Tax Shelters for the Unwealthy

Tax shelters are not only for the rich.

Jan 11, 2014 at 9:00PM

Hearing about tax shelters used by the rich can get many of us steamed. One technique recently in the news is the "Walton grantor retained annuity trust," or GRAT, which, according to a recent report in The Washington Post, may have diverted more than $100 billion from IRS coffers since 2000. The same report noted:

Goldman Sachs disclosed in a 2004 filing that 84 of the firm's current and former partners used GRATs. [CEO Lloyd] Blankfein has transferred more than $50 million to family members with little or no gift tax due, according to calculations based on his SEC filings.

See? Maddening. Don't feel entirely left out, though. There are plenty of ways to limit your own tax liability, even if your net worth is measured in five or six figures instead of in millions or billions. Tax shelters are not only for the rich. Following are a few examples.

Consider a Roth IRA
A traditional IRA offers its own kind of tax-advantage, sheltering part of your income from Uncle Sam -- for a while. It reduces your current taxable income and grows in the IRA until you withdraw funds in retirement, at which time you're taxed on them. Better still for many folks is the Roth IRA, which accepts post-tax dollars, but ultimately lets you withdraw your money in retirement tax-free.

That's right. Invest thousands over the years and if they grow into an account worth hundreds of thousands, you'll be able to withdraw all that in retirement without giving Uncle Sam a penny. That's potentially a powerful kind of tax shelter.

Buy a house
Next up, your house. It can be both a physical shelter for you and your loved ones, and also a tax shelter. Those who follow the rules can exclude up to $250,000 in gains from taxation -- up to $500,000 for couples. In other words, if you and your other half buy a home for $150,000 and many years later sell it for $550,000, representing a $400,000 gain, you can bypass paying taxes on that gain. If the corresponding tax rate at the time is even just 15%, you'll be saving $60,000! This handy tax shelter is available to most Americans.

Look at municipal bonds
Bonds may not be exciting, but the tax treatment of municipal bonds certainly is, as most of them will pay you interest on which you don't have to pay taxes. Proceed with caution, of course, since not all municipal bonds are high quality, and bonds are capable of performing poorly, just like stocks. Used sensibly, municipal bonds can act as a tax shelter for small investors (and large ones as well).

Buy and sell securities strategically
You can also create your own kind of tax shelters by timing your holding and selling of securities carefully. It's never smart to only consider taxes when you consider buying or selling a security, but it can be worth taking taxes into account. For example, if you sell a stock after owning it for 11 months and net a profit, that's a short-term capital gain, taxable at your income-tax rate, which might be 25% or more. If you hang on and don't sell until you've held it for more than a year, then it's a long-term gain, taxable at 15% for many of us. Presto -- you'll have parked some of that gain in a tax shelter.

Meanwhile, if you're sure that capital-gains tax rates are going to rise significantly in the near future, you might sell some of your big winners to pay a lower rate on those gains. (You can always buy them back after 31 days pass, in order to avoid the dreaded "wash sale.") Just be sure to assess your big tax picture, because creating a huge capital gain in a single year can sock you with a bigger-than-usual tax bill.

When it comes to your tax bill, you're not powerless. Make smart decisions and you can fork over less to Uncle Sam.

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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns no stock in any company mentioned in this article. The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

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