The Power of Tax-Free Income for High-Income Earners

“A penny saved is a penny earned.” Many people attribute this quote to Benjamin Franklin. However, I would change this statement – especially for high-income earners – to “A penny saved is more than a penny earned.” Why? Because taxes can impact your earned income so much.

Those in the top income tax bracket pay 39.6% federal tax on earned income. If you live in a state like Indiana, there may also be state and/or county income taxes. FICA (Social Security and/or Medicare) taxes may also be applicable. But wait…there’s more. As your income increases, certain tax deductions may disappear, which is like increasing the tax rate even more.

You can now see how sizeable taxes can be and the benefit of tax-free income for high-income earners.

Some may ask, “How can I create tax-free income?” One example is by funding a Roth IRA- an account with certain tax characteristics. Although contributions to a Roth IRA are not tax deductible, the Roth IRA grows without tax, and qualified withdrawals are completely income tax-free.

You may say, “That’s nice, but my high income makes me ineligible to contribute to a Roth IRA.” There may be other options. Here is one example.

Joe’s high income excludes him from making Roth IRA contributions. However, he does NOT own a Traditional, SEP nor SIMPLE IRA. This is a very important fact as other IRA balances may negatively impact this strategy. Joe may consider asking his tax professional if he can contribute to a Traditional IRA. The contribution may not be tax deductible so his Traditional IRA will then consist solely of “after tax” money. He may then “convert” his Traditional IRA (with little to no tax) to his Roth IRA. This may be a method of indirectly contributing to his Roth IRA. He should discuss this strategy with his tax professional before executing.

Depending on your situation, there may be other options for funding a Roth IRA for high-income earners. These rules are complicated, and stiff penalties can be incurred if you make mistake. Partner with professionals skilled in this area of tax law to avoid such pitfalls.

Every dollar you save on lifetime taxes is another dollar you can use for what’s important to you and your family. Are you receiving proactive planning advice to lead your best life? Let’s start a conversation about what’s important to you.

start-the-conversationTerry Prather

Published: November 23, 2016

Author: Terry Prather, CFP®, ChFC®, MSFS


Phone: (812) 602-6307

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The information in this material is only as current as the date indicted, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements.

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About the author

Terry Prather

Terry Prather tries to strike a healthy balance between today and tomorrow.

In his position as a Wealth Planner with Keystone Financial Consulting, Terry helps families use their financial resources to accomplish what’s most important to them. “I help families evaluate and balance their long-term financial independence with all their other life goals,” he says. “These families often want to be responsible with the financial resources available to them to do good things for family and the causes they’re passionate about. We all make financial decisions every day, and I have the privilege of helping clients make these decisions in context of their long-term picture.”

Had he not found college physics to be boring, he might not have ever become a wealth planner. Initially Terry pursued an engineering degree, but lacked enthusiasm for the physics classes in his major. When he switched colleges and changed majors, the pieces began to fall into place. He discovered an aptitude for accounting, and after graduation found himself drawn to financial planning. This desire eventually led Terry to earn the CERTIFIED FINANCIAL PLANNERTM certification and then pursue a Master of Science in Financial Services, and each day he uses this knowledge to help families find that healthy balance between today and tomorrow.

“I enjoy being face-to-face with our clients, and I like being able to explain the more technical aspects, explain how their strategy works,” says Terry. “We like it when clients walk away feeling they received a lot of value, that we’ve used their resources effectively.”

As a man with a strong, faith-filled Christian background, Terry devotes a good bit of his free time toward music ministry in his church, New Life Church in Newburgh. Terry and his wife Paula share their talents through singing and playing guitar (Terry) and keyboards (Paula) and are sometimes joined by their three children in this endeavor. They also like to spend time as a family outdoors, visiting Holiday World and Paoli Peaks, riding bikes, hiking, and swimming.

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