Tax Shelters

Tax shelters are an important part of financial planning and retirement planning. Many people seek to lower tax payments to both the state and federal governments. Tax shelters have become even more popular in recent times as investors seek to take advantage of opportunities to keep more of their income every year.

There are several types of tax shelters. The most common type are 401k’s and IRA’s. The amount contributed to a 401k plan is exempt from both state and federal taxes in the year that the contribution is made. The current annual limit is $16,500 for those under age 50 and $21,500 for those 50 or older. In addition, the earnings on a 401k plan grow tax deferred as well. This means that an individual will not pay taxes on the growth until they begin to withdraw from the plan during retirement. For those that do not have a 401k plan available with their employer, they are eligible to contribute $5,000/year and deduct that amount from their taxable income. This amount rises to $6,000/year for those 50 and older.

Another common tax shelter is municipal bonds. While contributions to a municipal bond are not tax deductible, the interest earned from a municipal bond is often exempt from state and federal taxes as well. An investor’s interest is usually tax exempt if they purchase a municipal bond in the state in which they reside. Some municipal bonds are tax free nationally and are exempt from taxes regardless of where a person lives. Many mutual fund companies have come out with funds in each state and there are several funds that are tax free nationally. Municipal bonds offer lower interest rates than taxable bonds. The tax equivalent yield (net after taxes) can be calculated to determine the net benefit to the investor. The higher the tax bracket, the more advantageous they become.

Tax sheltered annuities are another popular tax shelter. Tax sheltered annuities are an important part of an overall financial plan for many teachers and nurses. They are usually used for non-profit organizations as a retirement plan vehicle under IRS section 403B. Tax sheltered annuities are similar to 401k plans with the same contribution limits based upon age. The contributions are tax deductible and the earnings grow tax deferred as well.

Non qualified annuities are also a way to defer taxes. While contributions into a non qualified annuity are not tax deductible, the earnings grow tax deferred until withdrawn at retirement. There are no contribution limits on a non qualified annuity and they can be a very useful tax shelter.

Reducing taxes is an important part of wealth management. Taking advantage of tax sheltered opportunities allows for more assets to be kept by our clients as opposed to paying the IRS. At Clay Northam Wealth Management we work with our clients to reduce their tax exposure. We would be happy to answer any questions and have offices in El Segundo and Seal Beach.


Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are Federally tax-free but other state and local taxes may apply.

Investing in mutual funds involves risk, including possible loss of principal.