Investment Ideas For Low Income Earners
If you dont have a lot of money to invest it seems natural that your strategy would be to not take any risks with the money you do have. But, with the right budgeting strategies, saving and investing money is possible for this income group. It comes down to making choices about how you want to live.
Traditional low-risk savings options, like a savings account, no longer pay a high enough interest rate to keep up with the rate of inflation. This means you are essentially losing money leaving your savings in one.
So how to you make what money you can afford to invest grow?
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Max Out Your Retirement Account
Another one of the best tax reduction strategies for high-income earners is to contribute to a retirement account. Specifically, contribute to a traditional 401 or IRA.
These retirement accounts use pre-tax money, so you can deduct your contributions from your taxable income. A traditional IRA is a good option when you work for yourself and dont have another account.
However, if you have access to a 401, you can contribute to that as well. The maximum contribution for a 401 is $19,500 in 2021 and goes up over time.
On the other hand, you can only contribute up to $6,000 to an IRA during the same year. If you dont have access to a 401 through an employer, consider setting one up for yourself.
Then, youll be able to contribute even more money to retirement. And youll be able to reduce your taxable income.
Im 35 What Should I Have Saved
There is a lot of research showing that people tend to rely on approximations or rules of thumb when it comes to financial decisions.
With this in mind, many financial firms publish savings benchmarks that show the ideal levels of savings at different ages relative to an individuals income. A savings benchmark isnt a replacement for comprehensive planning, but it is a quick way to gauge whether youre on track. Its much better than the alternative some people useblindly guessing! More importantly, it can act as a catalyst to take action and start saving more.
However, for the benchmark to be useful, it needs to be realistic. Setting the target too low can lead to a false sense of confidence setting it too high can discourage people from doing anything. Articles on retirement savings goals have generated spirited discussion about the reasonableness of the targets.
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Tax Saving Strategies For High
One way to reduce your tax burden is to change the character of your income. If you’re wondering why you should do so, here are some of the ways it can help you to lower your tax bill.
The overall benefit of changing the character of your income is that it can reduce your MAGI for each tax year and allow you to take advantage of a lower tax bracket in some cases.
The good news is that with a combination of tax deductions, tax credits, and contribution strategies, you can reduce your tax bill by reducing your taxable income. Here are 9 ways to accomplish your goal and reduce your tax bill:
Explore More Retirement Savings Options
The tips laid out above are not exhaustive for high income earners, and they leave out those who are self-employed or own a business. In those cases, there are retirement plans like SEP IRAs and self-directed 401s that have much higher contribution limits than traditional retirement plans. In any case, it is important for high income earners not to feel limited by the retirement plan options that are right in front of you. There are plenty of options to explore to save and grow your retirement assets in a tax efficient way. To learn more about what you can do to save more and invest your assets in a tax efficient manner, call one of our Wealth Managers today at 1-800-541-7774. You can also email us at .
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Tax Planning For High Income Canadians
With recent federal tax changes, high earning Canadians may benefit from these strategies to help offset the added costs.
Canadians who earn more than $200,000 per year face personal income tax rates upwards of 50 percent. However, prior to the 2018 federal budget, high earning individuals enjoyed two effective strategies to reduce their overall tax burden income splitting and reinvesting undistributed earnings from an active business into a private corporation.
New legislation now challenges high earning Canadians by either eliminating or significantly reducing the benefits of these two tax planning strategies and Canadians are justifiably concerned about what that means for their bottom line.
High earning Canadians now need to look at other potential options to help offset the increased costs. We look at several below.
Prescribed Rate Loans
While income splitting between family members may no longer be viable, the new rules do not prevent higher income spouses from lending money to a spouse, child or family trust for investment purposes. Through a prescribed rate loan, the recipient has the potential to earn investment income with the borrowed funds.
Tax-Free Savings Account
The federal government has committed to increasing the annual contribution at the rate of inflation , and any unused contribution room automatically carries forward to subsequent years. Therefore, anyone who has not leveraged their TFSA to its full potential can still catch up.
Tax Efficient Investing For High Earners
Realize that youll never eliminate tax obligations on your investments all together. Taxes are a reality that come with growing your wealth and having money to invest.
Review the new tax law changes each year and be mindful of ways to invest with tax efficiency in mind.
Ultimately, make certain not to let taxes drive your investment strategy. Taxes are second to investment strategy and goals.
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Minimize Your Taxes On Passive Income
A passive income can be a great strategy for generating side income, but youll also generate a tax liability for your effort. But you can reduce the tax bite and prepare for your future, too, by setting yourself up as a business and creating a retirement account. This strategy wont work for all these passive strategies, however, and youll have to be a legitimate business to qualify.
Two of the most popular options are the solo 401 and the . If you stash the cash in a traditional 401 or SEP IRA, you can take a tax break on this years taxes. The solo 401 is great because you can stash up to 100 percent of your earnings into the account, up to the annual maximum. Meanwhile, the SEP IRA allows you to contribute only at a 25 percent rate. In addition, the solo 401 permits you to make an additional contribution of up to 25 percent of your profits in the business.
If youre thinking of going this route, compare the differences between the two account types or look at the best retirement plans for the self-employed.
What Are High Earners Not Rich Yet
High earners, not rich yet are individuals who currently have significant discretionary income and a strong chance of being wealthy in the future. The term HENRYs was coined in a 2003 Fortune Magazine article to refer to a segment of families earning between $250,000 and $500,000, but not having much left after taxes, schooling, housing, and family costsnot to mention saving for an affluent retirement.
The original article in which the “high earners, not rich yet ” term appeared discussed the alternative minimum tax and how hard it hits this group of people. The term has since been used to describe a younger demographic for the purposes of marketing products and services to them.
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Create A Blog Or Youtube Channel
Are you an expert on travel to Thailand? A maven of Minecraft? A sultan of swing dancing? Take your passion for a subject and turn it into a blog or a YouTube channel, using ads or sponsors to generate your income. Find a popular subject, even a small niche, and become an expert on it. At first youll have to build out a suite of content and draw an audience, but it can create a steady income stream over time, as you become known for your engaging content.
Opportunity: You can leverage a free platform, then use your great content to build a following. The more unique your voice or area of interest, the better for you to become the person to follow. Then draw sponsors to you.
Risk: Youll have to build out content at the start and then create ongoing content, which can take time. And youll need to be really passionate about the product, since that can help you maintain the motivation to continue, especially at the start as your followers are still finding you.
The real downside here is that you can outlay a bunch of your time and resources, with little to show for it, if theres limited interest in your subject or niche. Your area of expertise may be too niche to really draw a profitable audience, but you wont be sure of that until you experiment.
Tap Into The Triple Tax Benefits Of Your Health Savings Account
A Health Savings Account is an underrated investment account. It acts as both a savings and investment account that gives you three tax breaks:
In order to qualify for an HSA, you must have a high-deductible health plan. However, once you enroll in Medicare, you cant contribute to an HSA since its a high-deductible plan. But you can still use the money youve saved!
Unlike the Traditional 401 or IRA, you arent required to take required minimum distributions . You can withdraw money on your own schedule.
In the short term, you can use funds on qualified healthcare expenses, such as doctors visits and prescriptions.
In the long term, you can use your HSA to help cover the cost of medical expenses in your later years. The average couple retiring today will need $295,000 for medical expenses in retirementnot including long-term care!
To use your HSA as a Health IRA, simply contribute a minimum amount . Then, start investing that money into mutual funds inside the HSA.
Once you reach retirement age, you can take tax-free distributions for qualified health expenses. Or, you can take money out of your HSA and pay income taxesjust like you would with a 401 or traditional IRAand spend it on whatever youd like.
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Fort Lauderdale Poised For Unprecedented Growth This Decade
Playing Defense
The scarcity mentality of the middle class spills over into their investing habits habits reinforced by tradition, environment, family, society and Wall Street. When the subject of investing comes up, all they hear is diversify, diversify, diversify.
Here is what Warren Buffett thinks about diversification: “Diversification is a protection against ignorance. It makes very little sense for those who know what theyre doing.”
Diversification plays right into the middle-class mindset of scarcity and preservation. If the goal is to minimize the risk of losing money, Wall Street tells you that diversification is the way to do it. Whereas the middle class plays not to lose, the wealthy play to win.
Wall Street Is Not A Friend Of The Middle Class
On Wall Street, diversification is big business. The most significant selling point of mutual funds is diversification and the convenience of 401s invested in mutual funds makes investing simple for high-income earners. Wall Street has a significant stake in keeping the mutual fund gravy train moving.
Check out these mind-numbing mutual fund stats from Statista:
Number of mutual funds in the U.S.: 7,636
Total global net assets of U.S.-registered mutual funds: $23.9 trillion
Share of households owning mutual funds in the U.S.:45.7%
Expense ratio of actively managed equity mutual funds in the U.S.:0.71%
The Hard Work Myth
Relocating To A State With No Income Tax
It isnt unheard of for affluent investors to own a variety of properties, estates, residences, and businesses throughout the country. However, you could end up with dual residency and dual taxation if you dont develop a strategy. Certain states can impose taxes on any profit you earn from your ventures even if youre not a citizen of that state.
Several high-tax states charge rich families with the highest tax rate, which includes investment income tax, federal tax revenue, real estate tax, and more. You could consider relocating to a state with no income tax after you retire to save extra income.
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Financial Planning Tips For High Earners
In association with Close Brothers Asset Management
High earners face a unique set of challenges when it comes to financial planning. With those in the top tax bands facing high tax rates on both capital gains and dividend income, high earners can potentially face large tax liabilities from their investments.
Fortunately, there are a number of ways that high-income individuals in the UK can grow their wealth tax-efficiently. Here are some financial planning tips that could help high earners reduce their investment-related tax liabilities significantly.
How Investment Income Is Taxed
You need to include investment income in your tax return. This includes what you earn in:
- interest
- capital gains from property, shares and cryptocurrencies
You pay tax on investment income at your .
Use our income tax calculator to find out your marginal tax rate.
You’re allowed tax deductions for the cost of buying, managing and selling an investment. But there are rules around what you can and can’t claim as a tax deduction. See the Australian Taxation Office ‘s investment income deductions.
Investing and tax can be complex. See choosing an accountant for where to go for help.
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Sell Inherited Real Estate
If you have inherited real estate from a parent or someone else, you may not realize that you can save money on property taxes by selling the real estate quickly. Heres why:
Lets say your parents bought a home for $200,000 and it is now worth $900,000. If they had sold it while they were alive, they would have paid capital gains of $700,000. If you hold onto the house, you will have a stepped-up tax basis of $900,000 and will be required to pay property taxes on that amount, thus significantly limiting your potential gain from the sale. The goal is to minimize your capital gains tax liability.
The alternative is to sell the home quickly after you inherit it, thus saving money on property taxes and maximizing your inheritance. Of course, you should also know that you can avoid capital gains tax by rolling the income from the sale into another real estate investment within 180 days .
Save And Invest Within Isas
Saving and investing within an ISA is another tax-efficient strategy for high earners to consider. Like pensions, ISAs allow investments to grow free of tax.
The annual allowances for ISAs are quite generous today. The Stocks and Shares ISA, for example, has an annual allowance of £20,000. This means that a couple could potentially save £40,000 per year tax-free. This money can be accessed at any time.
The Lifetime ISA, which is open to those aged 18 to 40, has a lower annual allowance of just £4,000. However, contributions into this ISA come with a 25% top-up from the government while youâre under the age of 50. This means that if you invest the full £4,000, youâll receive an additional £1,000. The downside of this ISA is that it is more restrictive than the Stocks and Shares ISA. You cannot access your funds until you turn 60 or purchase your first property.
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How Is Your Money Taxed
High earners or those who will have a significant amount in tax-deferred retirement accounts and taxable investments should know how their money is taxed, and thus create a tax plan. While wages, salaries and investments held for less than a year are taxed at progressive income tax brackets, investments held for over a year are not. These are considered long-term capital gains and are taxed at preferential tax rates of either 0%, 15%, or 20%, depending on the individuals income level.
Individuals with taxable income between $40,401 and $445,850 and married couples filing jointly with taxable income between $80,801 and $501,600 owe 15% on their long-term capital gains. Earn less than that, and you pay 0% in capital gains taxes. Earn more, and the rate jumps to 20%.
Keep in mind that taking a distribution from a 401, IRA, or other tax deferred retirement account does not count as a long-term capital gain. Distributions are instead taxed as ordinary income.
Advertise On Your Car
You may be able to earn some extra money by simply driving your car around town. Contact a specialized advertising agency, which will evaluate your driving habits, including where you drive and how many miles. If youre a match with one of their advertisers, the agency will wrap your car with the ads at no cost to you. Agencies are looking for newer cars, and drivers should have a clean driving record.
Opportunity: While you do have to get out and drive, if youre already putting in the mileage anyway, then this is a great way to earn hundreds per month with little or no extra cost. Drivers can be paid by the mile.
Risk: If this idea looks interesting, be extra careful to find a legitimate operation to partner with. Many fraudsters set up scams in this space to try and bilk you out of thousands.
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