How to Pay No Taxes on Rental Income

Owning rental property can be a lucrative investment, but maximizing your profits by minimizing taxes on rental income is essential. 

In this guide, we will explore various strategies to help you legally reduce or eliminate taxes on your rental income. From utilizing a 1031 exchange to protecting gains in a self-directed IRA, we'll cover everything you need to know to optimize your tax benefits.

Using a 1031 Exchange for Real Estate Deals

A 1031 exchange is a powerful tax-deferral strategy that allows you to defer capital gains taxes on the sale of investment property by reinvesting the proceeds into another like-kind property. 

Under US tax code, you will avoid all taxes on proceeds from the sale of an investment property if invested into a property of like kind or equal value within 180 days from the close of the previous property. 

By utilizing a 1031 exchange, you can postpone taxes and reinvest your gains into more valuable properties, compounding your gains over time. This strategy is especially beneficial for real estate investors looking to expand their portfolios while minimizing tax liability.

However, one key obstacle of 1031 exchanges is that you will have to pay taxes eventually. For this reason, there is only one true way to avoid capital gains taxes entirely on the sale of a property, and that’s by using a special retirement account. 

Protecting Gains in a Self-Directed IRA

Another method to minimize taxes on rental income is by investing in real estate within a self-directed Individual Retirement Account (SDIRA). 

Self-directed IRAs offer the tax benefits of a Roth or Traditional IRA, with the flexibility of being able to invest in assets typically limited by retirement accounts. Examples include rental property investment, wholesaling, private lending, investing in private equity, and more. 

Self-directed IRAs offer several benefits for real estate investors, including:

  • Tax-deferred or tax-free growth of investment
  • Diversification of your portfolio
  • Control over investments

The big positive is tax savings. By using a self-directed IRA to invest in real estate with a Roth structure, you will never pay a cent in taxes ever again on your investments. 

SDIRAs do come with more stringent rules, but this is a powerful bonus that no other financial vehicle can match. 

Avoiding taxes allows you to compound long-term gains for retirement. Plus, you can withdraw contributions from an IRA tax-free and just play around with the earnings. 

How to Set Up a Self-Directed IRA

One unique qualification of setting up a self-directed IRA is finding a custodian. Unlike traditional depositories, custodians guide you on prohibited transactions to avoid penalties and properly manage your IRA. To set up an SDIRA with your custodian, follow the steps below. 

  1. Step 1: Contact a trusted self-directed IRA custodian. Look for a custodian that offers affordable fees and has good reviews with other customers. 
  2. Step 2: Open An Account And Fund It: You'll need cash deposits or rollovers/transfers from existing retirement accounts.
  3. Step 3: Select Investments: Your choice should align with IRS-approved assets, including real estate properties.
  4. Step 4: Direct the Investment: Instruct your custodian where to direct funds.

Remember, always consult financial advisors before making any decisions regarding complex investment strategies like using self-directed IRAs.

Using Depreciation to Deduct Taxes

Depreciation is another valuable tax deduction tool for rental property owners. The Internal Revenue Service (IRS) allows you to deduct a portion of the property's value each year as a depreciation expense. 

This deduction can offset your rental income, significantly reducing your tax liability. However, it's essential to understand the IRS rules and guidelines regarding depreciation, as they may vary depending on the property type and your specific circumstances.

"Every Landlord's Tax Deduction Guide" by Stephen Fishman is an essential resource for landlords looking to maximize their rental property deductions through depreciation. The book includes info on filling out Schedule E of your tax returns. 

Schedule E Treatment Explained

  • Mortgage interest, insurance costs, and repairs are all expenses that you incur when managing rental properties.
  • Include them on Schedule E during tax return filing season to lower your net ordinary income.

Borrowing Against Equity

One lesser-known strategy to reduce taxes on rental income is by borrowing against the equity in your rental property. 

By taking out a loan or line of credit using your property as collateral, you can access funds without incurring immediate tax liabilities. This method allows you to leverage your property's equity while keeping your taxable rental income to a minimum.

Using Mortgage Interest to Lower Taxes

Deducting mortgage interest is a common tax-saving technique for rental property owners. The interest paid on your rental property's mortgage is generally tax-deductible, reducing your overall taxable rental income. 

By maximizing your mortgage interest deductions, you can effectively lower your tax liability and increase your rental income's after-tax profitability.

Deferring Sales

If you are considering selling a rental property, it may be worth it to explore strategies for deferring the capital gains tax. One such strategy is installment sales, where you receive the sale proceeds in installments over a period of time, spreading the tax burden over multiple years. 

Additionally, you may consider a tax-deferred exchange, similar to a 1031 exchange, which allows you to defer taxes by reinvesting the proceeds into another property.

Becoming a Real Estate Agent

Becoming a licensed real estate agent can offer several tax benefits for rental property owners. As a real estate agent, you can deduct a range of business-related expenses, such as marketing costs, office expenses, and professional fees. 

Furthermore, being a real estate agent may provide opportunities to earn commissions on property transactions, adding another income stream to offset your rental income. While many may shy away from this approach, getting licensed to be an agent in your state is very affordable and typically requires the completion of a course and test to pass. 

Hiring a CPA

Navigating the complex tax landscape of rental property ownership can be challenging. Therefore, hiring a certified public accountant (CPA) with expertise in real estate taxation can provide invaluable guidance and ensure you maximize your tax savings. 

A knowledgeable CPA can help you identify all eligible deductions, structure your investments for optimal tax benefits, and ensure compliance with the ever-changing tax laws.

Minimizing taxes on rental income is a vital aspect of maximizing your real estate investment returns. By utilizing strategies such as a 1031 exchange, protecting gains in a self-directed IRA, leveraging depreciation deductions, borrowing against equity, utilizing mortgage interest deductions, deferring sales, becoming a real estate agent, and seeking professional tax advice, you can significantly reduce your tax liability and enhance your rental income's profitability. 

Remember, it's crucial to consult with qualified professionals and stay updated on tax regulations to ensure compliance and make informed decisions.

FAQs (Frequently Asked Questions)

Can I eliminate taxes on rental income entirely? 

While it may be challenging to eliminate taxes entirely, employing tax-saving strategies can significantly reduce your tax liability on rental income. Truly, the only way to stop paying taxes on rental property gains is to finance your investment using a self-directed IRA. 

Do I need to hire a CPA to manage my rental property taxes? 

While it's not mandatory, hiring a CPA with real estate expertise can provide valuable insights and help optimize your tax savings.

Can I deduct property management fees as expenses? 

Yes, property management fees are generally deductible as business expenses for rental property owners.

What are the advantages of a self-directed IRA for real estate investments? 

A self-directed IRA allows you to invest in real estate and enjoy tax-deferred or tax-free growth within the account, providing long-term financial benefits.

Are there specific rules for claiming depreciation on rental property? 

Yes, the IRS has specific rules and guidelines for claiming depreciation deductions on rental properties. Understanding and complying with these rules is crucial to maximizing your tax benefits.

How do I pay no taxes on rental income in the US?

You can minimize or eliminate taxes on rental income by utilizing strategies such as 1031 exchanges, investing through a self-directed IRA, claiming depreciation and other deductions, borrowing against equity, deferring sales, and becoming a real estate agent.

How can I reduce my taxable income on a rental property?

To reduce your taxable income from a rental property, you can claim eligible expenses like mortgage interest and repairs. Additionally, you may depreciate the cost of the property over time or use methods like 1031 exchange to defer capital gains tax.

How does the IRS know if I have rental income?

The IRS is aware of your rental income when it's reported on Schedule E of your federal tax return. In addition to this mandatory reporting requirement for landlords, tenants may also report rent payments which could alert the IRS.


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When you leave a job, your 401(k) account will still belong to you

Here's How to Maximize Your 401(k) When You Leave a Job

Most employees are content to leave their retirement plans alone when they feel comfortable at a job.

However, when you eventually leave your job, you’ll be confronted with the right decision of what to do with your 401(k). Without matching contributions, is it smarter to cash out your earnings or roll it over to an individual retirement account? What if you are offered a new employer's plan?

The earlier you start planning for this transition, the more you can maximize your retirement savings and secure your financial future.

What Happens to Your 401(k) When You Leave a Job?

When you leave a job, your 401(k) account will still belong to you, but you will miss out on matching contributions from your employer. Generally, there are several options available to maximize your 401(k) savings, including:

  • Rolling over to an individual retirement account (IRA).
  • Entering a new employer plan.
  • Leaving funds in the current plan and contributing to them.

Deciding which distribution option to choose depends on several factors, such as your employer's vesting schedule, tax implications (e.g., withdrawing funds before retirement age), and long-term retirement goals.

My preferred distribution option is to roll it over to an IRA, especially if you won’t enjoy matching contributions from your new employer, and here is why.

The Benefits of Rolling Over to an IRA

There are numerous benefits to rolling over your old 401(k) to an IRA:

  • Broader Range of Investment Options. By rolling over your 401(k) to an IRA, you will gain access to a wider pool of investments compared to the limited selection offered by your employer. For example, self-directed IRAs allow you to invest in stocks, bonds, and even lesser-known options like precious metals or real estate investment trusts (REITs). The growth potential of these investments is far superior to the stock market your 401(k) limits you to.
  • Competitive Expense Ratios. Employer-sponsored 401(k) plans often charge administrative and investment fees ranging from 0.50% to 2% on all assets managed without employer subsidies for these fees. In contrast, IRAs provide lower-cost investment options with expense ratios typically ranging from 0.12% to 0.75% (excluding self-directed IRAs, which may have higher custodial and transaction fees).
  • Improved Tax Liability. You can effectively reduce your tax liability by converting a pre-tax 401(k) to an IRA. Future qualified withdrawals from a Roth IRA can be tax-free, which is particularly beneficial if you anticipate earning more income shortly before retirement. You will have the option to choose a traditional Roth-structured SDIRA, depending on your investment objectives.

401(k) vs. IRA: Pros and Cons

Two of the most popular investment choices for retirees are 401(k)s and IRAs. Both hold unique benefits that you can leverage, depending on your financial circumstances. Let's explore the pros and cons of each:

401(k)s:

Pros

  • Employer Matching Contributions. Many employers offer matching contributions (e.g., 3%), allowing you to boost compound interest even further.
  • Higher Contribution Limits. Up to $22,500 annually (as of 2023) if you are under 50 years old. If you are 50 or older, your contribution limit increases to $30,000.
  • Borrowing Against Your Account Balance. Borrowing against your account balance in case of emergencies is possible. However, we do not recommend it.

Cons

  • Limited control over investment choices
  • Early withdrawal penalties (before the age of 59½) of 10% of the amount withdrawn, which is added to your taxable income for greater tax liability

IRAs

Pros

  • Greater Control. IRAs allow for greater control over your investments and the selection of providers, such as banks and brokerage firms, enabling you to align your investment choices with your risk tolerance and financial goals.
  • Tax-Deductible Contributions. Contributions made to traditional IRAs can be tax-deductible in the year they are made. This can reduce your overall taxable income, providing potential tax advantages. However, it's important to note that Roth IRAs use after-tax contributions, which can lead to tax-free qualified withdrawals upon retirement.
  • Alternative Investments: Self-directed IRAs allow you to invest in non-traditional assets, such as gold, Bitcoin, rental properties, promissory notes, private equity, and more.

Cons

  • No Employer Contributions. Unlike 401(k) plans, IRAs do not offer employer contributions. Individuals are solely responsible for funding their accounts, limiting the potential for additional retirement savings through employer matching.
  • Lower Contribution Limits Than 401(k)s. IRAs have lower contribution limits compared to 401(k)s. As of 2023, the maximum annual contribution to an IRA is $6,500, with an additional catch-up contribution limit of $1,000 for individuals aged 50 or over. In contrast, 401(k) plans allow for higher annual contributions, with a maximum of $22,500 (as of 2023), including catch-up contributions.

Review

IRAs offer greater tax benefits and flexibility if you choose a self-directed account. Rollovers are also easy and won’t cost you much.

However, 401(k)s offer higher contribution limits and matching contributions. If you don’t have access to matching contributions or plan to invest more than $6,500 annually, an IRA is the preferred choice. Besides, you can always build more money by putting your IRA to work rather than taking from your discretionary income.

Maximizing Investment Options with a Self-Directed IRA

One powerful tool for retirement planning I mentioned is the Self-Directed Individual Retirement Account (SDIRA), which offers several advantages over IRAs, including access to a wider range of investments beyond traditional stocks and bonds.

What Is a Self-Directed IRA?

SDIRAs provide access to a wider range of investments beyond traditional stocks and bonds. This allows individuals to explore alternative assets such as real estate, private equity, precious metals, and more, enabling greater diversification and potentially higher returns.

What Are the Benefits of a Self-Directed IRA?

One benefit of an SDIRA is greater control and flexibility over your investment choices. Unlike traditional IRAs that rely on a limited number of options, SDIRAs allow you to tap into alternative investment opportunities like mortgage notes, commodities, natural resources, real estate, and cryptocurrency. This enables you to create a more balanced, customized investment portfolio that aligns with your financial goals.

Another benefit of self-directed IRAs is the potential for tax advantages. Contributions to SDIRAs can help reduce your taxable income, while Roth SDIRAs offer the advantage of tax-free qualified withdrawals upon retirement. It is highly recommended to consult a professional tax advisor to understand all tax implications and make fully informed decisions.

Lastly, self-directed IRAs often come with lower fees. You can expect not to pay any custodial transaction or account valuation fees, which can easily accumulate to thousands of dollars over ten or twenty years. This can lead to significant savings and allow your investments to grow more efficiently.

How to Open an SDIRA

Opening an SDIRA is easy and straightforward. Here are five steps to open an SDIRA:

Scout Custodians.

Select a custodian that specializes in SDIRAs. Custodians are required to manage an SDIRA account. Pay close attention to custodial fees, third-party reviews, and their expertise in managing portfolios aligned with your investment goals.

Set Up An Account.

Once you've identified a custodian, gather all necessary supporting documentation, open an account, and pay any required fees. The required documentation may vary among custodians but generally includes government-issued photo IDs and proof of employment.

Fund Your SDIRA.

The next step is to fund your SDIRA. This can be done by transferring cash or moving funds from an existing 401(k) or traditional IRA through a rollover. You can set up automatic withdrawals to transfer funds to your newly established account regularly, such as bi-weekly or monthly.

Choose Your Investment Strategy.

With SDIRAs, you have unlimited potential with your investment strategy. You can select from diverse options, including stocks, bonds, real estate, precious metals, and more. If you have any questions about your investment strategy, it's advisable to consult a financial advisor for guidance.

Active SDIRA Management.

Once you've funded your SDIRA and selected your investments, monitoring their performance is important. Regularly check on the performance of your assets at your preferred interval, maintain communication with your custodian to ensure compliance with IRS regulations, and complete all necessary paperwork for tax purposes.

Opening and maintaining an SDIRA is relatively straightforward. However, adhering to all applicable tax laws and continuously monitoring your portfolio is essential. Implementing an effective asset allocation strategy that aligns with your investment goals will help you maximize the potential of your SDIRA.

Tips to Leverage Funds in an SDIRA

Whether you're considering investing in real estate, startups, or using your life insurance policy to fund investment opportunities within your SDIRA, there are so many creative ways to earn money in your retirement account using an SDIRA.

Invest in Rental Properties.

Investing in rental properties like condos and single-family homes allows you to generate passive cash flow, which is an excellent complement to your retirement income. Similar to stocks and bonds earning compound interest, your rental properties have the opportunity to appreciate, further expediting growth.

Syndicate a Real Estate Flip.

One of our favorite short-term profit opportunities, flipping real estate allows you to achieve high returns from property renovations and resale. Real estate syndication allows you to borrow other people’s money and earn a fee for executing a deal that can help build your SDIRA. SDIRA funds are a great source of wealth to syndicate a deal with, which you might not normally have access to. I’ve personally managed over $1.4 billion in real estate transactions. However, it wasn’t until I started using self-directed retirement accounts that I was able to help my clients and myself take home from each transaction by avoiding taxes.

Invest in Startups.

Investing in startups gives you exposure to emerging technologies. Everyone wishes they could have invested in Facebook but probably wouldn’t have the money anyways. Use your retirement accounts to secure your financial future with this high-risk, high-reward type of investment.

Use Life Insurance to Get Funds for Investments.

If you have a life insurance policy with a cash value component, it is possible to execute a strategy called premium financing, which allows you to access the cash value and death benefit. This can be used to invest in SDIRA assets. For premium finance, please consult your life insurance company to learn about eligibility criteria and financial requirements. Premium financing does come with higher fees, but you’ll never have to borrow through a bank again.

Why You Shouldn't Cash Out a 401(k)

Although it may be tempting to withdraw 401(k) funds for emergency expenses or larger purchases, there are several reasons why you should not cash out a 401(k).

Firstly, if you withdraw funds from your 401(k) before retirement, it will be subject to penalties and treated as ordinary income, potentially pushing you into a higher tax bracket. Secondly, early withdrawal penalties will deduct 10% of the amount withdrawn, further diminishing your returns. Additionally, it's important not to overlook the lost opportunity for compounding interest. Even small contributions to your retirement account can build up significantly through the power of compounding over time.

Of course, if you cash out your 401(k), you could miss out on the opportunity to double or triple your money using an SDIRA account.

Remember, your retirement plan should be viewed as a long-term investment vehicle. Early cashouts will only diminish your returns.

FAQs

What happens to a 401(k) when you quit?

When you leave a job, you have several options with your 401(k) plan. You can leave it in your previous employer's plan, roll it over to a new employer's plan, roll it over to an IRA, or cash it out entirely. However, we do not recommend the last option as it will subject your distribution to additional taxes and penalties if you're under 59½ years of age.

How long can you keep a 401(k) after leaving a job?

After leaving a job, you can keep money in your old 401(k) indefinitely. However, you should expect your employer and brokerage to provide options to roll over funds or cash out the balance, especially if your account balance is below a certain amount. Be sure to familiarize yourself with your employer's rules regarding company departures.

Can an employer take back their 401(k) match?

Once a 401(k) contribution is made, employers cannot take back the contribution. However, they can implement a vesting schedule that matches contributions after a certain period (e.g., three years). They can also amend 401(k) terms to cut or eliminate future matching contributions, but contributions already made to your account would not be affected.

Can I cash out my 401(k) from a previous employer?

Yes, it is possible to cash out your 401(k) from a previous employer. Just be aware of the tax consequences, early withdrawal penalties, and the potential loss of investment growth by cashing out early.


How to Pay Less in Taxes: Strategies for Investors

How to Pay Less in Taxes: Strategies for Investors (Video)

As experienced investors, we always seek ways to enhance our gains and reduce our outlays. By leveraging certain strategies, such as self-directed IRAs and investing in businesses and real estate through retirement accounts, we can gain the upper hand when it comes to minimizing our taxes. This article and attached video will reveal little-known methods used by only 4% of investors.

You'll discover how understanding self-directed IRAs and investing in businesses and real estate through retirement accounts can significantly reduce your taxable income. We will also discuss regaining control over your money, IRA, 401k, and retirement plan.

The top one percent have mastered building wealth without paying hefty taxes; you can also learn these techniques. For instance, utilizing Roth IRAs for tax-free growth is a strategy that many overlook when planning their tax year.

Whether setting up a Solo K for your business or exploring passive investment opportunities in various money vehicles, this guide aims to help you navigate these complex avenues with ease so that come next tax season, you know exactly how to pay less in taxes.

https://www.youtube.com/watch?v=tWIV_qO3-jk&t=1401s

Unlock the Secrets of Elite Investors

Don't settle for ordinary investment strategies when you can join the exclusive club of savvy investors who know how to make their money work harder. Only 4% of investors are using unconventional methods, and they are taking control of their finances and achieving greater wealth.

Take Charge with Self-Directed IRAs

Why limit yourself to stocks and bonds when you can have the freedom to invest in alternative assets? Self-directed IRAs provide you with increased autonomy in your investment choices, allowing for the diversification of assets through private companies and real estate. You will reap significant financial benefits with careful planning and due diligence.

Invest in the Future with Private Businesses and Real Estate

Looking for even more opportunities to grow your wealth? Self-directed IRAs allow you to invest directly in private businesses or purchase real estate properties.

Imagine being a part of a promising startup or earning rental income from a property in your retirement portfolio. You can even earn money flipping houses or raising money via real estate syndication. Just be sure to consult with experienced professionals to navigate the complex IRS rules surrounding prohibited transactions.

Regain Control Over Your Money, IRA, 401k, and Retirement

Don't let banks and investment firms control your financial assets. Take back the reins and invest on your own terms.

Identify Who Controls Your Financial Assets

Is a financial institution making decisions on your behalf? It's time to understand who's in charge and take control.

Handing off power might appear to be a smart move, but you could be missing out on chances for gain. Don't let rigid frameworks limit your potential for growth.

Strategies for Taking Back Control

  • Self-Directed IRAs: Invest in non-traditional assets like real estate or private businesses for more flexibility than traditional retirement accounts.
  • Solo 401(k): Maximize your tax-advantaged savings with higher contribution limits, ideal for business owners.
  • Infinite Banking Concept: Become your own banker by using whole life insurance policies as personal banking systems. Finance investments while still earning interest on the full amount of the policy's cash value. Learn more about infinite banking here.

Take charge of where and how your money is invested for greater potential growth and diversification beyond traditional markets. Build wealth and reduce taxes owed along the way.

Building Wealth Without Paying Taxes Like The Top 1%

The wealthy have a secret to amass wealth without paying taxes: Roth IRAs. These financial instruments offer tax-free growth and withdrawals in retirement, making them a powerful tool for building wealth.

Utilizing Roth IRAs for Tax-Free Growth

A Roth IRA is an individual retirement account that grows tax-free. Unlike traditional IRAs, you pay taxes upfront on contributions, but any earnings or gains from investments within the account remain tax-free when withdrawn during retirement.

For those expecting to be in a higher income bracket at retirement than when they contributed, the Roth IRA offers an attractive tax-saving strategy by locking in today's lower rates and avoiding potential future increases. It allows you to lock in today's lower tax rates and avoid potential future increases.

Case Study - Peter Thiel's $5 Billion Roth IRA

Peter Thiel's $5 billion Roth IRA is a prime example of this approach in action. By investing early in companies like PayPal and Facebook through his self-directed Roth IRA, Thiel enjoyed exponential returns completely free from taxation.

By using financial tools like Roth IRAs strategically, you can build substantial wealth over time while minimizing your exposure to taxes. Take the same path as the wealthy and commence constructing your tax-exempt wealth now. Learn about more ways the rich avoid paying taxes.

Get More Control Over Your Retirement Savings with a Solo K

As an entrepreneur, you can aim to safeguard your economic future and lessen the amount of taxes paid. A Solo 401k, also known as a Solo-k, can help you achieve both goals. This individual retirement account offers unique benefits that regular IRAs or 401ks don't provide.

Steps to Set Up Your Solo K

Setting up a Solo 401k may seem daunting, but it's achievable with some guidance and planning. Here are the key steps:

  1. Check Eligibility: Make sure you have self-employment income and no full-time employees other than yourself or your spouse.
  2. Select a Provider: Choose an IRA custodian who provides self-directed options like Horizon Trust.
  3. File Necessary Paperwork: File IRS Form 5500-EZ once your plan assets exceed $250K.
  4. Make Contributions: You can contribute both as an employer and employee, significantly increasing the amount you can save tax-deferred each year compared to traditional IRAs or 401ks.

There are several nuances related to contribution limits based on age and income levels that need careful consideration while setting up this powerful financial tool. It's recommended to consult with professionals experienced in dealing with self-directed IRAs.

By leveraging the power of a Solo-k for your business operations, you gain more control over where and how much money is invested toward securing future financial stability. You also create potential opportunities for reducing taxable income, keeping more profits within the company rather than paying them out as taxes.

Invest Your Way with Self-Directed Funds

Freedom to invest your way? Yes, please. Self-directed funds offer just that, but most Americans don't know about this option.

Benefits & Risks of Self-Direction

Self-directed IRAs provide flexibility that traditional retirement accounts can't match. Instead of being limited to stocks, bonds, or mutual funds, self-directed IRAs offer the opportunity to invest in various asset classes, such as real estate, precious metals, and private businesses.

  • Tax Advantages: Self-directed IRAs offer tax-deferred growth on investments, meaning you won't pay taxes until withdrawal during retirement, when your income (and tax rate) will likely be lower.
  • Diversification: With a wider range of investment options, self-directed accounts allow for greater diversification, potentially reducing risk and increasing returns over time.
  • Total Control: Investors have complete authority over their accounts, deciding where and how their money should be invested without needing approval from SDIRA custodians like Horizon Trust.

But be aware of the risks, such as lack of liquidity with longer-term investments like real estate and potential loss if investments don't perform well. Do your research and plan carefully before venturing into this realm.

Infinite Banking Concept - Be Your Own Banker

Want to control your finances, interest rates, and loan terms? The Infinite Banking Concept (IBC) lets you become your own banker. It's a financial strategy that's not well-known but offers a unique approach to managing your wealth.

The mechanics of infinite banking

IBC involves setting up a dividend-paying whole life insurance policy. Once it accumulates cash value, you can borrow against it for various purposes like investing in real estate or funding business ventures. The best part? You get to set the repayment terms since you're borrowing from yourself.

Becoming your own banker means having total control over your money without relying on traditional banks or lending institutions. It also means potentially reducing taxation on profits earned from investments made using borrowed funds.

But, this method requires discipline and careful planning. If loans aren't repaid according to agreed-upon terms, there could be negative implications for both the policy's cash value and the death benefit amount available upon passing away.

  • Flexibility: You decide when and how much money you want to borrow against your policy's cash value.
  • Tax benefits: Any dividends received through the whole life insurance policy are generally tax-free.
  • Liquidity: These policies build up cash values over time, which can be accessed at any point during your lifetime without penalties, unlike 401k plans, where early withdrawals may result in hefty fines.

To implement IBC effectively, you need to understand complex financial concepts and work with knowledgeable professionals who specialize in this area.

Horizon Trust offers guidance on establishing appropriate structures that align with individual goals while ensuring compliance with all relevant regulations and minimizing potential risks associated with self-directed investment strategies.

Passive Investing: A Low-Stress Way to Make Money

Want to make money without the hassle of constant oversight? Passive investing might be for you. It frees up time for other ventures while generating steady income streams.

What is Passive Investing?

Passive investing is an investment strategy that maximizes returns by minimizing buying and selling. Instead of trying to beat the market through active trading, passive investors buy assets and hold them for extended periods.

This strategy relies on the idea that markets are generally efficient in pricing securities over time. Thus, it's more beneficial to ride out short-term price fluctuations rather than attempting to profit from them.

Passive investing typically involves buying index funds or ETFs in order to replicate the performance of a benchmark such as the S&P 500 or Dow Jones Industrial Average.

Other Passive Investment Opportunities

Looking beyond stocks, there are numerous other asset classes available for passive investment:

  • Real Estate: Consider real estate crowdfunding platforms or REITs for consistent cash flow through rental income and appreciation in value over time.
  • Bonds: Bonds offer fixed interest payments over a specified period until they mature when you receive back your initial investment.
  • Precious Metals and Commodities: Assets like gold, silver, oil, or agricultural commodities can serve as hedges against inflation and add further diversification to your portfolio.

Remember to understand each asset class and how it fits into your overall financial goals before deciding where to allocate capital within these various money vehicles.

Take control of your finances and pay less in taxes by using self-directed IRAs and investing in real estate and businesses through retirement accounts.

Maximize tax-free growth by utilizing Roth IRAs and set up a solo K for your business to reduce tax liability.

Don't forget about passive investment opportunities to build wealth without excessive taxes.

By understanding these options, you can make informed decisions to achieve your financial goals while minimizing your tax burden.

FAQs: How to Pay Less in Taxes

How to Legally Reduce Your Tax Liability

Invest in tax-sheltered accounts like self-directed IRAs, claim eligible deductions, and leverage income-splitting techniques to reduce your tax liability.

Who Bears the Larger Tax Burden: Rich or Poor?

In the U.S., higher-income individuals typically bear a larger portion of the total tax burden, but effective rates may vary based on individual circumstances and tax planning strategies.

Claiming 1 or 0: Which is Better?

If you want more take-home pay each paycheck, claim 1, but if you'd rather have a larger refund at tax time, claim 0. It's about balancing immediate cash flow against potential future refunds.


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Investments can be used to generate passive income

Your Guide to Self-Directed IRA Real Estate Investing

A self-directed IRA (SDIRA) offers unique tax advantages that aren't available with traditional retirement plans.

One of the main reasons I swear by self-directed IRAs is because it allows me to invest in real estate, while taking advantage of the tax benefits of an IRA.

As a real estate investor myself, I’ve been able to generate millions in tax-free revenue from various real estate holdings using my tax-protected Roth IRA.

However, self-directed IRAs receive more regulations than most retirement plans and do have some limitations, also known as prohibited transactions.

That’s why I want to share some insights on self-directed IRA real estate investments based on what has worked and not worked for me in the past.

The Basics of a Real Estate IRA

Using your self-directed IRA to invest in real estate is one of the many advantages of converting from a 401(k) or traditional IRA to an SDIRA.

Your SDIRA can be used to purchase the following real assets:

  • Single-family homes
  • Multi Family homes
  • Raw land
  • REITs
  • Commercial real estate
  • Mortgage notes

In addition, SDIRAs can be used to fund non-recourse loans and private equity in mortgage companies that generate lots of revenue.

In short, there is no shortage of ways to invest in real estate using an SDIRA.

Investments can be used to generate passive income on rental properties or to buy and hold equity in a fast-rising market.

All income earned by the property is also directed back to the IRA and is held tax-free if you use a Roth-structured IRA.

However, before we continue, we should note that there are several regulations that govern self-directed IRA real estate investments that many people are unaware of before they open an account.

Real Estate IRA Rules and Regulations

First, all SDIRAs require a custodian, which comes with added fees and time constraints. Custodial interference can be circumvented by achieving checkbook control via an LLC, which I recommend opening through your SDIRA to fund all purchases.

An SDIRA also provides liability benefits, especially if you partner or syndicate a real estate deal.

Secondly, an SDIRA can only be used to buy and sell property in your account—not property you already own.

Third, in order to avoid tax penalties, the IRA owner must avoid a long list of what the IRS deems prohibited transactions.

  • You cannot reside in a property owned through your SDIRA.
  • All handiwork must be contracted out. You cannot work on the property by hand.
  • Your immediate family members, including your spouse, parents, children, grandchildren, and legally adopted children, as well as the spouses of your children and grandchildren, are prohibited from renting or residing in any property owned by your SDIRA account. This restriction also applies to investment providers or fiduciaries of your IRA.

These added caveats do tend to turn some investors off, but these cons are greatly overshadowed by the tax benefits of combining a Roth IRA with an LLC to generate high returns for retirement. Let’s explore some of these pros and cons below.

Pros and Cons of Using an SDIRA to Purchase Real Estate

Pros

  • Potential for a high return on investment.
  • Checkbook control enables greater control over assets.
  • Greater investment diversification shields assets from the stock market.
  • Real estate investments grow tax-deferred or tax-free.
  • You can use an SDIRA to invest in properties almost anywhere.
  • Self-directed IRA LLCs are protected from creditors and bankruptcy.
  • All costs come out of the account instead of your pocket.

Cons

  • You cannot dwell in the property.
  • Income isn't pocketed until you cash out.
  • It's necessary to have plenty of cash in your account to cover all costs associated with the property.
  • Real estate is not a traditionally liquid investment.
  • No DIY improvements allowed.
  • Everything is paid to the IRA account instead of the investor.
  • Unlike a traditional property investment, a real estate IRA requires third-party involvement in the form of an IRA custodian, though this can largely be bypassed with checkbook control.
  • No tax advantages are available for deducting mortgage interest, property taxes, or depreciation.
  • Potential for negative cash flow, problematic tenants, or major repairs.

How to Fund a Real Estate IRA

Now that we have the basics out of the way, it’s time to explore ways to fund your account.

There are several funding options for real estate IRAs. Many investors choose to transfer funds from an existing IRA or SDIRA. It's also possible to roll funds over from an employer-sponsored 401(k) into a new real estate IRA.

Investors can also make annual contributions within the IRS's contribution limits, which is $6,500 for people under 50, with a $1,000 catch-up rate allowed for people 50 or over.

How to Begin Investing in Real Estate With an IRA

First, you will need to open a self-directed IRA that will be used for investing in real estate through a brokerage. All real estate IRAs require an IRA custodian, so conduct your due diligence in finding the right one.

After you open an account and fund it, you will need lots of money for purchases and repairs. I recommend establishing an LLC.

LLCs come with liability protection against bankruptcy, and they allow you to exercise checkbook control, which cuts out the middleman of going through your custodian to make a purchase. Since real estate deals are notoriously tedious, this saves you lots of time.

If an IRA has sufficient funds to purchase a property, a cash sale can be made. If the account doesn't have sufficient funds, the investor has several options for closing the gap, which include:

  • Partnering funds with other investors. In this scenario, profits, expenses, and ownership are divided based on investor contributions.
  • Acquiring a non-resources loan. Note: Non-recourse loans allow the lender to foreclose on real estate used as collateral in the case of default.

Investors can also purchase mortgage notes instead of physical real estate as a low-commitment option. This option makes it possible to earn money from borrowers instead of being a landlord.

Keep in mind that a real estate IRA transaction follows all of the same steps of any traditional property sale. Once escrow is closed, the investor is free to rent or lease the property to anyone who isn't classified as a disqualified person.

An SDIRA makes it possible to buy real estate that can be used to generate income and value while avoiding taxes.

By following the simple steps outlined above and keeping yourself apprised of all of the latest IRS regulations, you can begin buying and holding real estate in your retirement portfolio so that when you retire, you will have substantially more money baked into equity and generated from passive income.

FAQs

What is the 5-year rule on the self-directed IRA?

Applied specifically to Roth SDIRAs, the 5-year rule requires investors to own an IRA account for a period of 5 years before taking penalty-free and tax-free distributions. Otherwise, the account holder will be responsible and must pay a penalty.

How do you avoid taxes on an SDIRA?

If you'd like to avoid paying taxes at the rate of ordinary income during the withdrawal period, opt for a Roth SDIRA that is funded with post-tax dollars instead of pre-tax dollars.

Do you pay capital gains on an SDIRA?

With earnings on an SDIRA having tax-deferred status, capital gains and dividends will pile up until the withdrawal period after age 59 1/2. Once withdrawals begin, the earnings will be subject to capital gains taxes at the rate of ordinary income. However, Roth IRA accounts are not subject to capital gains during the withdrawal period.


determine what early retirement looks like to you

Your Investment Guide to Retirement Early | How to Build Wealth Fast

The feeling of financial independence isn't something you can tally up using retirement calculators. It's also not something you can achieve on a whim. While the average American's retirement age is 61, your lifestyle, both leading up to and during retirement, will determine your true feasible retirement age. 

To help you retire early, I’ve laid out a few investment secrets I’ve learned over the years that allow you to scale your wealth quickly and sustainably for retirement. 

Step 1. Determine How Early You Want to Retire

First, determine what early retirement looks like to you. Do you want to retire in your 60s, 50s, or maybe even your 40s?

For some people, the idea of freely traveling, relaxing, or pursuing hobbies is all the motivation they need to aggressively save during their working years. 

Setting an "end date" is necessary because you have to work backwards from the age you want to retire to the age you are today to work out your investing strategy. 

Step 2. Calculate How Much Savings You'll Need for Retirement

Determine the "monthly nut" you'll need to sustain your standard of living during retirement. Your nut can consist of housing, utilities, transportation, groceries, and anything else you pay for that allows you to "exist."

An easy way to do this is to create a monthly average by looking at your monthly spending for the past six months. While some people think that coming up with a flat sum for their full retirement is the way to budget for retirement, it's actually important to calculate your way forward based on monthly expenses to create an annual retirement need. 

From there, you can see how much money you'll need to cover your anticipated retirement duration. 

Ideally, your monthly spend will not include a mortgage payment. The hard rule of retiring early is that your mortgage and other debts should be paid off by your retirement date. If your home has significant value, selling the home to purchase a smaller property for cash could be part of your plan for early retirement. 

Generally, it's recommended that you create a situation where you're living on 80% of your pre-retirement income to enjoy a similar standard of living. The less monthly costs you can avoid, the earlier you’ll be able to retire. 

For people retiring early, it's necessary to rely on your own investments and savings until Social Security payments can begin at age 62. If you can hold off until 70 before cashing in, you'll get the full benefits. 

Step 3. Start Saving Money

Even the smallest expense burden you can cut today brings you an hour closer to retiring. If you're doing retirement planning as someone who isn't a millionaire, there's no shame in "going cheap" for the sake of your end goal. Here are some ways to start cutting costs to get to the retirement finish line earlier than your peers:

  • Aggressively pursue promotions and "job leaps" that will max out your earning potential as quickly as possible.
  • Choose one streaming service that you like. Cancel all other subscriptions.
  • Pay off or refinance high-interest debt.
  • Open a short-term certificate of deposit (CD) for cash that isn't already being invested.
  • Invest in the annual family vacation fund instead of taking multiple vacations.

While this will help to build a nest egg, there's only so much that cutting costs can do for your retirement plans. It's just as important to grow money in anticipation of retirement. 

Step 4. Grow and Compound Your Money

Open a retirement account to start putting your retirement funds to work early. Receiving a matching 401(K) is a good place to start, though I recommend opening a self-directed IRA (SDIRA).

An SDIRA allows you to invest your IRA in alternative assets like real estate and crypto, which can grow in equity or accrue monthly mortgage payments to fund your retirement. There are several ways to raise money for real estate using your SDIRA that will allow you to compound your earnings without going broke.

If you're over age 50, take advantage of the IRS's catch-up contributions for retirement investing. Other growth and compounding options that are simple enough for the average person without a financial and investment background to use include:

  • High-yield savings accounts.
  • Certificates of deposit (CDs).
  • Bonds or bond funds.
  • Money market accounts (MMAs).
  • Real estate investment trusts (REITs).
  • Dividend-paying stocks.

Step 5. Reduce Debt and Expenses

Pay off all debts before retirement to limit your monthly spending. If your final mortgage payment falls beyond the date you want to retire, consider refinancing to a 15-year mortgage if you're in a position to make larger payments now in exchange for a mortgage-free retirement. 

I still recommend investing your money before paying off debt, though aggressively paying off your debt early will allow you to avoid interest payments. 

Step 6. Avoid Taxes

Many people lose a big portion of the money they've scrimped and saved for their entire working lives to taxes during retirement. If there is one secret the wealthy know that everyone else doesn’t, it’s how to avoid taxes

If real estate is your investment of choice for funding your retirement, make sure you're taking advantage of the 1031 exchange to jump from property to property without ever paying for capital gains on your earnings. 

A Roth-structured SDIRA is another great option to avoid getting hit by taxes. With this option, all of your income and gains will flow right back into your IRA on a tax-free basis. That means you're constantly building wealth without paying taxes on it until the day you need to take a distribution. Just remember to follow the IRS’s SDIRA rules.

Step 7. Budget for Healthcare and Other Expenses

The time from when you walk away from employer-sponsored insurance to when Medicare kicks in at age 65 is a long road. While it may seem like going without insurance can reduce your monthly nut, the truth is that one health emergency can leave you bankrupt in retirement.

A retirement health savings account (HSA) is one of the best ways to put aside money for care during retirement because it allows you to tuck away pre-tax dollars. If you've been carrying life insurance, consider swapping it for long-term care insurance once your policy terms are up.

The secret to retiring early is that nobody ever really stops working. That's because managing your investments and finances will remain a priority for the rest of your life. If you feel the nudge to get out of the rat race early, the first step is working with a financial advisor to start planning a realistic retirement budget.


11 Ways Wealthy People Avoid Taxes

One of the most common questions I get asked is: how do rich people avoid taxes without getting in trouble? 

It’s all too common to see headlines of rich celebrities and corporations that pay close to $0 in taxes. Recently revealed IRS files found that wealthy individuals like Jeff Bezos and George Soros have paid $0 in taxes over the years. 

However, the truth is that these individuals are able to do this through completely legal means available to any investor. 

While you may not have a team of attorneys and accountants working on your side, educating yourself on common tax loopholes and laws will help tremendously. 

Rethink your tax bill strategy with these 11 ways to avoid paying taxes like the rich. 

1. Invest in a Tax-Deferred Retirement Account

Capital gains taxes for assets can be as high as 20% depending on how long you held it and how high it was worth. 

One way to circumvent these taxes is to hold your asset for longer to qualify for a smaller capital gains tax. 

However, you can avoid most capital gains taxes altogether by growing your portfolio tax-free with an individual retirement account. 

IRAs offer many of the same tax benefits as a 401(k), except Roth IRAs can be managed almost tax-free. For example, all contributions to a Roth IRA are not taxable, and earnings can be withdrawn tax-free as long as they are within the required retirement window. 

Furthermore, a self-directed IRA under a Roth structure allows you to invest in alternative assets like real estate and crypto without being taxed. 

Other retirement accounts you might be interested in include:

  • SEP IRA: Recommended for self-employed individuals.
  • SIMPLE IRA: Recommended for small businesses.

Just be sure to research self-directed IRA IRS rules to maximize the benefit of your account. 

2. Depreciation

While many people are familiar with capital gains taxes, capital losses actually work in reverse–a process known as depreciation. 

You don't need to do anything special to benefit from depreciation. Under the IRS tax code, your assets automatically depreciate if you sell an asset at a loss. 

The simple depreciation formula requires subtracting the asset's salvage value before dividing the asset's cost by the estimated number of years of useful life. 

The asset's salvage value is the total it's estimated to be worth at the conclusion of its useful life. The number you get at the end is your depreciation expense.

Another method called double-declining depreciation allows you to bulk up your write-off of an asset's value right after its purchase in exchange for declining deductions as time passes. 

This is a good option for a small business that's struggling under the weight of startup expenses. The formula uses two times the number you get when you multiply your asset's single-line depreciation rate by its book value at the start of the year.

3. Charitable Donations

Claiming charitable donations on your tax return helps reduce your taxable income for the year. 

Both cash and material donations can be tax deductible as long as the recipient is a 503(c)(3) charitable organization. So plan your donations wisely. 

For example, if you anticipate being in a higher tax bracket this year, plan a larger charitable gift carefully to minimize your tax burden without exceeding the limit. If a donation is more than 60% of your income for the year, the excess amount will be rolled over for tax benefits for the next year.

For many, donating to charity is a great way to put the money they would have paid in taxes to better use. 

Remember, keep your receipts. 

4. Long-term Investment Income

As previously mentioned, the long-term capital gains tax is substantially lower than the short-term tax. 

While the short-term capital gains rate is between 10% and 37%, long-term capital gains are tiered at 0%, 15%, or 20% for people in different income and filing brackets. 

All it takes is holding on to an asset for a whole year before you sell. 

5. Tap Into Tax Breaks in Real Estate or Similar Industries

Every industry has its own set of "secret" tax breaks. 

In real estate, 1031 exchanges allow you to continuously raise money for real estate using the sale of your previous property without paying taxes on it. 

Let's also not forget about write-offs for property taxes, property insurance, repair costs, advertising, office space, legal fees, accounting fees, travel, and so much more. Wealthy Americans never leave these breaks and incentives on the table.

6. Step-up Basis

A need-to-know option if you're inheriting assets, the step-up basis loophole allows you to avoid capital gains taxes on inherited property. 

When a person inherits property or assets, the IRS resets the asset's original cost basis to its value on the inheritance date. 

While the heir will pay capital gains on that basis when selling the asset, the overall rate will be lower.

7. Gifting

Did you know that giving money to family members can lower your tax burden?

According to the IRS, a gift is not considered income for federal tax purposes unless it exceeds the annual exclusion of $17,000. 

As of 2023, the IRS allows you to give away $12.92 million in gifts cumulatively over the course of your life without ever paying gift taxes. 

Just be warned that the gift tax rate climbs to somewhere between 18% and 40% if you exceed the $17,000 cap in a single year.

8. Moving

While millionaires and billionaires hang out in the priciest zip codes in the country, they know better than to claim their wealthiest dwelling as their primary residence. 

If you currently live in a high-tax state, moving your primary residence to a home in a low-cost state can instantly boost your net worth. 

Changing tax residency is a complex process that usually requires the help of a tax expert. The biggest thing to remember is to never spend 183 days or more in a state other than the one you've claimed for your primary residence. 

9. Forming an LLC

An LLC helps you avoid double taxation the same way that the wealthy do. 

When you form an LLC, you'll enjoy the structure of a pass-through entity that allows earnings to go directly to you without prior taxation. That means you're only paying taxes on your personal income. 

LLC owners also enjoy tax deductions for business expenses, the Qualified Business Income deduction, and other perks that self-employed people don't get without an LLC.

10. Establishing Trusts

Establishing a trust can help you to reduce taxes in the context of a wealth transfer.

The first thing to know about this strategy is that trusts reach the highest federal income tax rates at lower thresholds compared to ordinary income. That’s why proper trust management is everything. 

The trick to using a trust to reduce your tax burden is to make distributions to a trust beneficiary only if that beneficiary is in a lower tax bracket. 

11. Understanding the Tax Code

This is probably the most important aspect of how wealthy people avoid paying taxes. 

You don't need to know all the tax laws to lower your tax rate, but it pays to know about the laws that relate to your investment decisions. 

Make sure to research various deductions and employ some of these tactics before the new tax year to lower your tax burden. 

Wealthy people don't just get lucky with taxes. They use existing tax codes to their advantage to keep more of their money without breaking the law. 

One of the best-kept secrets in personal finance is that many of the tax-deferral options available to millionaires are available to people making minimum wage, six figures, and everything in between. 

Experiment with some of these methods to try and lower your tax burden. Remember to talk to a financial advisor first.


How Do Self-directed IRAs Work?

While the days may feel long, the truth is that the years are short. This is especially true when it comes to saving away as much money as possible for retirement. 

If patience isn’t one of your strong suits, then looking for ways to build up for retirement as fast as possible may be tempting. 

One retirement plan I recommend to all of my followers and customers is a self-directed IRA (SDIRA). 

Unlike traditional retirement accounts, SDIRAs give you the freedom to explore alternative assets with high-growth potential. As a result, investors like me and Peter Thiel have used SDIRAs to significantly boost our wealth and portfolio. 

So how do self-directed IRAs work? Read more to learn the basics of opening a self-directed IRA.

What Is a Self-directed IRA?

A self-directed IRA is an individual retirement account that allows you to hold alternative assets. Unlike a traditional IRA that limits investments to stocks, bonds, annuities, unit investment trusts (UITs), mutual funds, and exchange-traded funds (ETFs), a self-directed IRA allows for investments in exotic, high-return assets. 

For example, a self-directed IRA allows investors to invest their IRAs in the following assets:

  • Commodities.
  • Real estate.
  • Raw/undeveloped land.
  • Water, oil, mineral, and gas rights.
  • Private stock.
  • Limited partnerships.
  • Cryptocurrency.
  • Precious metals that match specific standards.
  • Crowdfunded startup assets.
  • Foreclosure tax liens and deeds.
  • Foreign currency.

While custodians must oversee self-directed IRAs, each IRA is managed directly by the account holder. The burden is on the account holder to perform due diligence, conduct research, and maintain proper management of assets. 

Pros and Cons of an SDIRA

A self-directed IRA is an exceptional choice for someone seeking diversification of assets. 

For many people facing retirement, investing in alternative assets using an SDIRA is viewed as a shield against inflation and volatility. Here's a glance at the advantages of SDIRAs:

  • Flexibility: Self-directed IRAs provide a much broader scope of asset classes compared to traditional IRAs. Diversification beyond stocks, bonds, and mutual funds can help a portfolio to remain resilient against downturns. In addition, investors can dip their toes into exciting markets with everything from gold to cryptocurrency staking on the menu with SDIRAs.
  • Potential for Higher Returns: SDIRAs are especially attractive to investors looking for assets with higher-than-average investment returns. On the flip side, an SDIRA can also be a powerful tool for investment, such as raising capital for real estate using dormant retirement funds. 
  • Control: The account holder ultimately controls the destiny of an SDIRA. Many investors enjoy using their specialized knowledge regarding specific asset classes to make custom investment decisions. In fact, an SDIRA makes it possible to invest in hobbies and passions!
  • Tax Benefits: IRAs are amazing tax-free investments to build wealth to keep up with inflation without forfeiting most of it to the IRS. 

Some of the "pros" of self-directed IRAs can also be cons. For instance, the freedom and self-direction that make this an attractive option for some investors could turn an SDIRA into a hassle for others. Here's a look at the potential disadvantages of opening a self-directed IRA:

  • Full Control: The success of an SDIRA depends entirely on the judgment of the account holder. The pressure is really on when it comes to making smart investment choices.
  • Loss of Liquidity: While it's exciting to be able to invest in alternative assets, unloading them can take time and effort. Unlike traditional assets that can be sold off with the press of a button whenever the market is open, alternative investments can take years to sell, and some might never find buyers.
  • Fees: Fees can be slightly higher with SDIRAs. While the general cost to set up an SDIRA is reasonable, some custodial firms charge a lot for administration.
  • Complexity: A self-directed IRA comes with a long list of rules and prohibited transactions regarding your own assets. For example, real estate investments made through an IRA cannot be touched for personal use. The simple act of fixing a broken toilet in a property you own through an IRA could result in IRS penalties, interest charges, and forfeiture of your SDIRA tax benefits.

What's the Difference Between Traditional and Roth SDIRAs?

The difference between a Roth and Traditional SDIRA comes down to its tax structure. You have to consider whether you will be in a higher tax bracket now or at retirement to reap the full benefits of each IRA. 

Traditional SDIRA

With a traditional SDIRA, the account holder contributes pre-tax dollars. This investment then grows on a tax-deferred basis until being taxed as current income once withdrawals begin after age 59 1/2. 

This works for most people because they benefit from deferring taxes on a portion of their income during their "peak" earning years. For the average person, peak earning years are when their income is taxed at a higher bracket. 

The assumption is that people fall into lower tax brackets after retirement because they no longer work full-time. As a result, they will presumably pay a lower tax rate on their IRA withdrawals.

Roth SDIRA

With a Roth IRA, the account holder contributes after-tax dollars that will then grow on a tax-free basis. All withdrawals made after age 59 1/2 will not be taxed as current income. This can be a good option for someone anticipating that they will be in a higher tax bracket during retirement.

Rules, Contribution Limits, and Prohibited Transactions

In 2023, account holders under the age 50 have a contribution limit of $6,500. Account holders over 50 can add an additional $1,000 in catch-up contributions to max out at $7,500. 

Once a person reaches age 59 1/2, they can begin making withdrawals tax-free. However, the IRS only requires withdrawals at age 72, known as required minimum distributions (RMDs). 

Withdrawing funds before age 59 1/2 will result in a 10% penalty. The account holder will also need to pay income tax on the withdrawal amount based on their ordinary income tax rate. 

Fortunately, Self-directed IRAs do qualify for the same hardship distributions as other IRAs.

While much is made of the alternative investment options available through the SDIRA, this account type isn't made for free-for-all investing. For example, SDIRAs cannot invest in art, S-corporations, or life insurance. 

SDIRAs also have strong restrictions against what the Securities and Exchange Commission calls self-dealing. This means that IRA owners are not permitted to essentially "do business with themselves." 

For example, selling your property to yourself, lending yourself funds from an IRA, taking IRA income, and paying IRA expenses with your own money are all prohibited. 

In this scenario, the SDIRA owner is referred to as a "disqualified person" by the IRS. 

In the case of a real estate investment, this distinction means that the IRA owner is prohibited from living at a property, staying at a property, doing any kind of work or maintenance, or directly funding any kind of work of maintenance. 

The disqualified person's title even extends to an account holder's spouse, children, grandchildren, and parents. The same goes for any entity where the account holder possesses more than 50% ownership, holds a director role, or can be classified as a "highly compensated" employee.

How to Open a Self-directed IRA

A self-directed IRA must be opened with help from an account custodian or trustee. While some brokerage firms offer custodial services for IRAs, it's more common to use banks and trust companies that specialize as custodians of self-directed IRAs. Once the account is open, you are free to select investments.

Is a Self-directed IRA Right for Me?

Anyone seeking a bit of diversification and adventure in investing should consider an SDIRA. Although riskier, they tend to yield higher rewards. 

I recommend SDIRA owners research the risk involved with their investments, as well as what is allowed and disallowed in an SDIRA.

Opening an SDIRA isn't a spur-of-the-moment decision. You have to be both passionate and knowledgeable regarding the asset class you're investing in because you're betting on your ability to know a good thing when you see it.

Ultimately, an SDIRA is a great way to enjoy tax-free retirement earnings gained from real estate, private companies, cryptocurrency, and other unconventional asset classes.

Self-Directed IRA FAQ

What Type of IRA Lets You Invest in Cryptocurrency?

Unlike regular IRAs, the self-directed IRA allows investors to invest in cryptocurrency using tax-deferred income.

Can You Manage Your Own SDIRA?

While account holders get to make all of their own investment choices using an SDIRA, a custodian is required to open an SDIRA account. Trust companies and banks typically help with setting up SDIRAs.

What Can't You Invest in with an SDIRA?

While SDIRAs allow you to invest in a range of alternative assets, not everything is permitted. Art and collectibles, life insurance, and S corporations are all considered prohibited assets. In addition, certain precious metals won't qualify.


How to Use Real Estate Syndication to Build Wealth

There's power in numbers when investing in real estate. That’s why one of my favorite investments is through real estate syndication. 

Real estate syndication brings a group of investors together to pool their money to purchase a revenue-generating property. You don't have to be a millionaire to participate in real estate syndications, and it’s a great way to raise capital for real estate investments.

Thanks to the JOBS act passed in 2012, investors can now crowdfund real estate deals to earn passive income. 

Here's a glance at what you need to know about real estate syndication deals. 

How Real Estate Syndication Works

Prior to real estate syndications, single investors were forced to take on the full burden of funding the purchase of a property. Investors were also forced to manage every detail of property ownership. The income earned was anything but passive. 

While most people were simply locked out of investing in real estate due the cost and time required, the ones capable of funding investments had to put in full-time "landlord" hours just to keep a property profitable. 

However, real estate syndications allow you or your real estate LLC to pool your money with hundreds of other investors to invest in high-value real estate assets. While investing in a simple single-family home would be a bridge too far for most people, syndications make it easy to hold partial ownership in a high-value apartment building in a hot market. 

Once the property is purchased, it is managed by the syndicator responsible for originating the deal. That means that an investor isn't forced to deal with tenant issues, and profits and losses are distributed among the investors. 

The Real Estate Syndicator

Investment opportunities offered by a real estate syndication are initiated by a real estate syndicator. Also known as a sponsor, a syndicator is responsible for bringing the deal to life. 

Think of the syndicator as the general partner in the business arrangement. Here's a rundown of everything the syndicator handles in a typical deal:

  • Arranging the financing for purchasing a property.
  • Negotiating prices and terms with the seller.
  • Building a business plan.
  • Attracting investors.
  • Raising capital.
  • Hiring a team to manage the property.
  • Managing investor relations.
  • Handling all tax and financial reporting.

In many ways, an investment is only as good as the syndicator behind it.

A syndicator should be a real estate expert with experience in investing. 

They make everything happen by applying their experience and familiarity with real estate to handling underwriting, making deals, and performing due diligence on behalf of the investors pooling money into a deal. 

The Investor

The investor is an individual who decides to invest in the real estate deal being offered by the syndicator. You can think of an investor as a limited partner in the deal. 

As an owner of a percentage of the property, the investor gets all of the general benefits of property ownership without the administrative burdens that accompany owning property.

Syndicators may take a larger cut due to their active role in deals, but investors have far less liability.  

Benefits and Drawbacks of Real Estate Syndications

Benefits

  • Grow your real estate portfolio without investing large amounts of time, money, and research toward each investment.
  • Gain greater buying power by pooling money with other investors.
  • Access real estate in hot markets outside of your financial reach.
  • Offset gains with “paper losses” to reduce your tax burden. 
  • Invest passively (investor) without the headache of property management. 
  • Generate a high return on investment.
  • Gain knowledgeable advice on lucrative deals from trusted syndicators. 
  • Real estate syndication is available in a real estate IRA via self-directed investing. 

Drawbacks

  • Syndication deals have very specific investor requirements (must be an accredited investor).
  • Deals may be geographically limited. 
  • Deals may take a long time to develop and actualize. 
  • Investors have limited control over property management. 

In many ways, syndications are similar to real estate investment trusts (REITs). However, many investors prefer syndications over REITs because syndications allow investors to choose the properties they want to invest in instead of being forced to go in blindly. 

Eligibility Requirements

Eligibility is where real estate syndications begin to look different from other crowdfunded real estate options. While many investing platforms allow anyone with a few hundred dollars in their pocket to get in on deals, syndications come with very specific investor requirements. 

A person must be an accredited investor to participate in a real estate syndication. 

An accredited investor is defined as someone with an annual income of at least $200,000, a combined spousal income of $300,000, or a net worth of at least $1 million. 

How to Start Investing in Real Estate Syndication

Real estate syndication all starts with finding the right syndicator. 

It's important to look for a competent, experienced syndicator with a history of finding revenue-generating properties. 

A syndicator should also bring experience in property management, a successful track record with previous investments, and knowledge of real estate deals.

Real Estate Syndication Tips

  • Don't rush into anything. 
  • Conduct your due diligence.
  • Becoming familiar with the portfolio of a syndicator you are considering. 
  • Be ready for the long-haul–most syndicators hold a property for five to seven years before seeking buyers willing to purchase the property at a higher price. 

Real estate syndication can be a very high-risk, high-reward proposition.

If you are eligible for real estate syndication, I would strongly recommend considering it as an investment option for your portfolio.

Real estate syndication provides a great opportunity to earn high returns or to ramp up your retirement portfolio using a self-directed IRA

Quick Q&A Recap

1. Who Can Invest in Real Estate Syndications?

Unlike REITs, real estate syndications are generally only open to accredited investors. People who qualify as accredited investors are wise to take advantage of syndications instead of using crowdfunding platforms that allow anyone to invest because syndications provide access to high-value residential and commercial real estate. 

2. How Many People Can Participate in a Real Estate Syndication?

A real estate syndication technically only needs to have two investors. However, many have several hundred. 

3. What Are the Tax Benefits of Real Estate Syndications? Investors in real estate syndications can enjoy tax deductions, deferred income taxes, and lower tax rates. As a syndication investor, you also enjoy the benefits of depreciation for potentially paying capital gains taxes at lower rates. In addition, the 1031 exchange tax rule that allows you to defer capital gains taxes if you swap one property for another can apply to syndication investors.


Top IRA Real Estate Investment Strategies for Massive Wealth

Can you use your IRA to buy real estate? It’s a question worth asking as you eye up different investment strategies for retirement. 

To answer the question, not only can you invest in real estate with an IRA, but it could provide massive tax benefits that help compound gains in your portfolio. 

To get started, you’ll need to open a self-directed IRA, which is an IRA that allows for alternative investments. Self-directed IRAs can be structured like a Roth or traditional IRA, allowing you to compound those earnings tax-free until withdrawal–if you choose. 

However, there are several self-directed IRA rules limiting what you can purchase. Nevertheless, many investors still have lots of freedom to invest in multiple types of real estate that go beyond the restrictions imposed by traditional IRA custodians.

To help you get started with your real estate IRA investments, I’ve outlined a few ways to purchase real estate using your IRA. 

Five Strategies to Purchase Real Estate With an IRA

 1. Directed Purchase

The simplest way to purchase real estate is by using cash in your SDIRA account. If your account holds sufficient funds, you can purchase a property directly. Otherwise, you will need to pursue other options. 

Like a 1031 exchange, a direct purchase with an SDIRA is one of many tax-free investments you can use to build massive wealth. 

2. Start an LLC

Opening an LLC allows you to acquire complete checkbook control over your SDIRA funds to purchase and move real estate. Unlike direct purchases, which require custodial support, opening an LLC allows you to access funds directly without the support of your custodian, so you gain full control over your investment funds. 

To open an LLC, you’ll need to register it with all of the standard agencies required for incorporation in your state. A passive custodian is then used to transfer funds from the IRA owner to a new IRA LLC bank account.

Once opened, the LLC owner can exercise checkbook control over any investment they want. 

Additionally, LLCs offer investors additional tax incentives by helping them avoid direct federal taxes, so they are taxed at a lower rate. 

3. Partner Your IRA

Only some people seeking to generate wealth through IRA real estate investments have the cash available to purchase a property. Additionally, it can be difficult to raise capital for real estate

Fortunately, you can use your self-directed IRA to partner with additional investors to purchase a property. 

While we often call this partnering your IRA, the official term for this strategy is "purchasing an undivided interest" in a property. Once you've combined your self-directed IRA funds with partner funds, your IRA owns a percentage of the property that's proportionate to your funding contribution. 

In addition, your IRA is responsible for its portion of all property expenses. That same portion applies when proceeds are divided following the sale of the investment.

This approach is a great way to dip your toes in the real estate pool without taking on too much debt or risk. 

4. Invest in Mortgage Notes

What if you want to avoid using your IRA funds to manage a property you own physically? 

Fortunately, mortgage notes offer a passive alternative to traditional real estate investment. 

A mortgage note is a vehicle used to extend credit. Notes are used to back a loan and noteholders by charging interest. 

Portions of mortgages can also be purchased and sold through IRAs. Under this setup, your retirement account will hold an undivided interest in the portion of the note owned as a way to generate income.

5. Use Your IRA for a Non-recourse Loan

A non-recourse loan is another option for someone lacking the full funds to invest in real estate. This type of loan is secured in the name of your IRA using the property being purchased as collateral. 

Unlike personal loans, the IRA holder's personal assets are used as collateral. So a lender can only legally seize the IRA asset being financed.

Alternative Ways to Invest in Real Estate With Retirement Funds

If these traditional strategies require too much upfront capital or don’t suit your interests, there are several additional ways to leverage an IRA to invest in real estate. 

1. Become a Home Wholesaler

It's possible to use self-directed funds to put properties under contract from distressed sellers using your IRA. When you resell the contract as a wholesaler, the money from the buyer can be transferred directly to your IRA at closing. 

When done properly, a down payment ranging from just $100 to $1,000 can easily become $10,000.

2. Purchase Tax Liens

IRAs can be used to invest in tax liens that combine low capital, little responsibility for the investor, and generous returns. Tax liens are imposed on properties for delinquent taxes. 

When investors purchase liens from counties, they will make money in one of two ways. In the first case, the investor earns interest when a lien is redeemed. Secondly, if the taxes are never paid, the deed to the property is given to the investor.

3. Invest in REITs

Many people are surprised to learn that a REIT (real estate investment trust) is one of the investments permitted with a standard Roth IRA. REITs are publicly traded companies that own and manage income-producing properties on behalf of investors. The list of property types commonly offered through REITs includes:

  • Homes.
  • Apartment complexes.
  • Offices.
  • Warehouses.
  • Retail centers.
  • Medical offices.
  • Storage complexes.
  • Data centers.
  • Hotels.
  • Cell towers.

Investors favor REITs for their ability to pay out consistent dividends. In fact, IRS regulations dictate that REITs must pay out 90% or more of taxable profits to shareholders. While REIT dividends paid out to individuals are taxed as ordinary income, dividends paid out to IRAs enjoy tax benefits.

4. Form a Joint Venture With a Contractor

Self-directed IRAs can be used to invest in joint ventures. When designing a real estate joint venture, you can enter into an agreement with a contractor to pool resources to build or rehab properties. 

What makes a joint venture different from a partnership is that a joint venture is only intended to operate for a specific period. It's understood that both parties intend to sell for profit within that time frame, making them easy to enter and leave.

5. Bird Dog With an Experienced Broker

If your goal is to purchase a property through your IRA, there's no doubt that coming up with full funding using your IRA alone is a challenge. This is why many IRA-minded property investors like the "bird dog" technique, using brokers to help them find distressed, underpriced properties. 

While the broker takes a fee in exchange for leads, investors often find this the best way to scoop up bottom-of-the-barrel properties that can be turned into gems.

6. Purchase Options and Flip Raw Land, Farms, Vacant Lots, and Storage Units

IRAs can absolutely be used to fund "flip homes." Using a self-directed IRA, you can purchase homes in need of repairs for the purpose of either generating rental revenue or selling. 

However, it's important to be aware that the IRS has some pretty strict rules in place regarding who can perform work on an "IRA flip" property due to the disqualified person rule.

7. Sell Options on Existing Homes in Your IRA

Once you've added a property to your IRA, you can capitalize on that property by selling real estate options. Many investors are attracted to real estate options today because traditional real estate investment channels have become "crowded." 

With a real estate option, you're creating a contract that allows the buyer to purchase your property at a set price within a specific period of time in exchange for an option premium. If the buyer declines the purchase at the end of the contract period, you can move forward with another buyer with your premium in tow.

Using an IRA to invest in real estate is a great strategy for staying partially insulated against the stock market. Using the strategies above, investors can combine the tax benefits of IRAs with the growth of real estate to build massive wealth.


11 Best Tax-Free Investments to Build Wealth

Few people build wealth on salary alone. Instead, investments compound earnings by putting money to work passively. 

However, it's important to remember that how much you keep is more important than how much you make. Risk and taxes are the two causes of investment losses, but there’s no safer investment than a tax-free investment.  

Allowing your portfolio to grow tax-free removes the stress of moving your money around through 1031 or tax havens. Plus, you have a better chance of beating out inflation without the added burden of taxes. 

So whether you’re self-employed or a salaried individual looking to build wealth for retirement, here are 11 tax-advantageous investments for building wealth. 

1. 401(k)

The best way to tap into tax-free assets is to open up a retirement account. With a traditional employer-sponsored 401(k), employee contributions enjoy tax-free growth while reducing taxable income by transferring earnings out of each paycheck. 

As a result, you can contribute money to your 401(k) without having it taxed while also reducing the amount of taxable income from your regular salary. The only kicker is you’ll eventually pay taxes when you withdraw your funds at retirement.

An individual 401 (k) provides the same tax benefits as an employer-sponsored plan for self-employed people and small-business owners. 

While a 401 (k) is primarily used for investing in mutual funds, it can also be used for index funds, large-cap funds, small-cap funds, foreign funds, bond futures, and real estate funds.

2. IRA: Traditional, Roth, and Self-Directed

IRAs are another popular retirement account used to grow your wealth tax-free. 

There are a few different types of IRAs, including:

  • Traditional IRAs: Individuals contribute pre-taxed money to their accounts and are taxed at the time of withdrawal. 
  • Roth IRAs: Individuals contribute already taxed earnings and can withdraw their funds tax-free at retirement.
  • Self-Directed IRA: These retirement accounts allow people to invest in alternative assets, like crypto, gold, LLCs, or real estate, using a traditional or Roth structured account. 
  • SEP IRA: The Simplified Employee Pension IRA allows employers to contribute to their employee’s traditional IRA accounts. 
  • SIMPLE IRA: The Savings Incentive Match Plan for Employees allows employers to match contributions to an employee’s IRA. 

All IRA accounts are fine options for retirement, with the major difference being whether or not you think you’ll be in a higher tax bracket at retirement. If so, a Roth IRA may be right for you.

Additionally, all IRAs limit your investment options to standard stock market assets, such as stocks, bonds, ETFs, and CDs, with the exception of an SDIRA. 

3. 1031 Exchange

A 1031 exchange is an investing strategy that allows you to "swap" one investment property for another as a way to avoid short-term capital gains. Under normal circumstances, a person must own a home for one year before selling it if they want to avoid getting a hefty tax bill for income earned by selling real estate

The 1031 exchange allows you to avoid paying taxes at the rate of your ordinary income if you use the money earned from the sale to buy another property. 

4. Tax-loss Harvesting

Tax-loss harvesting works by selling an underperforming, money-losing investment to reduce taxable capital gains. For example, dumping an underperforming property can offset your ordinary taxable income to reduce your tax burden for the year. Once the property is off your roster, the money from the sale can be reinvested into a better investment option. 

5. Long-Term Capital Gains

Another way to lower your tax bracket is to hold an asset for more than a year to reduce your capital gains tax. When you hold on to a property or any asset for longer than a year, you'll pay long-term capital gains instead of short-term capital gains. While the short-term capital gains rate ranges from 0% to 37%, long-term capital gains are taxed at 0% to 20%.

6. Form an LLC

Forming an LLC allows you to avoid double taxation. An LLC is considered a pass-through entity by the IRS, which means LLC owners aren't on the hook for paying taxes on the corporate level. For example, many people form real estate LLCs to reduce their tax burden for any sale they make involving their investment properties. 

LLC owners can instead report their profit shares and losses on their personal tax returns, greatly lowering their taxable burden. 

7. HSA

Unlike a Flexible Spending Account (FSA), a Health Savings Account (HSA) doesn't require an employer sponsor. Your HSA will allow you to invest tax-deferred, tax-free earnings for eligible health spending. HSA funds can be rolled over yearly to ensure you don't lose the money you don't spend. The money can keep rolling all the way through to retirement to allow you to cover health services and products in your golden years.

8. Charity/Donations

Charitable donations can be tax-efficient investments. In addition to putting money toward a good cause, a charitable donation can reduce your adjusted gross income for the year. Everybody wins if the money you give to a good cause allows you to move into a lower tax bracket with a lower tax rate.

9. US Series 1 Savings Bond

A Series I bond is issued by the U.S. federal government with dual interest-earning potential that offers inflation protection. Every Series I bond earns both a fixed interest rate and a variable rate that changes with inflation. 

Series I bonds are never taxed at the state or local level. While federal taxes are based on the interest earned while an I bond is held, you can choose the method you want to use to pay your I bond taxes. The first option is only to pay tax on your Series I bond when it's sold back to the government one day. The second option is to pay the tax that is due on interest earned for the year that was added to your principal. 

10. 529 Education Fund

A 529 fund is a college savings plan sponsored by individual states. Money in an account can be used for school tuition, books, and other qualified expenses at most institutions. Contributions to a 529 account are counted as after-tax deductions. 

However, contributions can grow free of federal or state income taxes. Therefore, no income tax is paid when 529 funds are withdrawn for qualified expenses.

11. Municipal Bond

Finally, a municipal bond is issued by either a state or local government to fund investment projects in the community. When purchasing a municipal bond, you're effectively lending money to the bond issuer in exchange for interest payments. 

While short-term municipal bonds may mature in one to three years, long-term municipal bonds may mature 10 to 20 years in the future. Interest on municipal bonds is generally exempt from federal taxes. The bonds are also exempt from state and local taxes if you reside in the state where your bond is issued. 

Final Thoughts on Tax-Free Investment Strategies

We often focus on reducing risk when investing. However, a core principle of investing "for keeps" is to make choices that minimize taxes. The fun begins when you realize that this can be done using investments that involve everything from real estate to health savings accounts.