How do you multiply your net worth in 2022? It’s time to make your money do some work!
How?
If you’re in the right situation as a self-employed business owner then you could use both the SEP IRA and the solo 401(k) retirement plans. Your investment in your tax-favored retirement:
- creates tax deductions for the money you invest in the plan,
- grows tax-deferred inside the plan, and
- suffers taxes only when you take the money from the plan.
Example:
You invest $1,000 a month in your retirement. You are in the 40% tax bracket (combined federal and state), and you earn 10% on your investments. At the end of 30 years, you have $1.58 million in after-tax spendable cash, which comes from (in round numbers):
- $1.2 million in after-tax cash from the retirement plan ($2 million gross less 40%t in taxes—we’re taking the entire amount out of the plan in this example)
- $380,000 in the side fund (created by investing the $400 of monthly tax savings—$1,000 deduction x 40%)
If you had no government help on the taxes and invested $1,000 a month in an investment that earned 10% (6% after taxes), you would have a little more than $950,000.
The Bottom Line
Tax-advantaged investing multiplies profits. The retirement plan leveraging Uncle Sam’s help wins by $630,000—after taxes ($1.58 million vs. $950,000). If you have not yet started either of these retirement options, do so this month. A small start that ends with a big finish.
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