If I say “retirement account” what do you say?
“401k”?
Or, is there a better way …
MoneyMonk thinks that there may be, but only once you’re a millionaire:
If you can achieve your investment goals, at the same time taking advantage of the legitimate tax-shelters available to you (e.g. 401k, self-directed IRA, etc.), then you would be a fool not to do so
Agree, 401k is the best way I can shelter tax
Once you are a millionaire, I see why a person like yourself Adrian have no need for it.
Essentially, Money Monk is saying two things:
1. You would be a fool not to have a 401k if you can achieve your investment goals, and
2. You probably don’t need one once you are a millionaire
I’ll turn this over to Scott, who addresses both of these issues very nicely:
I think that’s the big point that many people are somehow still missing. The point is that you did not BECOME a multimillionaire by putting money in your retirement accounts. You BECAME a multimillionaire by focusing on building successful businesses(which required you to put all your available cash into developing those business, not stacking it away in 401k’s, Roth IRA’s etc..), as well as buying stocks and real estate.
I think many folks keep forgetting that the purpose here is to learn how to make 7 million in 7 years, not 2 million in 40 years and then get taxed on it anyhow when you withdraw it at ‘government declared’ retirement age.
And, Scott is right: if I had put money away into my 401k instead of investing it back in the businesses and in real-estate (I invested in stocks, at that time, mainly with what little was in my 401k-equivalents, which were self-directed), I’m pretty sure the blog that I would be writing today would be Frugal Living Until You Are Just On Broke … and, I WOULD be advertising: I’d need the extra $4 a week 😛
But, pursuing tax-savings – as part of a Making Money 201 wealth building program – is a noble, worthy …. and MANDATORY … goal if you truly want to become rich(er) quick(er) … it’s just that the 401k is typically not the right vehicle to foster an ‘early retirement strategy’, and the other government-sponsored programs also have their limitations (how long your money is tied up; what you can invest in them; and, more importantly for the BIG Number / SOON Date brigade: how MUCH you can invest in each) …
… so, by now, we know what NOT to do … but, what should we do to manage our tax expense (after all, if we pay less tax, we have more to invest)?
Well, let’s turn back to Scott who was your typical 35%+ tax bracket high-income earner:
As far as using retirement accounts to shelter tax,just to help the readers understand a little better, after my wife and I did our taxes at the beginning of the year, we realized that after all business deductions, real estate depreciation deductions and rental mortgage interest deductions, we only paid around 25% tax for the year on our income, which is substantial. This was about 10% LESS in taxes than we paid the previous year when we didn’t own such investments. Needless to say, that 10% savings over last year equals approximately the savings we would have made by putting money into a retirement account, but instead, we now have multiple business ownership and extra real estate. This was simply from our first year of dipping our foot into investing and being part of the 7 millionaires in training.
And this is only the beginning. I wonder how much less in tax we’ll pay next year by buying up appreciating assets and/or small business ventures?
No matter how much tax you pay next year, Scott, by investing in income-producing, appreciating assets – and, holding for the long-term in the right types of structures (trusts or companies) – I have absolutely no doubt that you will (a) pay less tax and, (b) return more than the average Doctor on the same salary who doesn’t …
… and, since you are one of the 7 Millionaires … In Training! I will show you exactly how to do it … and, anybody who wants to be a fly on the wall (better yet, participate in the open discussion) will be able to learn some valuable lessons, as well.
And, you can take that to the piggy-bank!
We cant really rely on 401K nowadays. There are so many write ups on the negative aspects of 401 that I think it had lost credibilities among the citizens. Everyone is looking elsewhere for options.
I’m definitely excited about learning more on how to reduce the tax burden in Money Making 201. I was pleasantly surprised to get a glimpse at how well it worked between this year and last year for us!
I’m struggling with this one right now. I don’t want my focus to be on my 401K, and I barely spend any time or energy on it, but I want to be sure I’m making the right call by investing in a 401k at all.
Here is my real world example: If I don’t put any money into my retirement account, I will pay $7,000 in taxes. If I put $10,000 in my IRA I pay $2800 in taxes (around $20K would have me owing $0). My decision was to invest $10,000 to keep from paying $4,000 in taxes.
I get that if I already have investment property or the like I could have further write offs and perhaps not be faced with this scenario, but other than my current S corp, I don’t have them yet (and what a motivation to get them!). What would you guys do in my current situation?
@ investment-gan – it’s not really the fault of the 401k … it’s all about the investments (and their associated fees) that you are normally ‘forced’ to put in them. 😉
@ Ryan – There’s nothing wrong with saving $4,200 in taxes … that’s an instant 42% ‘return’ … pretty hard to get in ANY market; the problem is: what comes next?
– You can’t touch that money without penalties until you’re pretty old
– You pay taxes at income tax rates rather than capital gains tax rates (but, who knows what will happen to these relative rates … this could become an advantage in 30 years?!) when you do withdraw the money
– Your 42% return is only year one; in year two and onwards you are tied to mutual fund returns MINUS fees.
On the other hand, if you used your S-corp (or, c-corp / LLC / or trust, depending upon what your attorney/accountant recommends) to purchase an income-producing investment, I can pretty much guarantee [ AJC:keeping in mind that this is an opinion column, NOT investment advice 😉 ]that you won’t give a hoot about that $4.2k tax saving in 10 years.
But, if you have nothing better to do with $10k, then the 401k option is better than the CD or spend options 😛
Anybody else want to venture an opinion?
I agree Adrian, if you don’t have any other plans for the money, the retirement account is the best place for it. That statement probably sums it up the best. I think it’s about making a decision between a couple of options. And only you can decide which option is best for you(gets you to your number faster).
Option #1: Go for the retirement account first, then think about investing the rest of your savings.
Option #2: Pour everything you can into a real-estate purchase, new business or current business expansion or stock purchase in good but undervalued companies, while studying all of these types of investments diligently as to control risk.
Both options are better than doing nothing or spending all your income, but in my opinion, Option#2 gets you a higher number faster. And in the long run, the amounts that you would have saved in taxes from retirement accounts are null and void when you have 10-50k(or higher!)/month in passive income coming in and your free to live your life’s purpose, now, rather than safely ‘getting by’ at 60.
Interesting. Now we’re getting to the nuts and bolts 😉