the end of the year, and you can contribute to one of these pretty much right up until you file your taxes.

And, for many of you, this is the ONLY tax advice your accountant will give you.
2. But, like my mom used to say 'just because you CAN do something, Ronnie, doesn't mean you SHOULD.'

(I usually did anyways....and whenever I got called Ronnie, my legal name, I knew I was in trouble).

Anyway, you guys know I like math so let's get to the math!
3. So, let's say you're a single guy or gal making 60k a year.

And you're taking the standard deduction, which is $12,400

Your 'take home' pay will be about $46,835.

That means you're paying $13,165 in taxes (including state and FICA taxes,)

Or, roughly 22% of your income. Image
4. BTW, my single person lives here in CA.

OK, so NOW she (I decided to make her a she, so I don't have to keep typing he/she/zer) listens to the accountant and 'saves taxes' by contributing to a traditional IRA.

The taxes now went down to $11,467.

So she 'saved' $1,698. Image
5. Or DID she?

No...she merely POSTPONED paying taxes on that $6,000 until a later date.

Now here is where the problem comes in:

The IRS doesn't WANT tax on the 6k.

They want taxes on the 6k & WHATEVER THE 6K MADE.

So, let's say she's 30.

And not going to retire until 65.
6. So, if she earns 7%, by age 65, that ONE contribution is now worth $64,059.

And THAT is what they now want to tax, and pay attention here....

..not at her rate NOW, but at WHATEVER THE TAX RATE IS IN 35 YEARS.

BTW, now multiply that by her doing that for the next 35 years.
7. She'd have 'saved' $59,430 in taxes because she deferred (postponed) taxes on $210,000.

But just THIS account is now worth $829,421....

...and that is what the IRS wants taxes on.

But wait, there's more....and it's worse.

Let's go back to just our one contribution.
8. Remember, she made ONE $6,000 contribution, and it' will be worth $64,059.

Let's say she took it all at once, and, in fact, her taxes WERE lower....15%.

She owes $9,609.

That's almost 6 TIMES what she originally 'saved'.

But, what if taxes go higher?
9. Not even a lot higher, just a little bit.

At 25%, she owes $16,015 in taxes, or almost 10 TIMES (!!!) what she supposedly saved.

But, wait, there's more.

It gets even worse for her.....
10. Likely she will NOT take the money all at once.

Let's say she takes it over 20 years.

On top of her other income, like Social Security (which they currently tax up to 85% of!)

She would receive $6,136 a year for 20 years, if she kept earning 7% on the money.
11. So, she actually withdrew $122,725 over the 20 years.

Again, if she did, in fact, have a lower tax rate of 15%, she still paid out $18,409.

And if taxes do go up to 25%, she'll have paid $30,681 over 20 years.

All because she wanted to 'save' $1,698 today.
12. Also, don't forget that if she wants to touch HER money, she has to pay taxes on it AND a 10% penalty.

Oh, and if she gets forgetful when she's older and forgets to take the distribution that the government requires when she turns 72, they slap her with a 50% (!!!) penalty
13. PLUS the tax she would have owed on the distribution.

So, there's that.

So, just remember: everytime you see 'your' retirement grow, Dongress is watching THEIR retirement grow as well.
14. I just saw the typo, but liked it and decided to leave it in.

That's going to be my new slogan for them

Dongress: Screwing you one bloated budget with giveaways to every country but yours at a time
15. Now, finally, are there EVER circumstances where I would recommend postponing paying your taxes?

Sure, if you're in a really high tax state and have a really high income and you KNOW you're going to move to a lower tax state in the future.
16. AND, you're contributing at least HALF your money to tax-free or tax favorable accounts, then why not?

BUT, don't for one second kid yourself.

You WILL pay more in taxes on that money later.

17. And if you start calling them Dongress too, don't forget to give your boy Ron C a shoutout!

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More from @roncaruthers

31 Dec 20
1. Year End Tax Tips:

Yes, there is still time to save money on taxes for 2020....even today.

Here is a list of some of your top options:

A) You can pay your kids up to age 18 up to $12,400 and if they have no other income, they owe NO federal taxes, but YOU get the deduction
2. Next up, you can prepay your expenses up to 1 year, using the IRS Safe Harbor:

This allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.
3. Qualifying expenses include, among others:

-lease payments on business vehicles

-rent payments on offices and machinery

-and business and malpractice insurance premiums
Read 15 tweets
16 Dec 20
1. How to know when it's time to quit your day job and go full time on your side hustle.

My thoughts.

I got asked this yesterday, and here is the formula I've used with clients that seems to work.
2. First, I recommend that you make AT LEAST 2x your day job income before even THINKING about quitting.

Yes, you can do it on less, but remember: right now, you're getting a steady check while you make side money, so it takes a lot of pressure off of you.

That will change.
3. Also, you are probably going to have to pay more in taxes, and cover your health insurance, so you'll NEED to make more money to take care of those things.

That's why I recommend 2 times your day job income.

Also, unless you work for a start up, you check has been steady.
Read 6 tweets
16 Dec 20
1. Your 401k sucks beyond the match because you are postponing paying taxes on it AND on EVERYTHING THAT IT EARNS.

And, you're postponing the calculation of the tax.

So, what should you do instead?

Here are 3 solid options:
2. First, a Roth IRA is a solid choice.

With a Roth, you do not get a current year tax deduction, BUT...

...your money grows tax -free AND after 59 1/2, you can withdraw it tax-free.

Also, you can access what you contributed without penalty or tax at anytime.
3. You can also pull $10,000 from a Roth IRA without tax or penalty for the purchase of your first home, as long as you've had the account for at least 5 years.

And the definition of 'first home' simply means you have not owned a home in 2 years.
Read 17 tweets
9 Dec 20
1. Will you get audited if you employ tax savings strategies, like @WCarlRussell is concerned about.

It's a pretty rational concern.

In fact, the IRS COUNTS on enough people having this fear so that they do NOT try anything.

However, how real is it?
2. First off, your odds of getting audited statistically DO climb if you add self employment income OR losses.

But, they climb from a .8% chance each year to a 1.2-1.4% chance each year.

In other words, about 8 people out of 1,000 get audited, vs 12-14 that own businesses.
3. So, the odds are WAY in your favor that nothing ever happens.

And there are things you can do like filing at the last minute that seem to improve those odds in your favor.

However, the SECOND point is even more important than the first:
Read 8 tweets
8 Dec 20
1. How to write off your next mattress or hot tub. (yes, hot tub)

First off, this thread is for business owners.

BUT, you should read this even if you do NOT have a business..so you have some idea of what I mean when I say that the tax laws were all written for business owners.
2. With this strategy, here is just SOME of what you can legally deduct:

-air conditioning

-a mattress (those suckers are EXPENSIVE!)

-hearing aids

-a pool

-a hot tub


-weight loss programs,


Now, HOW do you do that?

Read on:
3. What you need to set up is a Medical Reimbursement Plan, also known as a 105(b) plan.

It is NOT a typical insurance plan.

It is a legal fringe benefit plan that permits you to claim FULL deductions for reimbursing your employees (including spouse and family) ...
Read 36 tweets
5 Dec 20
1. Have you refinanced your mortgage yet?

Rates are still as low or lower than I've ever seen them.

Recent example: one friend of mine's parents refied their mortgage from 4.5% down to 2.5%.

The payment went from $1,700 a month to $1,300 a month.
2. So even though they added 4 years because their mortgage had 26 years left and they refinanced to a 30 year,

if you run the math, they STILL are saving $61,400.

Even AFTER adding 4 more years to the mortgage.

3. If they invest that difference of $400 a month at 7% (easily done over a long term with even index funds, though there are better places IMHO)

They will have...

....wait for it.


NOT a typo.

Read 11 tweets

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