The process of methodical analyzing a financial situation to allow you legally pay the lowest tax possible is known as tax planning. The goal is the overall reduction of tax liability both in the current year and future tax periods. Of course, this can lead to individuals contributing more to their retirement savings.
There are many considerations covered by tax planning. Some of these include income timing, timing purchases, and more. Certain factors impart tax planning, a few of which include:
Investing in a retirement plan is widely popular for a good reason. It is one of the ways to efficiently reduce your taxable income. Various retirement plans are available to choose from, with the Traditional IRA being one of the more common options.
When you save money in a Traditional IRA, the amount contributed would accumulate tax-free until retirement. Also, your gross income is adjusted to exclude the contributed amount.
Here’s a simple example to drive home the point. A person with an annual income of $65,000 contributes $6,000 to a Traditional IRA. Their adjusted gross income is now $59,000 (which is subject to taxation), while the $6,000 keeps growing free from taxation.
Other retirement plans are equally available to help you minimize your tax liability. The popular 401(K) is a typical example. Others include the Simple IRA and precious metals IRA.
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