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.

While you're minimizing your taxes, maximize your Social Security
Social Security plays a key role in your financial security. In our brand-new free report, "Make Social Security Work Harder For You," our retirement experts give their insight on making the key decisions that will help ensure a more comfortable retirement for you and your family. Click here to get your copy today -- it's free.

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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers