3 Key Strategies For Paying Less Taxes In Brooklyn
CASE STUDY
Meet Bob and Cat Miller, a happy couple in their 50s who believed their retirement plan was well sorted.
Living a comfortable life, they felt financially secure and prepared for the future. However, a meeting with a tax advisor left them stunned.
They came to realize U.S. national debt is at record highs, and the government has made too many promises without setting aside sufficient funds.
As more retirees draw benefits and fewer workers pay into the system, the government will require substantial cash infusions to fulfill its promises (Social Security, Medicare, and Medicaid).
These "unfunded obligations" are projected to cost trillions of dollars in the coming decades.
Without significant spending cuts or reforms, the only way to generate revenue is to raise taxes on hardworking individuals who have sacrificed and saved for a comfortable retirement.
Historically, today’s tax rates are among the lowest compared to previous years, meaning there’s a strong chance they’ll rise in the future.
We’ve all heard about tax-deferred accounts like 401(k)s and IRAs, and for years, we've been advised to use these accounts to save for retirement.
Many of us have followed this advice, including the Millers.
They have saved $600,000 in their collective IRAs and an additional $150,000 in mutual funds.
While it may not seem concerning now, it’s important to consider what the IRA might be worth in the next few years. Assuming an annual growth rate of 6%, this IRA could exceed $1.4 million by the time they retire in 15 years.
You might ask, “Isn’t $1.4 million in savings great? What’s the problem?”
The issue is taxes.
Allowing these tax-deferred accounts to grow unchecked can turn into a financial nightmare instead of a blessing.
If taxes increase over time, when they start to withdraw money after retirement, they could be taxed heavily, perhaps even more than they were during their working years.
To make matters worse, their Required Minimum Distributions (the minimum amounts that must be withdrawn annually from retirement accounts once the owner reaches a specific age) are greater than their standard deduction.
Since the entire RMD is counted as provisional income, a significant portion of their Social Security benefits could be subject to federal income tax, with some potentially being taxed heavily.
However, there is a way for them to avoid reaching that state, and that is to act now and not allow their tax-deferred account to reach $1.4 million.
A popular solution in this situation is a Roth conversion, which allows you to convert a traditional IRA to a Roth IRA.
In order to complete the conversion, the Millers would need to pay taxes on $600,000 now, instead of on $1.4 million in 15 years.
It’s essential to note that everyone’s financial situation and beliefs are different, and that’s okay.
While the numbers may not be the same for you as they are for the Millers, the concepts still apply.
No matter your income or savings, understanding how your money is taxed can significantly impact your future.
This guide serves one purpose: to help you protect yourself from paying excessive amounts of taxes.
In the following sections, we will discuss the three components of the Tax Control Triangle: Taxable, Tax-Deferred, and Tax-Free accounts. Each point of this triangle represents a different type of account, each with its unique specialty.
Understanding each bracket will help you allocate the right amount of money to each type of account and pay less in taxes during your retirement years.
Now is the time to take action and plan to create tax-free income for your retirement years and beyond.
Start Planning Today To Live A Happy And Financially Secure Future!
TAXABLE ACCOUNT
WHAT IS A TAXABLE INVESTING ACCOUNT?
A taxable account (often referred to as the "Tax Now" bucket) includes everyday investments such as money market accounts, CDs, stocks, bonds, and mutual funds. Unlike tax-deferred or tax-free accounts, taxable accounts offer no tax benefits. This means that any income earned is subject to taxes in the year it is received.
It’s important to note that not all investments in a taxable account are taxable. Just because you hold investments in a taxable account doesn’t mean that every dollar is taxed each year.
Generally, you will be taxed on the following:
Earned income (such as interest or dividends)
Sale of an investment for a profit (capital gains)
Receiving distributions or payouts
Quick Tip: If you’re unsure whether your investment is taxable, it’s best to check your Form 1099. This tax form, usually received during tax season from your bank or brokerage firm, reports your investment earnings to you and the IRS.
To make it simple, take a look at this example:
Suppose you invest $150,000 in dividend-paying stocks with an annual yield of 4%. Over the years, you would earn more than $6,000 in dividends. However, you would owe taxes on that $6,000 gain, even if you don’t withdraw it.
If you are in a 25% tax bracket, you would pay $1,500 in taxes on the $6,000 dividend, leaving you with $4,500 and effectively achieving a return of 3%.
Another factor to keep in mind when using taxable accounts is the annually compounding interest it generates. As your balance in this taxable account increases due to interest, your tax bill also rises. Additionally, if tax rates go up, the amount you owe in taxes will increase even more.
Thus, in an environment of rising tax rates, your tax bills can grow significantly!
While taxable accounts provide flexibility and accessibility, the annual taxation is one of their drawbacks, making them a poor choice for long-term savings.
ADVANTAGES OF TAXABLE ACCOUNTS
You may wonder, “Why be taxed every year by placing our money in taxable accounts? Why can't we just place money in tax-free and tax-deferred accounts?”
And the answer is that everything needs a balance, even these accounts.
No Age or Contribution Limits: In taxable accounts, there are no restrictions on contributions or age limits, which means you can transfer any amount into your account regardless of your age.
In comparison, tax-advantaged retirement accounts do have contribution limits.
For example, in 2025, the standard contribution limit for a 401(k) account for individuals under 50 is $23,500.
Liquidity and Accessibility: Taxable investment accounts are excellent for maintaining an emergency fund. Most financial experts recommend saving up to six months' worth of income in these accounts for unexpected situations.
If you don’t have enough in your taxable accounts, you may need to withdraw from illiquid investments, such as tax-deferred or tax-free accounts. Early withdrawals from these accounts could result in penalties or restrictions on accessing your funds.
Conversely, having too large a balance in taxable accounts may lead to paying more in taxes. It’s important to find the right balance—not too much and not too little.
TAX-DEFERRED ACCOUNT
When it comes to the tax-deferred accounts (also known as “Tax Later” accounts) there are two important aspects to consider:
Contributions are tax-deductible:
This means you can reduce your taxable income by the amount you contribute to the account.
For example, if you earn $150,000 in a year and contribute $20,000 to your 401(k), you will only be taxed on $130,000 of your income.
Withdrawals are taxed as ordinary income:
Taxes on the money you invested are postponed until you withdraw it, typically after retirement. In the previous example, while your taxable income is $130,000 due to the contribution, you will eventually pay taxes on the $20,000 when you take it out. The tax you owe will depend on the tax rate applicable in the year you make the withdrawal.
Two popular types of tax-deferred accounts are Individual Retirement Accounts (IRAs) and 401(k) plans.
In the case of a 401(k) or other employer-sponsored plans, funds are deducted directly from your paycheck.
However, it's critical to note that having too much money in your tax-deferred accounts can lead to unintended consequences even if tax rates remain the same.
Though it’s unlikely that tax rates will stay the same, most retirees aren’t aware of a major problem: they lose most of their valuable deductions they had before retirement.
For example:
Mortgage interest- Most retirees have already paid off their homes
Child tax credits- Your kids are grown and are no longer qualified as dependents.
401(k)/IRA contributions- Once retired, you no longer earn a paycheck to contribute.
Charitable giving deductions? Most retirees choose to give their time instead of money, due to tight budgets.
This means that retirees go from having potentially $50,000 or more in deductions during their working years to just the standard deduction in retirement. With fewer deductions, more of your income becomes taxable.
TAX-ADVANTAGED ACCOUNT
Imagine a future where your money grows tax-free, quietly and steadily. Most importantly, it protects your Social Security benefits from being taxed by the IRS.
That’s where a tax-advantaged (also known as Tax-free) comes in.
Now, the most commonly used tax-free account is the Roth IRA.
So, what exactly is a Roth IRA?
A Roth IRA is a tax-free retirement account. While you don’t get a tax deduction for your contributions now, your money grows tax-free, and you can withdraw it tax-free in retirement as long as you meet specific guidelines.
Additionally, you don’t have to worry about your Social Security being taxed, as the Roth IRA does not count as provisional income.
You might wonder, “If it’s so great, why not put all your money in a Roth IRA?”
The IRS knows how beneficial this arrangement is, which is why they have established limitations to prevent people from overfunding their accounts.
1. Contribution Limitations
For 2025, the standard contribution limit for a Roth IRA is:
- $7,000 for those under age 50
- $8,000 for those age 50 and older
In comparison, with accounts like a 401(k), you can contribute up to $23,500.
2. Income Limitations
If your income is too high, you can’t contribute directly to a Roth IRA. As of 2025:
Married couples earning less than $236,000 can contribute.
Single earners earning less than $150,000 can contribute.
Important note: To contribute, you need to have earned income, which means you need a paycheck. Retirees or children who don’t have jobs cannot use a Roth IRA.
3. Not an Emergency Fund
You can withdraw your contributions penalty-free, but not from the growth, until two conditions are met:
You’re at least 59½ years old
The account has been open for at least 5 years
If you withdraw your earnings early, you will face taxes and penalties.
By understanding these guidelines, you can make the most of your Roth IRA for your retirement savings.
“Is it too late to switch my traditional IRA savings into a Roth IRA?”
Not at all. It's never too late to start converting your traditional savings into a Roth IRA.
This process is known as a Roth conversion, which involves you paying taxes on the amount you are converting into the Roth IRA.
It's important to begin this process as soon as possible, especially if you anticipate that tax rates will rise.
Remember, timing is crucial:
If you convert too quickly, you might find yourself in a higher tax bracket.
If you convert too slowly, you may not complete the conversion before tax rates increase.
The key is to work with a financial advisor who can help you convert your savings at the right pace and in the right amounts, all while minimizing your tax bill.
If you are concerned about potential tax increases in the future, a Roth IRA can be a valuable solution to consider.
Despite its limitations, this tax-free account can be one of your strongest tools for protecting your retirement savings from the unexpected.
3 Tax-Saving Strategies
Use Life Insurance for Tax-Free Retirement Income
This may surprise many, but certain types of permanent life insurance can serve as a savings account to protect you and your loved ones.
One notable option is the Life Insurance Retirement Plan (LIRP).
A LIRP is a life insurance policy specifically designed to help you build tax-free retirement savings.
It offers you the long-term care you need by providing two benefits in one: it offers lifelong coverage and allows you to access a portion of your death benefit early to pay for long-term care expenses, such as nursing homes, or to help cover a mortgage.
It also ensures that your family receives the necessary care or providing them with a death benefit when needed.
Importantly, the cash value does not count as provisional income, meaning it won't affect your Social Security taxes.
Unlike a Roth IRA, there are no income limits on who can fund a LIRP, and there are also no contribution limits.
A LIRP is especially useful if:
You have already maxed out your contributions to a Roth IRA or 401(k).
Your income is too high to contribute to a Roth IRA.
You seek additional protection along with tax-free growth.
For more information
Manage Your Provisional Income
As discussed when talking about Miller’s situation, having too much in your tax-deferred account can lead to your Social Security being taxed.
The IRS uses the “provisional income” to decide how much of your Social Security benefits gets taxed. The more provisional income you have, the more of your Social Security gets taxed.
Provisional income includes:
Half of your Social Security income
Withdrawals from tax-deferred accounts
Taxable interest and 1099 income
Employment income
Rental income
Even interest in municipal bonds
The ultimate goal is to avoid high taxes in retirement and to lower the balance in your tax-deferred accounts (like IRAs and 401(k)s) before you’re forced to take Required Minimum Distributions (RMDs) starting at age 73.
If your tax-deferred balance is low enough, your RMDs will be small, leading to your taxable income staying low and your Social Security benefits staying tax-free.
Balance Your Buckets
An ideal balance is that you divide your savings into three types of buckets: taxable, tax-deferred, and tax-free.
Balancing and understanding the right amount of money to place in each bucket is one of the smartest ways to control your tax bill now and in retirement.
1. Taxable Bucket
Ideal amount: 6 months’ worth of basic living expenses
For example, let’s say that a couple needs at least $5,000 per month to meet their basic needs. To determine the ideal balance in their taxable bucket, we simply take this amount and multiply it by six months. So, the most they would want to maintain in this bucket at any given time is about $30,000.
Not less than that nor more. '
2. Tax-Deferred Bucket
Ideal amount: Enough to keep Required Minimum Distributions (RMDs) below the standard deduction
This includes your:
Traditional IRA
401(k) or 403(b)
Other employer-sponsored retirement plans
Too much money here can increase your provisional income, leading to pushing you into a higher tax bracket, making 85% of your Social Security taxable, and increasing your Medicare premiums
By retirement, aim to keep your savings roughly below your standard deduction.
3. Tax-Free Bucket
Ideal amount: Most of your retirement savings should go here
This is where you want the majority of your retirement dollars, because
It grows tax-free
You can withdraw money tax-free
It doesn’t count toward provisional income
If your savings in a tax-deferred account are higher, consider a Roth conversion, which involves converting your traditional IRA savings to a Roth IRA.
Bottom Line: Determine What You Believe About Future Tax Rates
Remember that everyone’s financial situation and beliefs are different.
If you believe that tax rates will decrease by the time you retire, it may be best to invest your money in tax-deferred accounts such as a traditional IRA or 401(k).
On the other hand, if you agree with many financial advisors that taxes are likely to rise, it may be more beneficial to prioritize contributions to tax-free accounts instead.
While building tax-free income for the future is smart, it’s equally important to protect the income you rely on today.
That’s where disability insurance comes in.
It ensures that, in the event of an unexpected illness or injury, your income and financial goals remain on track.
Do you have the disability insurance that you need?
Disclaimer: All content on sjmcares.com and its subpages is intended for informational and educational purposes only. It should not be interpreted as direct financial, insurance, or legal advice. Every person’s situation is unique, call 917-373-0117 to speak with a licensed advisor for personalized guidance.
