Fastest Way to Avoid Taxes and Retire Rich

The Neighborhood Finance Guy writes about financial literacy topics, tax planning, tax reduction, investment strategies, and retirement tips to help you make effective decisions and set S.M.A.R.T.+E.R. goals with your money.

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Table of Contents

Retiring as a Millionaire can be Automatic

According to the 2019 report from the US Bureau of Labor and Statistics, the average household brings in $82,352 annually.

These households end up spending $63,036 from housing costs to entertainment.

The average family (which is loosely defined as 2+) stashed almost $7,250 in combined savings (less than 1%) and pension (about 8.2%).

Saving less than 10% is not the most efficient way to retire (see the graphic on the right). That route would take you over 50 years.

As such, I provided proof of the Easiest Way for An American Family to Retire with One Million Dollars. This method boosted annual savings by 231%.

With just 30 years of automatic saving/investing, you could be looking at $2 Million Plus. It’s all there. As a bonus, I added a way an average family can use the Hyper Escalation method to invest for less time.

Investing Saves You On Taxes!

The average family is spending as much as 17% of their income on taxes. With my background in Taxation, I can tell you that it doesn’t need to be that way at all. I’m a betting man; we can definitely make the improvement to lower the $14,000 tax bill.

This article is all about proving why investing can save you on taxes every year. Here are the given stats (we always need to have a mutual starting point):

We are using the 2019 median income of $82,352 and the taxes of 17%,
The family (of 3) can either be dual-income or one-income,
At least one person would have to MAX out the annual contributions to an employer-sponsored retirement plan,
Finally, the family would need to invest in a Health Saving Account (HSA), and
then, we get Creative.

I call it the Net/Max Approach. If you are impressed by this later, share it because I think I impress myself with this stuff.

Tax Avoidance is a Hidden Secret of the Rich; Now You Know. Don’t Let It Stay a Secret to Friends and Family.

1. Original Tax 17% Levels

Here’s the fast tax with no special provisions. Let’s also say that the family received $2,000 in state tax returns last year and that they generally take the standard deduction (2020 – $24,800). And they receive a credit of $2,000 for the kid. Refer to table #1.

Table #1

Income (from all sources)		$82,352
	Add. State Refund	+$2,000
Gross Income		$84,352
	Minus not Taxable Income	-$0
Adjusted Gross Income (AGI)		$84,352
*Modified Adjusted Gross Income
Minus Itemized Deduction or Standard Deduction	Whichever is Greater, For this example $24,800	-$24,800
Taxable Income		$59,552
Gross Taxes	Formula Based on Income tax Bracket	($6,751) Meaning You Owe This
Withholding	Let’s say that it’s 10% of Salary	+$8,235 Meaning You Saved This Each Pay Period
	Plus Other Credits – Kid	+$2,000
Total Refunded or (Owed)		$3,484.08

Check out the tax estimator (excel) in the resources.

Almost $3,500 that’s not a bad haul.

As you can see from the table above, the effective tax rate is really 8.19% even though for a family that’s married filing jointly tax bracket is 12% for income ranges of $19,751 to $80,250. If you are wondering why that’s not 17%, the additional 5% is likely to be state, local, and sales taxes.

Hey, sometimes we have to make the math do things so the logic and learning can stay consistent.

2. Let’s Make this Tax Efficient Instead

Table #2

Income (from all sources)	Due to the $19,500 Max 401k Contribution at work. Income = $82,352 – $19,500 Tax Deferred	$62,852
	Add. State Refund	+$2,000
Gross Income		$64,852
	Minus not Taxable Income: Health Saving Account Contribution of $4.5k	-$4,500
Adjusted Gross Income (AGI)		$60,352
*Modified Adjusted Gross Income
Minus Itemized Deduction or Standard Deduction	Whichever is Greater, For this example Std. $24,800	-$24,800
Taxable Income		$35,552
Gross Taxes	Formula Based on Income tax Bracket for Married Filing Jointly	($3,871) Meaning You Owe This
Withholding	Let’s say that it’s 10% of Salary	+$8,235 Meaning You Saved This Each Pay Period
	Plus Other Credits – Kid	+$2,000
Total Refunded or (Owed)		$6,363.88

Check out the tax estimator (excel) in the resources.

This is an 83% increase in your refund in table #2.

The Average US Household can boost its tax refund efficiency by 103%. The power of investing. The End Goal is to Retire Richer.

By Investing in your 401k, 403b, or 457b to the max of $19,500, you are looking at a refund increase of $2,879.80.

That’s not including any growth in the market for the year or any matching contribution with its own growth.

It’s literally stacking money.

Tax Avoidance is the way to quote the Mandolorian.

3. (Bonus) Kick Flip Tax Method

If you go back to the total estimated refund in Table #2, the ending total is $6,363.88. Let’s play with this.

You know you can file make contributions to a Traditional or ROTH IRA from January to April 15 of the following year. In essence for any given year, you have up to 16 months to fund an IRA. The max now is $6,000. What if you took the refund and retroactively made a prior year’s contribution?

Your refund jumps to $7,083.88.

You just pocketed an extra $720 while boosting your savings/investments for that year.

Table #3

Investments	Contributions in Table 1	Contributions in Table 2	Contributions in Example 3
401k, 403B, 457B	$0	$19,500	$19,500
Health Savings Account	$0	$4,500	$4,500
Traditional IRA	$0	$0	$6,000
Total Investments	$0	$24,000	$30,000
Refund	$3,484.08	$6,363.88	*$7,083.88
Real Refund	$3,484.08	$6,363.88	$1,083.88

*with $6,000 Earmarked for Contributions Prior to the Tax Due Date

$2,500 monthly (or $30,000 Annually) yields $1.4 Million in 20 years

$2,500 monthly (or $30,000 Annually) yields $3.5 Million in 30 years

Investing in yourself works every time.

I’m just the bearer of good news. Opportunity and wealth are in your grasp. However, the financial heavy lifting is still yours to carry. Executed to the fullest, this is a 103% Tax Refund Efficiency increase. But Hey I’m only playing with numbers.

If you want to know more, I also have strategies in which you can keep most of your money active in the market earning at least 6% in dividends. Check out How to Beat Compounding Generational Debt with a $1,000,000+ ROTH IRA Investment Portfolio.

Disclosure: This post is brought to you by the Neighborhood Finance Guy. We highlight financial literacy information, resources, and more on your way to money management goals and personal wealth. Our goal is to help you make S.M.A.R.T. decisions with our money. We do not give investment advice or encourage you to adopt a certain investment strategy. Your personal finance is up to you. If you take action based on one of our recommendations, we don’t earn a dime as of 5.2021. We operate independently.

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