American Dream

Stock Market Success Stories: Using Stocks and Taxes to Save for Retirement

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Justin McCurry retired at age 33 thanks to frugal living and wise investments. On his blog, Root of Good, he shares stock market success stories so that others can follow his lead. His big secret? Investing with the goal of keeping his taxable income low.

“I started out investing the first year or so, not really thinking a whole lot about it,” Justin says. “I just put money in a 401(k) and had a guy at Edward Jones helping me. I didn’t understand expense ratios, tax impacts, diversification, etc.”

After Justin began studying investment strategies, he decided switching to an index fund with Vanguard would be better for his family. By staying with Edward Jones, he was losing hundreds of thousands of dollars in taxes and extra fees.

“I’m paying a 0.17 percent expense ratio today, compared to 0.7 percent when I was with Edward Jones,” he says. “Index funds in general have few capital gains compared to actively managed funds, so we focus on those.”

Lowering Taxes Through Retirement

Although many people favor Roth IRA investments, Justin isn’t a fan. Roth IRA contributions aren’t tax deductible, and Justin knew he’d have a lower income after retirement. He wanted his biggest tax deductions to occur now, while he was in a higher tax bracket, so that he could invest any money saved through tax deductions.

Justin also used his retirement funds to amplify tax savings by putting more than half of his paycheck as a state employee into his 401(k) and state 457 plans. On his blog, he talks about how he was able to use these types of decisions to make $150,000 a year and only pay $150 in taxes.

“There was no tax dodging or anything questionable,” Justin says. “I just combined accounts and deductions to end up with a low income and, as a result, a low tax liability.”

Strategically Low Income

You can invest in stocks and keep your taxes low if you’re willing to live frugally. Justin suggests investing in every benefit an employer offers, including retirement plans, employee stock purchase and ownership plans, and health savings accounts. He also recommends keeping your adjusted gross income within the 15 percent tax bracket ($18,450 to $74,900 per year for a married couple). When factoring in standard deductions and personal exemptions, married couples can end up with $95,000 in gross income each year, he says.

When your salary is in the 15 percent bracket, you qualify for extra tax deductions. In 2013, Justin had $8,000 in dividend income, $5,500 of which counted as qualified tax-free dividends. These deductions only count for federal income tax, however. You may still owe state taxes.

Simple Investing Strategies Make for Stock Market Success Stories

How do you know when you’re ready to start investing in the stock market? Justin recommends that you first pay off high-interest debts with rates above 4 to 6 percent. After that, start investing when you have about $1,000 to $3,000 saved.

“Keep it simple,” he advises. “There’s nothing wrong with just buying an index fund or two. And remember that it’s long term. Don’t invest money that you need tomorrow, next year, or in five years. Invest money that you don’t need to touch for 10 or 20 years.”

Lastly, remember that even if you don’t reach your goal, you can still be a stock market success story.

“If you want to get $1 million by the time you’re 40 and you only end up with $100,000, you still have $100,000 saved,” Justin says. “You’re still better off. If you never try, you won’t save anything.”