Pay Taxes Like Trump?

The news that Trump pays no federal income tax will surprise no one. Absent tax fraud, I don’t know any way to cut your taxes as low as Our Great Leader, but there are legal tax shelters to take full advantage of what our tax code allows. Not all will apply to everyone but you may be able to use some.

1. Health Savings Account (HSA)

The best choice is a health savings account. If you have a high deductible health plan, you are eligible for an HSA. There’s no better way to reduce your taxes — your contributions are tax deductible, the investment grows tax-free, and the distributions are non-taxable if you use the funds for qualified medical expenses. That’s hitting the tax minimization trifecta. You can read more here.

2. 401K

If your employer offers a 401K plan, use it — especially if they offer a match. You’ll either get a tax deduction on your contributions (i.e., a “Traditional” plan) or your funds will grow tax-free forever and not be taxed when they’re distributed (i.e., a “Roth” plan). Either is a good option.

If you’re maxing out your contributions, some plans allow non-deductible contributions up to $57,000. Even though you don’t get a tax deduction now, that money will grow tax-free and can be rolled into a Roth IRA when you leave that employer.

3. IRAs

These are tax-sheltered retirement plans sponsored by you, rather than your employer. Eligibility varies depending on your income and if you’re self-employed but if you can contribute, do so.

The tax benefits work similarly to a 401K. A SEP-IRA is a pre-tax IRA for self-employed people. A Roth IRA is for after-tax contributions and is a great place to stash extra savings as it will grow tax-free forever.

4. 529s

These are college savings accounts for your kids or grandkids that work similarly to a Roth IRA. You don’t get a tax benefit when you make the contributions (other than, perhaps, a small state tax deduction in some states), but the money will grow tax-free. When you use the funds for qualified educational expenses, the distributions will be tax-free. You can read more here.

5. Tax-exempt municipal bonds

Bonds issued by state and local government entities are generally free from federal income tax and state income tax in the state of issuance. For high income taxpayers, these are often a better choice than other types of bonds.

6. Roth IRA conversions

You convert a traditional IRA into a Roth IRA. If your income is low in a particular year and you expect it to be higher in future years, this can be sensible, especially if you have the funds to pay the tax. Yes, you do pay tax on the converted amount.

These conversions can also make sense in the early years of retirement before Social Security and required minimum distributions from your retirement account(s) have begun.

Be tax-smart with your investments and take advantage of any of these options. Over a lifetime, these tax shelters can amount to substantial savings. You may not pay as little as Our Great Leader, but don’t give Uncle Sam anymore than he’s minimally entitled to receive.