Finance Guider » Credit, Tax

Shedding Light on Tax Shelters

A tax shelter is a tool that individuals can use to reduce their tax liabilities and shield a portion of their money from taxation. Most tax shelters can be used to reduce what is commonly referred to as taxable income. Others types of tax shelters allow you to grow your money tax-free. When the proper tax shelters are used to grow money, people can expect to withdraw all of their money and earnings tax-free in the future. When choosing a tax shelter, it is important to choose the right type of shelter otherwise, you may wind up getting taxed and penalized.

There are Many Different Types of Tax Shelters to Choose From

When it comes to choosing the right tax shelter, there are so many different things to consider. What tax shelter an investor should choose depends on a person’s income, age and other factors. The rules on how to use these tax shelters vary, so investors should always discuss their overall plan with their tax adviser before making a decision on which tax shelter to use. Choosing the wrong shelter can have severe consequences. This is why it is extremely important to make an informed decision before depositing money into a tax shelter.

Some of the top tax shelters to choose from are 401K plans, individual retirement accounts (IRA), qualified real estate, bonds, municipal bonds, 529 college saving plans and qualified annuities. All of these tax shelters help people reduce their tax bill at the end of the year in one way or another. Investing in real estate has become very popular over the years, but investors must know what they can and cannot do before making a decision to use real estate as a tax shelter.

ROTH IRAs Are Popular Tax Shelters

Many experts indicate that a ROTH IRA is in fact the best tax shelter that people should use to minimize their tax liability and grow their money. However, Roth IRAs are only available to qualified individuals. In addition, to get the full benefit of a Roth IRA people should plan to deposit money in their account each year. Investors who follow the rules and deposit earned income into a ROTH IRA will be able to retire comfortably without worrying about paying taxes when they withdraw their money in the future. The only downside of using a ROTH IRA is only earned income can be deposited into this type account. If anything other than earn money is deposited into this account, then the IRS will tax the unearned portion of the account.

If your goal is to save money each year, then you should really consider depositing money into a tax shelter each year. Many people who have heard of tax shelters mistakenly believe that they are only available to people in high tax brackets. However, this is not the case. Individuals who are in different tax brackets can use tax shelters to grow their money and reduce their taxes at the end of the year. However, there are some restrictions on what can and cannot be done, so it is always important to consult with a tax professional for further information. Depositing into the wrong tax shelter can have consequences, so that is why it is important to know the rules before making a decision. By taking the time to learn more about tax shelters, you will save a lot of money each year.

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