Being poor isn’t fun, but looking poor to the government can be very helpful in retirement. After all, the government only cares about a few things, so it’s entirely possible that you’re living very well (perfectly legally) out of the sight of the IRS.
invisible net worth
The IRS rarely considers net worth and 99% of the time it only considers income. This means that even if your net worth is very low, you will pay high taxes if your income is high.
Conversely, if your income is low, you pay less tax even if your net worth is very high.
Two Strategies for Reducing Your Retirement Taxes
There are two main strategies for increasing your retirement net worth while reducing your taxable income.
Strategy #1
The most important thing is to pay off the house before retirement. Paying off your home will increase your net worth. And since you won’t be paying for housing in retirement, you won’t need to withdraw as much from your Thrifty Savings Plan (TSP) account to maintain your standard of living.
Less withdrawals from a traditional TSP (withdrawals are taxable) means less income and less taxes.
Strategy #2
Second, keep more money in your Roth account (such as a Roth TSP or Roth IRA) after you retire because withdrawals from your Roth account are completely tax-free.
Again, a Roth account will increase your net worth, but it will not increase your taxable income, unlike traditional TSP withdrawals which are taxable.there is Pros and cons of both types of TSP accounts.
Advantages of being poor
Being poor on paper has three main benefits.
- you reduce taxes
- Medicare Part B premiums are based on your income, so you pay less
- Future tax increases unlikely to affect ‘low-income’ households
I’m always in favor of paying taxes fairly, but I don’t like to leave tips.
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