Being poor is not fun, but looking poor to the government can be really helpful in retirement. After all, the government only cares about a few things so it is very possible to be very well off without the IRS seeing it (completely legally).
Invisible Net Worth
The IRS rarely looks at net worth and 99% of the time only cares about income. That means if you have a high income then you’ll pay high taxes even if your net worth is really low.
Conversely, if you have a low income, then you’ll pay low taxes even if your net worth is very high.
2 Strategies to Reduce Taxes in Retirement
There are two main strategies to increase your net worth in retirement while also lowering your taxable income.
Strategy #1
Number one is paying off your home by retirement. Paying off your home will increase your net worth, and since you won’t have a home payment in retirement that means you won’t need to withdraw as much from your Thrift Savings Plan (TSP) account to maintain your standard of living.
When you withdraw less from your traditional TSP (withdrawals are taxable) then you have lower income and lower taxes.
Strategy #2
Number two is by having more money inside of Roth accounts (such as Roth TSP or Roth IRA) in retirement as withdrawals from a Roth account are completely tax-free!
So again, Roth accounts increase your net worth but never increase your taxable income, unlike withdrawals from traditional TSP which are taxable. There are pros and cons to both types of TSP accounts.
Benefits of Being “Poor”
Being poor on paper has 3 main benefits:
- You pay less taxes
- You pay less in Medicare Part B premiums as the premiums are based on income
- Future tax increases are less likely to affect “low-income” households
I’m all always in favor of paying my fair share in taxes but I have no desire to leave a tip.
