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How to Avoid Paying Income Tax on Rental Earnings

I wanted to bring to your attention a rarely used strategy: you can get tax free income for renting your home!

Rent Your Home for 14 Days or Less.


You can cash in on this awesome tax exemption in 2018 by renting your house for two weeks or less. Renting your house for less than 15 days keeps you from having to pay taxes on a single cent of income you got from your short-term rental(s).

According to the IRS, “There’s a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days. In this case, don’t report any of the rental income and don’t deduct any expenses as rental expenses.”

This means, no matter how much money you make from these 14 days of renting, you don’t even have to report the income to the IRS.

This is not for “rental properties.”

To take advantage of this benefit, you must personally use the dwelling in question for 15 days or more over the course of the same year. This means that for tax purposes, your home is considered a personal residence so you can’t deduct operating expenses or take a depreciation deduction.

What happens on day 15?

I think the kind of coolest thing about this strategy is for business owners. Once you rent out that 15th day, you’ll owe taxes on ALL income you made on renting that year. Fourteen days of renting income can provide major padding in your 2018 budget, especially if there are major events in your area, like the PGA Tournament in Quail Hollow.

What about tax breaks for renting for business?

If you have a business let’s say you hold a business meeting in your house or your vacation home once a month. So that would be 12 times – less than the 15 – so your business can pay you a check for renting your house for the day, take a tax deduction, and the income to you is tax-free.

Watch my #TaxTalk video:


Make Your Charitable Donations From Your IRA

Qualified Charitable Distributions: Transferring funds from an IRA

As an alternate method for donating to a charity, certain taxpayers may transfer funds from their IRA to an eligible charitable organization.


Taxpayers who are age 70 ½ and older can choose to make a tax-free qualified charitable distribution (QCD) from their Traditional IRA or Roth IRA.

This rule cannot be used for distributions from SEP, SIMPLE, or qualified retirement plans such as 401Ks. The donation must be made as a trustee distribution directly to the qualified charity of the your choice. Private foundations and donor-advised funds are not eligible charities.

You will not receive a charitable donation deduction, but will be able to exclude the amount transferred to the charity from income. The taxpayer is limited to a maximum qualified charitable donation amount of $100,000 per year.

In order for the distribution to be a qualified  tax-free distribution, the amount distributed must be deductible under §170. Therefore, if the donor receives any benefit from the charity that receives the distribution, the benefit must reduce the charitable donation amount by the FMV of the benefit.

If the donor owns more than one IRA where they made non-deductible contributions, the taxable amount is treated as distributed first for qualified charitable purposes. The taxpayer must aggregate all of their IRAs for this purpose. All of the taxpayer’s Roth IRAs are also separately aggregated for this purpose.

Because a Roth IRA can be received tax-free by the owner’s heirs, this donation option does not appear to be as appealing to the Roth IRA owner as to a Traditional IRA owner.

It is simple to report your qualified charitable donation. You report the qualified tax-free distribution on Form 1040, Line 15a, then enter $0 on Line 15b. You must write the letters “QCD” on the dotted line next to Line 15b to designate the distribution as a charitable donation.

Tax-Free Education Expenses for Your Beneficiary – Learn More about Your 529 Plan

Did you know tuition, books, supplies, computers, internet and mandatory college fees can be paid TAX FREE from your 529 plan? While your kid is home from college (and holiday shopping) make sure you save those receipts. Learn more about your 529 plan below.

Tax-Free Education Expenses for Your Dependent - Learn More about Your 529 Plan

What is a 529 plan?

A plan operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training for a designated beneficiary, such as a child or grandchild.

Congress created them in 1996 and they are named after section 529 of the Internal Revenue code. “Qualified tuition program” is the legal name.

There are two basic types: prepaid tuition plans and savings plans. In addition, each state has its own plan. Each is somewhat unique. States are permitted to offer both types.Your state’s 529 plan may offer incentives to win your business. But the market is competitive and you may find another plan you like more. Be sure to compare the various features of different plans. A qualified education institution can only offer a prepaid tuition type 529 plan.

Why should I have a 529 plan?

Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board. Contributions to a 529 plan, however, are not deductible.

Does my 529 plan change?

A qualified, nontaxable distribution from a 529 plan during 2009 or 2010 now includes the cost of the purchase of any computer technology, related equipment and/or related services such as Internet access. The technology, equipment or services qualify if they are used by the beneficiary of the plan and the beneficiary’s family during any of the years the beneficiary is enrolled at an eligible educational institution.

What is included in my 529 plan?

What is an eligible educational institution?

An eligible educational institution is generally any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.

What does “computer technology or equipment” mean?

This means any computer and related peripheral equipment. Related peripheral equipment is defined as any auxiliary machine (whether on-line or off-line) which is designed to be placed under the control of the central processing unit of a computer, such as a printer. This does not include equipment of a kind used primarily for amusement or entertainment. “Computer technology” also includes computer software used for educational purposes.

Is this “cost of the purchase of any computer technology or equipment or Internet access and related services” available for any other education benefit under the tax laws?

No, it is only for 529 plan withdrawals. Such costs are generally not qualifying expenses for the American opportunity credit, Hope credit, lifetime learning credit or the tuition and fees deduction.

Who can set up a 529 plan?

Anyone! You can set one up and name anyone as a beneficiary — a relative, a friend, even yourself. There are no income restrictions on on either you, as the contributor, or the beneficiary. There is also no limit to the number of plans you set up.

When should I set up a 529 plan?

You can start one anytime. But the benefit of a 529 plan comes with the tax-free withdrawal of earnings that build up in the plan based on the contributions made. Like other types of savings accounts, earnings are usually a function of time. A 529 plan which is set up while the student is already enrolled in college or in other postsecondary education may not accrue enough earnings to be of immediate benefit.  However, that doesn’t mean that such a student wouldn’t benefit from a 529 plan as his or her postsecondary education continues.

Are there contribution limits?

Yes. Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $14,000 during the year. For information on a special rule that applies to contributions to 529 plans, see the instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

Who controls the funds in a 529 plan?

Whoever purchases the 529 plan is the custodian and controls the funds until they are withdrawn.

Each 529 plan account has one designated beneficiary 

A designated beneficiary is usually the student or future student for whom the plan is intended to provide benefits. The beneficiary is generally not limited to attending schools in the state that sponsors their 529 plan. But to be sure, check with a plan before setting up an account.

Changing your 529 plan beneficiary after you set it up

There are no tax consequences if you change the designated beneficiary to another member of the family. Also, any funds distributed from a 529 plan are not taxable if rolled over to another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family. So, for example, you can roll funds from the 529 for one of your children into a sibling’s plan without penalty.



How to avoid an IRS tax audit

The Internal Revenue Service has gotten much leaner lately. The Center on Budget and Policy Priorities recently estimated that funding for enforcement is 20% below where it was in 2010.

But if you think hard times at the IRS mean easy times for tax filers, think again.
Like so many things, the tax filing process has come to rely on more automation and fewer discerning human beings. That means all you need to do is befuddle one computer program, and you could be in trouble.

“Robo-audits” of taxpayers are increasingly common, said James Keller, executive editor with the tax and accounting business of Thomson Reuters, and are going to “become a bigger and bigger deal” when it comes to tax time.

That means it’s more important than ever to leave no guesswork on your returns, because computers aren’t capable of giving taxpayers any benefit of the doubt.

To reduce your likelihood of an audit come tax time, here are some common reasons IRS auditors and their computers may be suspicious about your return:

• Typos and bad math: If the form you get from your employer says one number and you input a different figure into TurboTax, you could open the door for an IRS audit. Common sources of IRS inquiries are “W-2s or 1099s that do not agree with the return,” said John Piershale, a certified financial planner at Piershale Financial Group in Crystal Lake, Ill. To save yourself some headaches, double-check your numbers and income sources when you file.

• A big one-time change: “The IRS now uses an electronic statistical sampling system to select returns for audits,” Piershale said. In layman’s terms, that means any items outside the usual range for American taxpayers or even from your previous personal filings could trigger a red flag with the IRS.

• Doubled dependents: If there have been changes in your household situation, make certain any dependents are claimed on only one taxpayer’s return. “Claiming dependents that have been claimed by someone else or have already filed a return and have claimed themselves” is a common source of audits, said Paul Dunham, tax managing director at business services firm CBIZ.

• Odd itemized deductions: “If a taxpayer has an unusually high amount of itemized deductions given their income levels, an audit is potentially more likely,” Dunham said. Claiming any deductions but not including proper documentation can rub the tax man (or robot) the wrong way.

• More than $1 million in income: “As one might expect, the higher the adjusted gross income, the more likely the taxpayer is going to be audited,” Dunham said. He points to IRS audit statistics that show roughly half of audits occur to those reporting $1 million or more in income.

• Zero income: Dunham points out that another red flag is the lack of any income, particularly self-employed individuals running their own business. In some cases, unprofitable businesses are either simply set up to reap the benefits of tax breaks or are significantly underreporting income – neither of which sits well with the IRS.

What happens if you legitimately fall into one of these categories through no fault of your own? For starters, tax experts agree you should never forgo tax benefits simply for fear of an audit; Truthful taxpayers acting in good faith have nothing to fear.

Secondly, remember the initiation of an IRS enquiry is nothing personal – and in fact, that impersonal nature is what prompts many audits.

“In an odd way, your income tax return is presenting your financial picture to somebody that you don’t know,” said Keller of Thomson Reuters. He said the IRS sends “millions and millions” of Automated Correspondence Exam notices each year based on computer algorithms that simply see something they can’t make sense of. Thus, the simplest way to defuse the threat of an audit is simply to promptly respond and set the record straight.

“Make it easy for the IRS to track what they’re seeing,” Keller said. He recommended that anyone who gets a notice should “include a copy of what the IRS sent to them, maybe come up with a little spreadsheet or calculation that shows how you came up with the numbers – make it easy for the IRS to take a look at it and say, ‘Either that’s correct or that looks reasonable, so we’re going to move on to the next case.’ ”

In fact, there’s nothing wrong with sending along a pre-emptive explanation with tax forms when you know you have a situation that is unique.

“If I feel that the numbers are going to be out of whack at face value, I think it’s a good idea to attach an explanation,” Keller said. “As long as you’re being honest and upfront, I don’t think that’s going to hurt you.”

The bottom line is transparency and honesty, providing documents and explanations when necessary, so the IRS realizes you’re not part of the problem.

“If people take a common-sense approach and look at it as presenting info to somebody that doesn’t know you, stuff can go a lot smoother that way,” Keller said.

From: US Today

Do I Have to Pay ‘Nanny Tax’ on a Babysitter?

For every parent that posts a panicked “In Search Of: Help with Nanny Taxes!” plea on parenting listservs, there are countless others who are looking the other way. And its not just the parents. Even though the taxes are in the caregiver’s long-term financial interest, the immediate loss of wages to taxes has many sitters requesting to be paid off the books.Nanny Taxes

One thing that galls some parents is the idea that they are paying taxes for a full-time nanny and are also expected to do the same for an irregular babysitter. It’s helpful to get over the notion that, although its short hand is “nanny tax,” this does not only pertain to a full time Mary Poppins, but, perhaps, to the neighborhood Kristy, Mary Anne, Claudia and Stacey too.

According to the I.R.S. Household Employer’s Tax Guide for 2014, if you pay more than $1,900 annually or $1,000 a quarter to a person working in your home you need to pay employment taxes. This requires a family to withhold Social Security and Medicare (FICA) and to pay a matching portion. State and federal unemployment insurance taxes may also be due.

Many parents feel they are being taxed by going to work and again by coming home to pay the caregiver. Some tax advisors point out that there could be greater compliance if the threshold were higher – something closer to $3,000 or $5,000 a year. If you’re paying for part-time child-care at $18 to $22 an hour, let alone full-time care, you’ll reach the threshold pretty quickly. Even with a more informal sitter, by the time you go out for date-night every Saturday while the same sitter comes by, you’re up to the $1,900 annual limit.

Of course, you don’t have to manage this yourself. A thriving cottage industry has developed providing tax services for families employing caregivers. Companies like Paychex or Homepay offer services specific to paying in home caregivers and can process your payroll and roll out tax forms for you. But unless you have a full-time or heavy part-time caregiver for your children, this will not be a worthwhile household expense.

For those with a sitter, hired-hand, mother’s helper — or any of the other titles we use to try to avoid the more professionalized “nanny” — here are some questions to aid in evaluating your tax responsibility.

Do You Have an Employee or Independent Contractor?
If you control what work is done and how it is completed, you have hired an employee. It doesn’t matter whether the worker is paid hourly, weekly or by the job. The contractor, by contrast, is someone who has their own company and contracts with you for appointments, such as a lawn-care company, house cleaner or a home-health aid. An outside individual who cares for your children in your home is an employee and generates taxable income.

Does Your Caregiver Reach the Wage Threshold?
The requirements to pay Social Security and Medicare kick in after you have paid a caregiver $1,900 for 2014, or $1,000 in any quarter of 2013 and 2014. You are required to report and pay taxes on that person’s 2014 wages.

What Will You Need From Your Caregiver?
Your sitter will need to provide you with a Social Security number or an Individual Taxpayer Identification Number (ITIN), a completed I-9 form, a completed federal W-4 form and state income tax withholding form (if you live in a state with income taxes).

What’s the Benefit of Paying the Taxes?
The real benefit is for your sitter. The point of the taxation is to provide your caregiver with Social Security income and Medicare coverage upon retirement. It will also provide your sitter with unemployment benefits and a verifiable employment history.  But there’s also a benefit to you: possible tax breaks to offset the cost of taxes and a clear conscience.

What’s the Danger of Paying Off the Books?
Let’s say, after working with you for a while without you paying taxes on your caregiver’s wages, you part ways with your sitter. Should the caregiver do something like apply for unemployment benefits, a review may find that your family didn’t file any tax returns or pay into the state unemployment insurance fund. The caregiver is denied benefits and you’re facing questions.

From: Forbes

Property Depreciation: Why the Tax Benefits Could Come Back to Bite You


When you purchase a new rental or commercial property with investment intent, you must allocate a portion of the purchase price to improvements and the remaining amount to land. The reason for this practice is that you cannot depreciate land, only improvements. This makes sense because dirt lasts forever.

Depreciation is the reduction in value of a property over time due to the particular wear and tear on the asset. Residential properties (1-4 units) are depreciated over 27.5 years, while commercial properties (5+ units and commercial buildings) are depreciated over 39 years.

This reduction in value is a current expense, yet no money comes out of your pocket. Sounds like a pretty awesome deal, right? You get to reduce your reported income by your annual depreciation expense without actually paying for anything!

But what is depreciation really? Do you think the IRS, our favorite government agency, would let you have it that easy? I’ll give you a hint: the answer starts with the letter “N” and ends with “O.”

In actuality, depreciation is similar to an interest free deferred loan with no time restrictions. You see, when you sell a property that you have been depreciating, you have to pay a thing called “depreciation recapture taxes” at a 25% rate. This 25% rate is multiplied by the total value of depreciation you have taken over the property’s hold period. So the income you are “sheltering” each month really isn’t being sheltered like you think it is, as you will eventually have to pay a portion of it back. Without prior knowledge (or having a good accountant), you could be in for quite the surprise!

I’m going to walk you through three scenarios of taxpayers in different marginal tax brackets: the 15% bracket, the 25% bracket, and the 28% bracket. I’ll then provide you with three ways to avoid depreciation recapture taxes.

The Taxpayer in the 15% Bracket

Dave buys a single family rental for $100,000 and determines that his improvement ratio is 90%. Therefore, his improvements are valued at $90,000 (0.90 x $100,000) and will be his cost basis for depreciation. Dave’s annual depreciation will be $3,723 ($90,000/27.5).

Assuming that his annual depreciation brings his Net Operating Income (NOI) to $0.00 each year, Dave saves $491 annually (0.15 x $3,723). If Dave holds the property for ten years and then sells it, his ten years’ worth of depreciation will have saved him $4,910, a solid savings indeed.

But what Dave doesn’t realize, likely because Dave didn’t consult with a real estate savvy accountant, is that Dave has to repay the total depreciation taken at a 25% rate. The total amount of depreciation Dave took over ten years was $32,730, meaning his recapture taxes amount to $8,183. Annual depreciation actually costs Dave $3,273.

Depreciation Recap 1

The Taxpayer in the 25% Bracket

Dave buys a single family rental for $100,000 and determines that his improvement ratio is 90%. Therefore, his improvements are valued at $90,000 (0.90 x $100,000) and will be his cost basis for depreciation. Dave’s annual depreciation will be $3,723 ($90,000/27.5).

Assuming that his annual depreciation brings his Net Operating Income (NOI) to $0.00 each year, Dave saves $818 annually (0.25 x $3,723). If Dave holds the property for ten years and then sells it, his ten years’ worth of depreciation will have saved him $8,183.

The total amount of depreciation Dave took over ten years was $32,730, meaning at a 25% rate, his recapture taxes amount to $8,183, which is a net $0 savings. Because Dave consulted with a real estate savvy accountant, Dave knew he would owe nothing in depreciation recapture taxes and was essentially getting an interest free loan on his money.

Depreciation Recap 2

The Taxpayer in the 28% Bracket

Dave buys a single family rental for $100,000 and determines that his improvement ratio is 90%. Therefore, his improvements are valued at $90,000 (0.90 x $100,000) and will be his cost basis for depreciation. Dave’s annual depreciation will be $3,723 ($90,000/27.5).

Assuming that his annual depreciation brings his Net Operating Income (NOI) to $0.00 each year, Dave saves $916 annually (0.28 x $3,723). If Dave holds the property for ten years and then sells it, his ten years’ worth of depreciation will have saved him $9,164.

The total amount of depreciation Dave took over ten years was $32,730, meaning at a 25% rate, his recapture taxes amount to $8,183, which amount to a savings of $982. Basically, the IRS loves Dave so much they decided to pay him a premium for the money they were lending him over the past ten years. And who said the IRS doesn’t care about us?!

Depreciation Recap 3

We Can Make This More Complicated

Due to inflation, the real value of your annual savings will diminish. So in order to increase the accuracy of our model, to “break even” in respect to inflation, you will need to account for the reinvestment of your savings from depreciation at somewhere around a 2.5% annual rate of return.

Additionally, we can break the model out on a monthly basis rather than an annual basis to gain a clearer picture of what is actually going on. We can model what would happen if we reinvest our annual savings into various investment vehicles over the hold period to develop a strategy that makes sense and best utilizes depreciation savings. But that’s all beyond the scope of this article.

Moral of the Depreciation Story

Being in a low tax bracket actually hurts the taxpayer in respect to depreciation expense. Fifteen percent Dave should have tried to minimize his annual depreciation expense, which really boils down to how much of the purchase price he allocates to improvements vs. land. If Dave’s research could have supported a higher land valuation, he would have been better off to go that route.

This can be a double edged sword, though. If Dave’s rentals push him into the 25% tax bracket, Dave will then want to take more depreciation, as seen in the next scenario.

On the other end of the spectrum, 28% Dave fares quite well in respect to depreciation and should try to utilize the highest improvement ratio he can support to shelter even more of his income per month. Since 28% Dave only pays the IRS back at a 25% rate, he will come out on top.

And of course 25% Dave is just excited to get an interest free loan. He thought lenders did away with that years ago.

Avoiding Depreciation Recapture Taxes

There are three good methods of avoiding depreciation recapture taxes.

The first option is to utilize a 1031 exchange. Doing so will allow you to defer paying depreciation recapture taxes, as a 1031 exchange allows you to roll the depreciation into the next property. The downside here is that you are merely deferring your depreciation recapture tax liability and will have to pay the recapture taxes upon the sale of the exchanged property at some point in the future.

The second option is to never sell your properties and pass them on to your heirs. When your heirs inherit your investment property, they receive a “stepped-up basis” equal to market value at the date of death, or if they elect this option, the market value six months after the date of death. This means that your heirs will not have to pay your depreciation recapture taxes or capital gains from your original purchase price.

To illustrate, let’s assume you pass on a fully depreciated property to your heirs. Over the years, you benefitted from $90k of depreciation, and if you would have sold, you would have owed $22,500 in depreciation recapture taxes. Due to the stepped-up basis your heirs receive, that depreciation is wiped clean, and their cost basis will be the fair market value at the date of death. Even better, if it’s still a rental, they can begin depreciating it all over again.

The third option (which is not so popular) is to sell the property at a loss. Gains are calculated by subtracting the property’s adjusted basis from the selling price. Adjusted basis generally means original purchase price plus improvements, less depreciation and amortization.

So if you bought a property for $100,000 and you have taken $5,000 worth of depreciation, your adjusted basis is $95,000. If you sell the property for $95,000, you will have a $0 gain and will not have to pay recapture taxes on that $5,000 of depreciation.

There are many other ways to utilize tax deferred strategies to avoid depreciation recapture taxes and capital gain taxes, but can be complicated to explain and so are beyond the scope of this article. The important thing to note is that something as small as depreciation can have lasting impacts on your bottom line and is critically important to plan for in your overall investment strategy.

From: Here

Tax Deferral Is Millennials’ Ticket To An Awesome Retirement

It may be hard for someone in their twenties or early thirties to start thinking about retiring, especially when there is so much interesting stuff to check out on Facebook, Instagram, or Twitter; but this is exactly the time that a Millennial should start preparing for retirement if one wants to have the chance to nail retirement without having to save a lot of money each year. Listen up, Millennials (or Generation Y, if you prefer): One Direction may sing “Live While You’re Young”, but if you started saving for retirement while you are young, then you can chill when you’re old.


The foundation of retirement investing is based off the concept of tax deferral. Tax deferral means that you can postpone taxes on any earnings you make on the money in your tax-deferred accounts. That means your money is growing each year without having to remove any funds to pay tax. For example, if you contributed $2,000 to a Traditional IRA each year for 10 years and averaged a 7% annual rate of return, assuming a 25% income tax rate, your Traditional IRA would be worth $31,291, whereas if you invested the funds personally, you would have just $23,468. Now, imagine that instead of contributing over 10 years, you contributed over 30 years. Assuming the same facts, your Traditional IRA would be worth $244,692 versus just $183,519. Pretty impressive numbers for just saving around $5 a day. If a Traditional IRA was used, you would eventually have to pay the taxes on the income deferred. But here’s the good news. You may be in a lower tax bracket in retirement, so the taxes you pay will be less than if you had paid them during your working years, and you only pay tax on the amount you withdraw from your tax-deferred accounts. The rest of the money in your tax-deferred account continues to grow tax-deferred—and compounding interest continues to work its magic over time. Of course, you could always open a Roth IRA, assuming you satisfied the income limitations, and all your income and gains would be tax-free, assuming you were over the age of 59 ½ when you took a Roth IRA distribution and the Roth IRA had been open at least 5 years.

The thing with tax deferral is that, generally, the earlier you start, the greater the tax deferral power will be. This is exactly why today is a perfect time for Millennials to start saving for retirement and kick-start their tax deferral clock. Of course, it is never too late to start saving for retirement, which bolds well for Generation X and baby boomers, but Millennials are at the perfect age to take advantage of the amazing power of tax deferral. Much has been made of the enormous impact that student loans and a soft job market has had on Millennials, and how it has hurt their ability to save for retirement. This is all true, but the power of tax deferral can help you retire in style by just saving $5 a day – that’s one less Grande Cappuccino at Starbucks each day. Not a huge sacrifice for potentially having hundreds of thousands of dollars when you retire. They key is starting early, which gives the Millennials a huge advantage over Generation X and the baby boomers. Take a look.

Let’s assume that Dylan is 25 years old and saves $5 a day or $1,825 a year, which he contributes to a Roth IRA. Let’s also assume that Dylan was able to save $1,825 a year until he reached the age of 70. Not a very unrealistic assumption. Let’s also assume that Dylan was able to average 7% annually on his investments, which is actually below the average S&P 500 return since its inception through 2014, which is close to 10%. Let’s further assume that the tax rate stayed static at 25%. Based on the facts, Dylan would have $557,997 in his Roth IRA at age 70, versus just $419,498 had he made the investments personally.


Now let’s take Susan, who is 45 years old, and has not yet started saving for retirement. If she was able to contribute $5,000 a year to a Roth IRA until she reached the age of 70, then, assuming the same 7% rate of return as Dylan and the same 25% tax rate, Susan would have $338,382 in her Roth IRA at age 70, but only $253,787 if she made the investments personally.

As you can see, from a retirement standpoint, Dylan is much better off than Susan because he started contributing at a young age. Dylan’s Roth IRA contributions equaled $82,125, whereas Susan’s contributions equaled $125,000; yet, because her Roth IRA funds has less tax deferral power behind it, her Roth IRA was close to $219,000 less than Dylan’s. Now, even if Susan earned a 9% rate of return on her investments instead of 7%, that would only increase Susan’s Roth IRA to $461,620, still almost $100,00 less than Dylan’s.

The Millenniums or Generation Y folks are certainly the most savvy and well informed generation ever, but if they just added the concept of “tax deferral” to their vocabulary to go along with Tweet, Face-time, or photobomb, they could also end up being the richest generation.

From: Forbes