How to LEGALLY Pay Less Taxes in 2025 ( Secrets Revealed! )

Hey, what's up everyone and welcome to the school of personal finance. So, I don't know about you, but taxes they are always top of mind and I'm always trying to think strategically of the best way to approach taking tax deductions now to reduce my current tax bill versus foregoing those current deductions so that I could have tax-free income in retirement and walking that fine line each year. So, in this video, I'm going to talk strategy. I'm going to walk you through some things that you should really be thinking about and steps that you could take to make sure that you are taking full advantage of the tax code and that you put yourself in the position to be able to control your tax bill later on in life. All right, I hope you find this one helpful. Let's get to it real quick. Head over to school of personal finance.com. Check out the new membership community that I'm going to be launching. It's going to be called Personal Finance for the Stressed out middle class. So, if that sounds like you, if you are in the middle class and it just feels like everything is super expensive and it's just hard to hit on all your goals and keep up with the rising cost of everything, then this community is going to be for you. So, go check it out. Jump on my email list. I'll send out emails as I get closer to launching it. So, I work with a lot of retired people and one of the biggest stresses that these people have is that they have saved their entire lives in traditional 401ks and IAS. So, the bulk of their net worth is split between their current residence, their home, and their retirement accounts. And now they're in retirement, and they're collecting social security. A lot of them still have pensions, and they have these big IRA accounts where they are being forced to take money out of the account every year, even though they really don't need it. Now, I know that this is a good problem to have, but it is still a problem. and taking these big distributions. We call them required minimum distributions where the IRS they want their tax revenue. So they force you to take these distributions and pay ordinary income taxes. But it's no longer like that anymore, especially if you were around my age, right? So I'm 47, especially if you're younger than me. There are different types of accounts that are becoming popular that people could use where they pay the taxes now and then the money grows tax-free forever. Those are called Roth accounts. Most corporations, most government entities now, they are offering Roth 401k, Roth 403b, Roth 457. And it could be a very smart idea to start utilizing those accounts so that when you get into retirement, not all of your money is under the umbrella of types of accounts that are always going to be taxed. Every time you take money out of it, you're taxed on it. And it prohibits people from wanting to take money out. They'd rather not take money and pay the taxes. They'd rather leave it in there, but then the government starts making you take it out. So, you don't want to have these four situations where you owe a ton of money in taxes. And not only that, but now after the Secure Act, they changed the law. They changed the rules around inherited IAS. So, if you pass away and you leave one of these very big IAS to your children, for example, they only have 10 years to take out all of the money from those accounts. And it's usually in their prime earning years, right? Because most of the time when you pass away, you leave money, you leave IAS to your kids. they might be in their 50s or their 60s, their peak earning years, their 40s, and they're forced to take that money out over that 10-year period, and they might be in the top tax bracket at that point. So, from a tax standpoint, it is not very advantageous. So, just the first step for you right now is to figure out what is your situation look like? How much money do you make? What tax bracket are you in? Are you in a 24% tax bracket? Do you earn more than that and you're in a 32% tax bracket? depending on what tax bracket you're in, that will dictate what type of account you should really use right now. Like if you're in the 32% tax bracket or more, then the tax deduction right now is very valuable. You want to take that deduction. But if you're in the 12% tax bracket right now, then you do not need the deduction right now. You're better off taking your money and investing it in a Roth, paying the taxes now, investing it in a Roth 401k, and letting that money grow tax-free forever. So, it really does come down to your specific situation with all of this stuff. The next step would be doing a projection. When you look out into the future, is your income stable? Is it going to continue on the path that it's on? Do you have very big years and some low years or you just get a basic 3% raise every year? When are you going to retire? What is retirement look like? Will you get a pension? So, pensions are great, but it is income each and every year, right? So, the pension, social security, all of these things are going to lead you into a higher tax bracket. So, the first thing that you could do is start building up cash and investments outside of retirement account. So, in the regular high yield savings account or a brokerage account, start contributing to that on a monthly basis for later on in life. Because what that could do is when you have a year of very low income, you could live off of your savings or off of your brokerage account. And that opens up the opportunity to maybe take some of your traditional IRA money, the pre-tax money, and convert it into Roth. And we'll talk more about that strategy right now. But the point is get started now. Open up a regular brokerage account. Start flowing money over to it every single month and build as much as you can in there because that is going to give you total flexibility in retirement from where you want to pull from. The second thing that you could do, and you see very wealthy people do this, is they accumulate assets. They buy real estate, rental properties. They have permanent life insurance policies. they have ways that they are able to access money from those assets, typically through loans, so that they don't have taxable income from it. So, for example, if you had a rental property and you keep it for 20 years and you're constantly paying down the mortgage, paying down the mortgage, and the value of the property is going up. Let's say you buy a rental property for 200 grand. 20 years from now, let's say it's worth 400 grand. And at that point, you only owe $50,000 on the mortgage. You could take a new mortgage. You could refinance, pull the cash out of the house, use that cash to live on during one year. Maybe you retire early, use that cash to live on. It's not taxable to you. So, it's a loan. So, yes, you're going to have to pay that loan back, right? If you refire a mortgage, the mortgage payment is going to go up because you just pulled a ton of money out of it, right? So, you are going to have expenses that are associated with that. But what you're doing is you're giving yourself the money to live on when you're not working when you have no other sources of income and you're going to be in a very low tax bracket at that point because you don't have any income. So that then opens the door to doing Roth conversions to taking money from your pre-tax account, converting it to Roth, paying the taxes on it in that year in the lower tax brackets, right? You fill up the 12% tax bracket or so with Roth conversions, and then you're able to have that money grow tax-free inside of the Roth forever. So, that is a great strategy to get money from pre-tax over to never being taxed and doing it when you're in a low tax bracket, paying the taxes then, all by just using assets that you've accumulated through the years to borrow against so that you have money to live on cuz you're not working at this point. All right, now let's talk about Roth conversions. I feel like so many people out there do not take full advantage of Roth accounts. They probably default into their 401k plan at work where it's a traditional 401k. they get the tax deduction now and people just usually leave it that way. Or with Roth IAS, you know, maybe you make too much money, you can't contribute to a Roth IRA or you just say, "I'm just going to do my 401k. That's all I could do right now." And all your money is going to that pre-tax bucket where it's going to be taxed in retirement. What a Roth conversion is, it's when you take money that's in a pre-tax bucket, like a traditional 401k or a traditional IRA, and you convert it over into a Roth. And when you do that, you have to pay taxes in the year that you do the conversion. So now there's no income limits on Roth conversions. You can make a million dollars a year and still do Roth conversions. You might not want to if you're making a million dollars a year because you're in the top tax bracket, right? But there's no income limits and there's no dollar amount limits either. So let's use a very simple example. If you have $100,000 in a traditional IRA, let's say it's a Fidelity or Schwab or Vanguard or whatever, right? And you have no Roth money and you're only in the 12% tax bracket. What you could do is you could take, let's say, $10,000 from your traditional IRA and convert it into your Roth IRA. All right? And you don't even need to have a Roth IRA. You could open one up and then do the conversion and send it over there. So now, when you do that, that $10,000 becomes taxable in the year you make the conversion. So on $10,000, if you're in a 12% federal tax bracket, you would have to pay $1,200 in federal income tax and then whatever your state is as well. So, you have to have the money to be able to pay the tax bill because you don't want to take it out of the IRA. So, you have to have the money to the side to pay the tax bill. Now, by doing this, right, so you're going to be out the $1,200 in taxes in that current year. Now, you have $10,000 that's in your Roth IRA. Now, that Roth IRA is going to grow tax-free forever. So, now by doing this, you're going to allow your Roth to grow. So, that tax-free bucket of money you have is going to continue to grow and the amount in your traditional is being reduced because you're converting it over to the Roth. So, what that's going to happen over there is that the money will continue to grow that's left in there, but once you get to age 75, when the IRS is forcing you to take money out of there, you will have less in that traditional bucket so that your required minimum distributions are in a tremendous amount of money that automatically jumps you up into a very high tax bracket. So, the goal is to go into retirement with a nice balance between all of these accounts. If you could balance the amount of money you have in traditional accounts versus Roth accounts versus just a regular brokerage account and high yield savings account, then what you could do is you could control your actual tax bill in retirement. By the time we get to retirement, not many people are going to have pensions. All right. Now, with Trump's new bill that's going through Congress right now, there is not going to be any taxes on social security. So, we'll see if that actually sticks. So, let's just make the assumption that it does. You could go into retirement, no pension, no social security that's taxable. So your only taxable income is going to be what you pull from these traditional IRA accounts. And if you have good tax diversification, then what you could do is you could take traditional IRA money out each year up to the top of the 12% tax bracket. And then beyond that, whatever more you need to live on, you could take from your high yield savings account or from your Roth account. And as you go through those years, you are keeping yourself in a 12% or lower tax bracket. Obviously, it depends how much money you have in all of these and what it looks like. I'm just using 12% as an example, but you could control it. You're not going to be forced to go up into a 22 or a 24% tax bracket because you have these tremendous required minimum distributions that are taking out. So, Roth money, it's going to be so important to you being able to control your tax brackets later on in life. And you don't have to go crazy. You could start slowly converting a little bit each and every year and moving that money from traditional to Roth. All right, everyone. That is it for this one. Hit that like button if you enjoyed it. Check out school ofpersonalfinance.com. I will see you again in the next video. Thanks.