Tax Free Wealth
Imagine your money growing happily in a sunny garden without sharing any of its fruits with the taxman. Tax-free wealth is like a unique plant that lets you enjoy all its benefits without tax deductions. It's like having a magical shield to protect your money from being eaten up by taxes, allowing it to blossom and flourish freely. Like a sweet treat you can savor without worrying about any bitter aftertaste, tax-free wealth lets you enjoy the full rewards of your hard-earned money. So, nurture your tax-free wealth garden and watch it grow into a beautiful and bountiful paradise!
Rather than imagine, I’d like to explain how you can make this a reality.
First and foremost, I am not a financial advisor or a CPA, but I’ve been doing this long enough to know the tips and tricks. What I am about to write about is based on my own experiences and how our family uses Tax-Free Wealth to grow our investments.
What is tax-free wealth?
“Today I will do what others won't, so tomorrow I can do what others can't.” – Jerry Rice.
I’ve noticed that many people would rather cut out an eye before discussing taxes and saving for their future. But the truth is, if you do the work many don’t want to, you will succeed.
If you have a W2 job, do me a favor and look to see how much of your salary is paid in taxes each year. It’s a big chunk of change. Now, I am not saying we don’t need taxes. We do. If you get smart about how you invest your money, you can grow it faster by reducing your tax burden. Let’s take an example below:
If you live in North Carolina and you make $125,000 per year. You would pay around $30,000 in taxes, if not more. So you pay around $1,000 per month in taxes. I got this data from https://www.ncdor.gov/taxes-forms/individual-income-tax-estimator
Let’s talk about how you can start reducing your tax burden.
Individual Retirement Accounts (IRAs)
Several types of individual retirement accounts (IRAs) can help you save on taxes. The money you invest in a Roth IRA is taxed when you deposit it, and the interest generally won't be taxed when the money is withdrawn in retirement as long as you've had the account for at least five years.
Traditional IRAs let you deduct the amount you contribute from your income, lowering your tax burden for the year you make the contributions. Your money grows tax-free while it's in the account. You pay no taxes on the interest it earns until you take the money out when your contributions and earnings are taxed at your current income tax rate.
401(k) Plans and Similar Savings Accounts
Employer-sponsored 401(k) plans let you defer part of your paychecks toward a retirement account. With a traditional 401(k), you aren't taxed on any income you put into a 401(k), so you lower your total taxable earnings for the year for every dollar you contribute. Your employer might sometimes contribute to the account, making it even more advantageous.
403(b) plans are for public school employees and those who work for some tax-exempt organizations. 457 plans are available to particular government and nonprofit employees.
Earnings on your investments in all of these traditional accounts are untaxed until you withdraw your funds. Both contributions and earnings are then taxed at your current income tax rate.
The 401(k) has had a Roth option since 2006 with employers that chose to offer them. You set aside after-tax income. You won't get a deduction for your contribution (as with a Roth IRA), but the account grows tax-free. There are no taxes on withdrawals in retirement as long as you've had the account for five years. Employer-matching funds, if any, are taxable upon withdrawal, just as with a traditional 401(k).
Flexible Spending Accounts and Health Savings Accounts
Flexible spending accounts (FSAs) and health savings accounts (HSAs) help provide some tax relief while helping with healthcare expenses. Certain FSAs also help with childcare expenses.
FSAs
Must be sponsored by an employer
Must be set up with a deposit amount that usually must be declared at the start of the year and can't be changed11
Don't roll over year after year, so you lose the money if you don’t use it
Are available for both healthcare and childcare expenses
Don’t require that you have a high-deductible health insurance plan
HSAs
Don't require an employer sponsor
Can be opened by anyone with a high-deductible health insurance plan
Can be rolled over from year to year, so you don’t lose your money if you don’t spend it
Can earn interest
Can only be spent on qualifying health-related expenses
Can serve as an extra source of retirement savings
Anyone with a high-deductible health plan can open a health savings account. As of 2025, a high-deductible plan has a minimum annual deductible of $2,850 for self-only coverage or $5,700 for family coverage, an increase from $2,800 and $5,550, respectively, in 2024.
Annual out-of-pocket expenses for self-only coverage are limited to $5,700 in 2025, up from $5,550 in 2024. The limits for family coverage are $10,500 in 2025, up from $10,200 in 2024. Out-of-pocket expenses include deductibles and copayments but not monthly insurance premiums.
The annual contribution limit for a health savings account is $4,300 for individuals and $8,550 for families. In 2024, it was $4,150 for individuals and $8,300 for families.
FSAs and HSAs have in common that you can contribute to these accounts before you pay income tax on your earnings, stretching the dollars you have to spend on healthcare. One of these accounts can be worth considering if you have one-time or recurring medical expenses or an upcoming procedure not fully covered by insurance. You have a reasonable estimate of your medical and childcare needs for the next year.
Education Savings Accounts
College or other education costs are another significant expense for which people save money. Certain savings accounts can help by reducing the taxes you pay. For example:
529 Accounts
A 529 plan lets you save for both K-12 education and post-secondary education costs. There are two main types: prepaid tuition plans that let you pay now for future attendance at specific schools, locking in tuition rates, and savings plans that are invested and grow tax-free.
Many states also offer tax benefits on the money you contribute.
This is just the beginning of your tax planning adventures. Stay tuned for my favorite, REAL ESTATE AND SMALL BUSINESS.
Lots of love,
xoxo
Steph
