It isn’t what you make. It’s what you keep that matters. A penny saved is a government oversight, but the individual who understands the tax code the best keeps the most money.
And your CPA probably isn’t that person. Accountants are not trained to help you figure out which deductions apply to your situation. At the end of the day, you alone are responsible for what the CPA files as a tax return. Your CPA may not be able to save you money, but he can bleed you dry if he testifies against you in an audit. Never… ever… never hire a CPA directly.
Of course, the last thing you want is for the IRS to find you “cooking the books” or working in the gray area of the tax code. No, you don’t have risk being audited to save on taxes. Instead, it’s much easier and more effective to avoid taxable events altogether.
Let’s look at how a Traditional IRA or 401(k) gets taxed. Both of those structures deposit your money tax-free. Then, you are taxed at withdrawal during retirement. For example, if you earn $5,000 per month and you deposit $500 of that into your 401(k), the IRS can only tax you for $4,500 of earned income. The extra $500 goes straight from your employer’s account into your 401(k), tax-free. When you draw from your 401(k) in retirement, you are taxed as if you were still earning an income.
What’s wrong with this scenario?
To start with, we don’t know what tax rates are going to be in 10, 20, or 30 years. They could be less, the same, or more than 2015 tax rates. We don’t know. But if you had to take an educated guess based on an exploding Federal debt, what would you guess? If you guessed that taxes will be more 10-30 years from now, you’re probably right. Someone has to foot that bill, and it doesn’t make sense for Washington to wait to raise tax rates once Baby Boomers are no longer contributing their wealth, which makes up a significant part of income in the U.S. The younger, much smaller next generation of American workers simply doesn’t have the kind of “buying power” that can turn around the debt crisis.