My investing career has spanned some incredibly interesting timeframes – the Internet bubble burst of 2000, the Great Financial Crisis of 2008, the beginning of the COVID-19 pandemic… each unique, but with one strong commonality – in every one of them I lost what felt like a great deal of money.
But this time it truly is different in one regard… this is the first time I’ve been able to say,
“Huh, so that’s what it feels like to lose one million dollars.”
(GCC: A few months ago, today’s guest post author reached out with the desire to share knowledge about a unique option to accelerate early retirement. Thanks to a deferred compensation plan, this post was written between retirement activities in a sunny zero income tax State. Maybe this is also an option for you…)
Does your financial freedom plan include maximizing both earning and savings? Mine did, but one of the challenges with this approach was higher marginal taxes. I discovered the (GCC: subjectively) brilliant Go Curry Cracker tax avoidance strategies years ago, but filing a 1040 with a $0 federal income tax liability was impossible as my earned income increased.
My income soared as I advanced my career, and the typical tax deduction tools were already maximized. Deductions (itemized or standard), exemptions (when they existed prior to 2018), credits (usually child and foreign tax), and cafeteria plan elections (those employer deductions like 401(k)s, HSAs, health insurance premiums, etc.) shielded less and less income from taxation. As income is subject to higher marginal tax rates, the IRS adds insult to injury by phasing out IRA contribution deductibility.
If you’re earning enough to lose this benefit, your earnings are AT LEAST into the 22% tax bracket! Imagine paying an extra $1,320+ to the IRS just because you can’t deduct a $6,000 IRA contribution. Your employer giveth, and the IRS taketh… Maybe the average high earner brushes it off as a “death and taxes” situation, but if you’re aligned with the Go Curry Cracker approach to taxes you find this unacceptable.
I did too, and now you may be thinking, “there must be a way to be a highly compensated employee AND have an IRA tax deduction.” Not only is it possible, but you can also shield even more money from your taxable income. I just “stumbled” into a savings plan that allows this, but maybe some of you GCC readers can more purposely take advantage of this.