Come April 15th, it’s easy to get upset about the money you have to pay the government. But what if there was a way that a person’s hard-earned dollars did not have to go straight to Uncle Sam — or at least not all of them. No, I’m not talking about tax evasion, but instead about a legal way to save money rather than paying taxes on it: the Tax Saving Savings Effect. The Tax Saving Savings Effect can have a big compounding effect on your wealth. For instance, let’s say you find a way to shelter $30,000 from taxes so that you can make (or beat) your savings goal. One way is to contribute the extra earnings into a pension plan. Sheltering those earnings in a pension plan turns them from a tax liability into a tax deduction. The $30,000 is now subtracted from your taxable income rather than added to it. If you’re earning $500,000 and you put $30,000 into a pension plan, your taxable income is now only $470,000. So now, if you’re saving 40 percent of $30,000, there’s now $12,000 you effectively won’t have to pay: either the government will refund you $12,000 or you can reduce your withholdings or quarterly tax payments by $12,000. You now have $12,000 of “found money.” That’s money for you to save or spend. If you opt to save it, you will probably meet your financial goals sooner, have more cash flow or wealth when you get there, and/or reduce the risk in your portfolio.

But don’t just put that money into a traditional savings account, contribute it to a pension plan. If you save that money in your pension plan, you save 40 percent of $12,000 due to the tax deduction, which is $4,800. You can contribute that $4,800 to the pension plan, and you save 40 percent of that, which is $1,920. To recap: any person who begins saving $30,000 a year can actually save $50,000 a year if they save the tax savings that they were going to pay to the government. But let’s multiply that. If you can save $300,000 in a pension plan, you can save $500,000 due to the Tax Saving Savings Effect. Put it into perspective: the government was paying for almost half of the pension contribution. Recently, I dealt with five partners and sixty employees of a business and was able to show them a pension plan where they could contribute almost $1 million per year and save almost $500,000 in taxes. Employee costs were $50,000 net of tax. For them, they could shelter almost $1 million to grow tax deferred, have the government pay about half of it, and have a net cost of $50,000 for their employees. This is the power of the Tax Saving Savings Effect.

To find out how the Tax Saving Savings Effect can benefit you, visit tswealth.com.