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How to Pay NO TAXES on Social Security | Five Simple Strategies - YouTube
Channel: Holy Schmidt!
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in this video i'm going to show you how
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to reduce or even
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eliminate taxes paid on your social
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security payments
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coming up next on holy schmidt
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holy schmidt
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for many people in retirement every
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dollar counts and just like
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your working years understanding how to
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manage your tax bill
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is of paramount importance to a retiree
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this video will discuss how to cut your
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tax bill on two different types of taxes
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state income taxes and federal income
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taxes let's start off with state taxes
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because this one's quite easy
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then we'll move on to federal taxes and
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i'm going to show you several different
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ways to bring your tax bill
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down or close to zero well in the video
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on one point that almost everybody
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misses
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on federal taxes that's an absolute game
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changer
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but it does require a bit of planning
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before we begin
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please make sure you click subscribe and
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notifications so that you get alerted
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the next time i post a video
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social security is moving fast now and i
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want to make sure that you get alerted
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the next time i post a video
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let's start off with state taxes on
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social security
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currently there are 38 states that don't
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tax social security
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practically speaking this means that you
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have a 76 chance
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of not paying taxes at the state level
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on your social security payment but you
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do need to check to make sure that your
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state
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is one of the 38. if you don't live in
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one of the 38 states you have two
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choices
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you can move to one of the 38 states and
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a lot of retirees do do this
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or you can do what i'm going to show you
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next for your federal taxes
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and you'll have the benefit of the same
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impact on your state taxes by the way i
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list the 38 tax friendly states in the
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description below
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so that you have the information at your
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fingertips you don't need to go anywhere
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else
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except for right down there let me begin
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by saying that i'm not going to take
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this into
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deep deep math i'm going to make it very
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easy for you
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you don't need to understand tax math
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here but i will provide a few examples
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for you
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you can either trust me when you look at
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the examples or if not
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you can go to my website i'll give you a
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link down below
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which shows you how to calculate exactly
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what i'm going to show you here
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but in order for you to understand what
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i'm going to tell you
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there are three terms that you need to
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know the first is what i call
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traditional income
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basically this is your taxable
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wage base plus municipal bond interest
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this includes things like a 401k
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distribution
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earnings from your job interest
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dividends
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etc all of that is taxable but
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traditional income
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does not include your social security
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payment the next term is what is called
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provisional
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income i'm just going to call it
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combined income here because that's
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a much easier and probably more accurate
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definition
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of what we're talking about combined
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income is just your traditional income
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wages 401k distributions dividends
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interest
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etc plus 50
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of your social security payment
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you put those together and that is your
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combined
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income and that's the definition we're
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going to use for the rest of the video
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by the way why 50 of your social
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security payment
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that's just the number that the
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government came up with when they
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designed the formula
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the last point are what are called irs
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thresholds or just thresholds
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this is the dollar amount of your
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combined income
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above which you start to get taxed
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on your social security payment
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currently
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if you're single the threshold starts at
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twenty five
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thousand dollars of combined income
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and if you're married the amount is
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thirty two thousand dollars
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of combined income married filers who
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earn between thirty two thousand
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forty four thousand can have up to fifty
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percent of their social security
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benefits taxed
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and above 44 000 that can be up to 85
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percent of your social security benefits
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and just for completeness i'm going to
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show you one example and then i'm going
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to get
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into how to reduce your
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traditional income so that you in fact
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reduce
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your social security tax let's say you
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had traditional income
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of fifty thousand dollars and social
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security payments of thirteen thousand
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two hundred dollars your combined income
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would be fifty thousand
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plus half of thirteen thousand two
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hundred that's fifty six thousand
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six hundred dollars assuming that you're
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married the first thirty two thousand
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dollars would be excluded from the
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calculation
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and you would be taxed on eleven
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thousand two hundred and twenty dollars
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of your social security payment that's
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thirteen thousand two hundred dollars
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times point eight five
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it's important to note that the way that
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your
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taxable social security amount is
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derived depends on your income level
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again if you go to my website holy
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schmidt dot com
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forward slash ss tax you'll find a
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spreadsheet there that will help you
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with this calculation
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for your individual situation as i said
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at the beginning
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this video is about reducing or
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eliminating tax on social security
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so let's get into that in order to
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reduce or eliminate
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tax on social security you need to know
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what you can control and what you can't
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control
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the first point is that you can control
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tax on social security by waiting to
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take
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social security until a later age the
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irs can't tax your social security
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payment
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if you don't take your social security
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payment this has the added benefit
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of providing you with a larger payment
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in retirement
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the social security payment for someone
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who takes social security at age 70
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is 77 percent higher than someone who
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takes social security
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at age 62. the other option and the one
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we're going to focus in on for the rest
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of this video
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is reducing traditional income that
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means
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reducing your taxable income and
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or muni bond interest and transforming
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it into something else
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that you can still spend but doesn't
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fall under the definition of traditional
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income
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the first is through the use of roth ira
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or roth 401k
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as opposed to a traditional ira or 401k
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when you contribute to your 401k or your
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ira
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what you put in in most cases provides
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you with a tax break
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conversely when you take it out you're
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taxed on 100 percent of everything you
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take out
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from your 401k or your ira with the roth
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ira or 401k you contribute
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to the fund with after-tax dollars
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but in return when you withdraw the
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money from the
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fund you take it out tax-free including
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growth
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this means that the funds from a roth
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are not part of
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traditional income a roth is a fantastic
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planning tool because it allows you to
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steer your income
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take a little bit more from your roth
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401k or ira
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and a little less from your traditional
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401k
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or ira if you want to achieve less
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taxable income
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most employers offer a roth option and
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if you're already
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in retirement they offer a roth
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conversion option
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i will note that if you convert from a
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traditional to a roth you will pay taxes
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at the time of conversion the second
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fantastic option is the use of a health
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savings account
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or an hsa an hsa is
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a vehicle that allows you to contribute
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to a savings account
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to pay your medical expenses you
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contribute with pre-tax dollars
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and you take them out untaxed so it has
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a double benefit
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unlike a flexible spinning account or
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fsa which
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is a use it or lose it account meaning
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if you don't use it within the year that
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you contributed
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you lose the money in the account and
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hsa allows you to contribute
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and save the balance over your lifetime
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an hsa does have some restrictions
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an hsa typically requires you to have
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higher deductibles
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but the benefits often outweigh the
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higher deductible
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this is of course an individual decision
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for you
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and a subject of another video the third
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point is what wealthy people do quite
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often and that is selling
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stocks or mutual funds that have not
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done well so that there are no gains
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they let their winners run and they sell
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their losers
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this creates cash flow but non-taxable
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cash flow
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the seller often even gets a tax
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deduction for the loss on the stock
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which can later offset taxable income
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and bring down your traditional income
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the final point is the use of rental
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real estate
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rental real estate has wonderful tax
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benefits because
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if done right there's cash flow positive
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maybe even extremely cash flow positive
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but because you are depreciating the
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house or the apartment over time you're
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actually taking a tax loss
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particularly in the beginning and middle
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years of ownership of the property
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so you're paying no taxes maybe even
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getting a tax deduction
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and at the same time getting a lot of
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cash flow coming in
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if you like this video and you'd like to
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see more of me please make sure you
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click subscribe
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notifications so that you get alerted
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the next time i post a video
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as i said earlier i post about twice a
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week also check out this video
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on the average net worth of a 62 year
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old
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this is jeff schmidt thanks for watching
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