3 Key Strategies For Paying Less Taxes In Brooklyn
CASE STUDY
Meet Bob and Kat Miller, a happy couple in their 50s who believed their retirement plan was well sorted.
For years, they felt safe and set for the future. Until a conversation with their tax advisor left them stunned.
They came to realize the 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.
And many of us did just as said, including the Millers.
The Millers saved up to $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To make matters worse, their Required Minimum Distributions (the minimum amounts that must be withdrawn annually from retirement accounts once the owner reaches a specific age) are greater than their standard deduction.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 the state of having $1.4 million in their tax-deferred account.
A popular solution in this situation is a Roth conversion, which would allow them to convert their money from a traditional IRA to a Roth IRA.
In order to complete the conversion, the Millers would need to pay taxes on $600,000 now. But that’s better than paying taxes on the $1.4 million in 15 years.
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.
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.
But keep in mind 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
A piece of advice: If you’re unsure whether your investment is taxable, it’s best to check your Form 1099.
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. And, 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.
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 or tax-deferred accounts?”
And the answer is that, like most things in life, these accounts too need balance.
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.
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. So, it’s best to find the right balance.
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 instance, if you earn $150,000 in a year and contribute $20,000 to your 401(k), you will be taxed on only $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.
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
Tax-advantaged account (also known as a Tax-free account) allows your money to grow tax-free, quietly and steadily. Most importantly, it protects your Social Security benefits from being taxed by the IRS.
The most commonly known tax-free account is the Roth IRA.
In short, for a Roth IRA, 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, since a Roth IRA does not count as provisional income, you don’t have to worry about your Social Security being taxed.
“If it’s really that amazing, why not invest all my 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
As of 2025, the standard contribution limit for a Roth IRA is:
$7,000 for those under age 50
$8,000 for those aged 50 and older
2. Income Limitations
If your income is too high, you can’t contribute directly to a Roth IRA.
Married couples earning less than $236,000 can contribute.
Single earners earning less than $150,000 can contribute.
3. Not an Emergency Fund
You can withdraw your contributions penalty-free at all times. However, to withdraw from the growth, the following two conditions should be 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.
“Is it too late to switch my traditional IRA savings into a Roth IRA?”
Not at all. It's never too late for a Roth conversion.
When it comes to a Roth conversion, you pay taxes on the amount you are converting into the Roth IRA. But 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.
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.
Unlike a Roth IRA, there are no contribution limits or income limits on who can fund a LIRP.
It offers you the long-term care you need by providing two benefits in one: lifelong coverage and a death benefit. You may even use the savings early on to pay for long-term care expenses, such as nursing homes, or to help cover a mortgage.
A LIRP can be extremely useful if you fall within the following categories :
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.
Manage Your Provisional Income
As we discussed regarding Miller’s situation, having excessive funds in your tax-deferred account may result in your Social Security benefits 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.
A 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 allocating the right amount of money 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
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 the $5000 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 too much nor too little…
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), and other employer-sponsored retirement plans.
Too much money here can increase your provisional income, which may push you into a higher tax bracket and make 85% of your Social Security benefits taxable.
So 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, can be withdrawn tax-free, and does not count towards your provisional income.
If you have a significant amount saved in a tax-deferred account, you might want to consider a Roth conversion to avoid potentially paying higher taxes during your retirement years.
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.
But, 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.
The choice is yours to make.
Now that we’ve covered ways to minimize your taxes, let’s make sure your income is protected as well.
Sometimes it’s the thing you least expect, sudden illnesses or an incident, that throws your finances off course.
And these are the times when disability insurance becomes essential.
So, are you ready to learn more about disability insurance?
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.
