Chief Executive Boards Blog: 5 Ways to Move up to $80,000 a year into Tax-Advantaged Investments

Most Americans and many business owners fail to take full advantage if the array of tax-advantaged investment choices available to them. Sure, people know about IRAs and 401(k)s, but few actually take full advantage of even those. Here's a checklist of tax-advantaged investment options available to most business owners. How many of these are you using?

401(k) -- The 2013 maximum employee contribution is $17,500, with a "catch-up" provision of an additional $5,500 for those over 50 -- a total of $23,000 annually. Perhaps your contributions have been limited by "top heavy" provisions in your plan -- here's an article on some ideas to fix that.

Additionally, your own contributions are eligible for a pretax company "match", which could be worth several thousand dollars more in tax-free (and payroll tax-free) investments. Consider also the Roth 401(k) option - instead of rolling up a future tax bill from tax deferral now, you can choose tax-free for life.

Potential benefit - up to $26,000 in tax-advantaged savings ($50,000 for a working couple), including the company match.

Roth IRA -- Most business owners' higher income limits or eliminates their eligibility for a Roth IRA -- or does it? If you (or your spouse) do not have a self-directed or rollover conventional (pretax) IRA, here's a strategy for converting up to $13,000 per year between you (if you're over 50) to a tax-free investment for not only your lifetime, but the lifetimes of your heirs, as well. It's now being referred to as the "Back Door Roth IRA": http://www.chiefexecutiveboards.com/briefings/briefing297.htm

Potential benefit -- up to $13,000 per year, tax free for decades.

HSA Health Care Plans -- Many companies have chosen health care cost reduction strategies that include Health Savings Accounts (HSAs). This is just a "freebie" waiting for you to do the paperwork. By taking maximum advantage of these plans, you can avoid both State and Federal Income taxes on $6,450 of income for a family -- $7,450 if you're over 50. You can spend this tax free money on any health care expense, including deductibles, Dental, Orthodontia, Optometry, and a host of other costs not covered by your health insurance. And you can roll over that money for years, if you don't use it right away. HSA Bank and others offer long-term investment options just like an IRA.

Potential benefit - $7,450 off the top of both Federal and State income.

529 College Savings Plans -- Actually, they're educational savings plans - you can use the money for anyone's educational expenses, including yourself or your spouse. In most states, your contribution is deductible from your state tax return. That's an immediate ROI of the state tax rate (up to 7%) in year 1, and the investment growth and income is tax free, as long as it's eventually used for educational expenses.

Some states limit that deduction. Ohio is particularly interesting - limiting the state tax deduction to $2,000 per year per beneficiary. Yes, that means you could set up accounts for all your kids, nieces, nephews and neighbor kids and take a $2,000 deduction for each. Later, you could re-name the beneficiaries of those accounts to anyone you want (you own the accounts). Peculiar, but that's the game Ohio set up.

Potential Benefit -- Unlimited, depending on state tax deduction rules. Say, at least $10,000 per year in state tax deductions, practically.

Private Pension Plans -- The strategies above allow you to move a lot of money into tax-advantaged plans every year. Potentially:

$50,000 ($25,000 each) for yourself and your spouse to a 401(k), including the company match.
$13,000 ($6,500 each) into a Roth IRA.
$7,450 into an HSA.
At least $10,000 into some combination of 529 plans (unlimited state tax deduction in some states).
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So, if $80,000 or so a year isn't enough, you can set up a Private Pension Plan within your company that greatly favors yourself. Now we're talking some meaningful expense, but if your income warrants it, Google "Private Pension Plan" and read up on the idea

One strategy you didn't see mentioned above? Cash-Value Insurance or Annuities -- Ask anyone who's seen the back side of one of these products (tried to get the money back out), and they'll tell you these are very expensive, illiquid products constructed for the benefit of the company and the agent selling the products. If you need life insurance, buy term insurance.

Building wealth is not only figuring out how to earn a lot of money. It's about figuring out how to keep most of it out of the hands of tax collectors - legally. If you have some additional tax-advantaged investment strategies, click on "Comments" below and share them with others.

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