Six Tax Free Investments that Beginners need to start
investing in right now because it's what wealthy people are doing and it's
totally accessible to you!
Number one is going to be the ira, (individual retirement account).
Almost anybody can do an IRA as long as you have a reportable
taxable income. You can do one whether you're 12 years old, high school, college,
about to retire, etc.. it's super easy it takes about five minutes. You can sign up
through like fidelity or vanguard one of those
companies. As of 2020 you can do $6,000 per year towards an IRA
or if you're 50 and older you can do $7,000 per year towards
an IRA. If you're married you can do two IRA's so you do $6,000
in one spouse's account and $6,000 and the other spouse's account for a
total of $12,000. Both of you guys don't have to be
working, just one person has to have a taxable income.
In an IRA you can choose between a Roth or Traditional. Roth means that you pay
the taxes up front and it grows tax-free. When you pull it
out it's all tax-free. Traditional means you're going to defer
the taxes to a later date- so you're going to lower your taxes you're paying
now but when you pull it out that's when
you're going to get taxed. There are income limits for doing a Roth
IRA. If you make more than $124,000 as a single person
you can't do a roth IRA or if you're married your household income has to be
less than $196,000. If you're over those limits you can
still do an IRA you just have to do Traditional.
And if you do want it to eventually be Roth- as soon as you deposit into a
Traditional just roll it right over to a Roth. It's just one extra step you have
to do if you're making that much money. Personally this year I'm going to do
$6,000 towards a roth ira. Let me know comment below are you
doing roth or traditional or both? Because you can also do both. You can do
$3,000 in Roth and $3,000 in Traditional for a total of
$6,0000. But let me know in the comments below.
The SECOND tax free investment you need to be involved in is an
Employer Sponsored Plan. This is also for retirement. This is
the 401k, 403b, 457b, TSP, the Deferred
Comp... Whatever you call it they're all the same it just depends on
what type of company you work for. You can also choose to do a roth or
traditional in these type of accounts. Roth 401k came out in 2006
so if your company only offers traditional keep this in mind- the
federal government, who their version of the
401k is the TSP, have a roth TSP and a traditional TSP so if your company is
not offering a roth 401k yet (only traditional) then
you're actually moving slower than the federal government. Which means you're
really behind! Unlike the ira there's no income limits
for a 401k and as of 2020 you can do $19,500 a year or if you're age 50+
you can do $26,000 a year. If you and your spouse are both working
and both have your own 401ks then you can do $19,500 in theirs
and $19,500 in yours. Personally my employer offers a 457b
with no match so I'm doing $19,500 of my own money
into my roth 457b. Now if your company does offer a match like
they match up to $5,000 or 3% of your salary...
You need to absolutely be doing that! That should be the first thing that you
should be investing in. That is free money and not only is it free money
but that money is going to make you even more free money down the road.
Bonus knowledge: whether you choose to do roth or traditional with your own
contributions you still get your employer match.
However, the employer match always has to go into a traditional 401k
type account per the IRS. Hit thumbs up like button
if you're learning something today! The THIRD account that you should start
looking into is an Education Savings Account (ESA) or a State 529 Plan.
An ESA (education savings account) and the 529 plan have
awesome tax benefits if you need to go back to college, go get your master's,
you have kids and you want to save for their college fund, or you have
kids and you want to put them through a private high school. There's a list
online of all "qualified educational expenses" that
these accounts can be used for. As of 2020 you can do $2,000
per year in each child's ESA. So if you have three
children you can do $2,000, $2,000, $2,000
up to the age of eighteen. As soon as someone's 18 they're no longer eligible
for an ESA (education savings account). However, this is where
the 529 is awesome. There's no age restrictions on a 529 so
you yourself can even contribute to your own 529 plan.
And when you're 30 or 40 years old go back to school and use that
for your educational expenses. Every state has their own 529
plan, but you do not need to live in that state and you do not need to go to
school in that state in order to invest in that state's 529 plan. For example I
live in Texas, I can invest in Ohio's 529 plan and go
to school in texas and pull the money out of their plan and
it'd be fine. The cool thing is 529 plans also
has a lot higher maximum contributions more like $8,000-$10,000/year.
Plenty of money you can do per year higher than the ESA's
$2,000. What's awesome about the ESA
and the 529 is they're actually even more
tax beneficial than an ira or 401k. The money that you put into it is a 1) tax
write-off, 2)it grows tax-free and when you pull the
money out to buy qualified educational expenses (ie. tuition,
books, etc.) that's also 2) tax-free. So you never pay
taxes on it. It's like a triple tax threat. It''s even better than the
401k and the ira. Personally I don't have any kids so
I'm not going to do an ESA. I may go back to school and if I'm going
to I'm going to utilize a 529 plan as well as the
GI Bill to make sure that all my
educational expenses are covered. And guys if you like these type of
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The FOURTH tax free account that you can invest in is going to be an HSA (Health
Savings Account) or a 529 ABLE if you're qualified as a
disabled person per the IRS. Let's talk about the HSA (health
savings account). This works similar like the education
stuff but for "qualified medical expenses" and the tax benefits
are phenomenal. You can put money in as a tax write-off, it
grows tax-free, and when you pull it out you're not taxed on it! It's completely
tax-free. The 2020 limits for an HSA for "Self" = 3550 for "Family" =
$7,100. Typically in
order to have an HSA you're going to have
a High Deductible Health Plan (HDHP) through your employer.
Sometimes the employer will actually contribute money to an HSA but you can
also contribute money yourself to the HSA plan.
Personally I have an HDHP through my employer
and they put in $500 every year into my health savings account.
The FIFTH account
that you want to start looking at is a Brokerage Account.
That's going to be something that you can open up through like E-trade,
Fidelity, Charles Schwab , etc... one of those companies.
A brokerage account is going to allow you to invest money
and pull it out and have the gains not be taxed as much as regular
income. These are great for people that want to
retire early because you can't pull out money out of an ira or a 401k
until you're age 59 1/2.
If you pull it out before 59 1/2 you're going to be
penalized. However, with a brokerage account because
it's not as tax beneficial but it still has some benefit,
you can put money in there and you can pull it out without penalty anytime.
So some people use this as what's called a "bridge account" to bridge the gap from
when you retire early until you reach age 59 1/2.
Another great use for this would be if you want to just store a large sum
of money for maybe five years or more. Such as a down payment on a house or you
want to save up for a large purchase. The tax benefits like I said aren't
as great as a 401k but they're still not bad.
The way it works is if you own a stock or a fund or whatever you
own inside your brokerage account, as long as you own it for one year or
longer you're not subject to regular income tax.
You're subject to what's called "long
term capital gains tax" and that's going to be lower than
what your income tax bracket is. For example if I'm in the 25% tax
bracket and I start investing in a brokerage
account the gains that that money make... If I put in $10,00 and it
makes$5,000 over the course of whatever.
I pull out $15,000 well I made $5,000 and that
hasn't been taxed yet. But instead of getting taxed at 25% like
I would if I got paid $5,000 from my employer.
That money (those gains) get taxed at typically it's 15%. Which means I just
saved 10% in taxes. Which isn't you know
life-changing but it's still pretty good. Personally I have a brokerage account.
There's only maybe a few hundred dollars in that account but I used to have more.
What i did with that account is I
stockpiled a bunch of cash in that account and invested it in an S&P 500
index fund. That was my down payment for my
house When I bought the house I moved that
money out of the brokerage account and into the down payment of the house.
I only had to pay long term capital gains tax on all
the gains that I made. So that's one way you could use a
brokerage accoun. Hit like if you're learning something! The SIXTH
place you want to look for investing your money
with huge tax benefits is going to be starting your own
business. If you want to do some real estate investing like you want to be a
landlord or you just want to start a small business from home this year
there's huge advantages when it comes to taxes when you own the business.
Now do this safely and do this smartly, this is a little bit more
advanced than the beginner accounts we've been talking
about. But it still can pay off pretty good, in fact comment below let me
know if you're thinking about starting a business- what kind of business would it
be? Or if you already own one what kind of business is it.
You can either do a sole proprietorship, LLC, or Corporation. The tax
benefit to that is going to be...businesses only pay taxes
on their profits. And profits equal
revenue minus expenses. So what does this mean? If a
business makes $50,000 in revenue but they have $50,000
worth of business expenses they don't pay any taxes that year. So
how does this come into play for someone like you. Well let's take
this cell phone for example. I probably paid 25% less for the
cell phone than you did. Let me explain why...because I use the
cell phone to do one-on-one coaching like on timwolffe.com
or because I film weekly videos like this on youtube and other educational
videos. I use it for business purposes therefore
it's a business expense and so I can write it off on my taxes.
So instead of getting taxed at 25% and then buying a cell phone I never pay
taxes and I just purchase a cell phone with
that money. Whereas you you get paid $1,000
from your employer and you get hammered in taxes, and then you buy the cell
phone. It''s things like that that really
add up that you never even thought about like day-to-day use stuff
that you could start writing off if you use them for qualified
business expenses. So guys that's all I got and that's the
SIX places I would start putting my money
if I were you. If you like these videos I put out weekly
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