One of the Lesser-Known Ways to (Legally) Give Uncle Sam the “Slip”
Issue #2010
- WEALTHY: One more way to avoid overpaying Uncle Sam (Tom Phelan)
- HEALTHY: Keep your heart safe with 3 easy methods (Dr. Al Sears)
- WISE: Arthur Godfrey on paying taxes
ALSO IN THIS ISSUE:
- 6 steps and 5 years to a better life (Michael Masterson)
- What to do when someone screams your ear off (Suzanne Richardson)
- It’s Fun to Know… where the word "stat" comes from
- Add "undulant" to your vocabulary
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- Patrick Coffey
"I’m proud of paying taxes. The only thing is - I could be just as proud for half the money."
Arthur Godfrey
One of the Lesser-Known Ways to (Legally) Give Uncle Sam the "Slip" This Tax Season
By Thomas Phelan
It’s tax season again, and that means millions of Americans are reviewing their finances. Ultimately, we’re seeking the answer to the same basic question: "Is there a way improve the performance of my investments AND keep more of those profits to myself, rather than handing them over to the IRS?"
The answer is "yes" on both counts.
You may have seen my past articles in ETR describing exactly how you can achieve those goals. I’m talking about harnessing the power of "non-traditional" retirement accounts that allow you to invest tax-advantaged in real estate, businesses, and other non-Wall Street fare.
There are several types of non-traditional retirement accounts to choose from, including the Solo Roth, SEP, Roth IRA, and the increasingly popular Self-Directed IRA. Each plan appeals to a different type of investor, depending upon his or her personal situation.
Today, I’d like to tell you about the Individual or Solo 401(k), as opposed to a Company or Employer-Sponsored 401(k)). It’s a little-known plan that could allow you to sock away as much as $49,500 (or $99,000 total for a married couple) of tax advantaged money this year. That’s far more than most plans allow, and it provides you with considerable investing power.
Who Can Benefit From the Solo 401(k)?
The Solo 401(k) is designed for independent contractors or small-business owners who have no employees. And even if you work for somebody else as an employee, you may still qualify for a Solo 401(k). If, for instance, you have a business on the side (such as investing in real estate).
Just to clarify, while your business cannot have a single employee who receives a W2 from you, you may employ contract workers who receive a 1099. And if you are married, you can be in the business together and belong to the same 401(k) plan - and, thus, you can invest together.
The Solo 401(k) is a powerful tool with several distinct advantages for investors.
7 Distinct Advantages of This Retirement Plan
With a Solo 401(k) plan, small-business owners can take control of their investment choices. That could mean putting money back into the business or buying real estate or other non-traded assets (such as notes, mortgages, or trust deeds). And, if you qualify for the plan, you may be able to sock away far more money tax-advantaged than would otherwise be possible. Let’s take a look at seven of the distinct advantages you’ll have as an investor with a Solo 401(k).
- You write the checks directly from your account, which means you can fund an investment much faster than you can with a Self-Directed IRA or SEP. (No need to submit a Buy Direction Letter or Form to your IRA custodian.)
- You can use mortgage financing as leverage and, unlike a Self-Directed IRA that holds real estate, any net cash flow won’t be subject to Unrelated Business Income Tax (UBIT).
- If you set your small business up as an LLC, with yourself as the employee, you can contribute $15,500 annually (plus an additional $5,000 catch-up if you’re 50 or older) to a Tax Free Roth account inside the Solo 401(k).
- With your business set up as an LLC, you can also (this time as the employer) defer up to an additional $24,000 in earned income into the same Tax Free Roth account inside the Solo 401(k).
- Your spouse can be part of the same LLC that sponsors the Solo 401(k), and he or she, too, can contribute $15,500 annually into a Tax Free Roth account (plus an additional $5,000 catch-up if he or she is 50 or older).
- There is no income "ceiling" with a Solo 401(k) plan, in contrast to other plans (such as the Roth IRA), where you cannot earn more than $110,000 as an individual or $160,000 filing jointly.
- You can borrow up to $50,000.
In other words, you can use a Solo 401(k) account to invest far more funds tax-advantaged than would otherwise be possible. As I said, a husband and wife can contribute as much as $49,500 each for a total of $99,000, whereas an IRA or Self-Directed IRA (traditional or ROTH) has a maximum contribution of $4,000 annually (plus an additional $1,000 catch-up if you’re over the age of 50). And your funds don’t have to be invested in Wall Street products. You can invest in your business, or even buy real estate with a mortgage.
The Solo 401(k) can be a great option for people with a high income or a business with no employees if they are looking for a way to avoid taxes and have greater flexibility with their retirement planning.
Whether the Solo 401(k) is the best plan for you depends on your personal situation. But it is worth doing your homework to determine if you are maximizing your retirement savings with your current plan… or if there is room for significant improvements with a non-traditional plan.
[Ed. Note: Tom Phelan is a leading real estate tax-loophole expert specializing in helping individuals retire years, even decades, sooner than they ever dreamed possible. Tom travels the nation speaking to CPAs, realtors, lawyers, mortgage brokers, and individuals about 1031 Exchanges and Self-Directed IRAs. He is also the co-author of ETR's Million Dollar IRA and 1031 Exchange programs.]
Little known tax loopholes that actually help you retire early?
Are you missing out on two simple but little known tax loopholes that could not only save you thousands of dollars in taxes, but actually help you retire years earlier than might otherwise be possible?
If you’d like to stop working, and start enjoying your wealth sooner rather than later, take a look at this very special Tax Season offer on two myth-shattering techniques that…
- CNN/Money describes as the “obvious” way to wealth.
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- The Wall Street Journal recognizes as an “extremely tax-advantaged activity”
April 15th is just around the corner - don’t waste another dollar making Uncle Sam rich when you can be using these simple loopholes to accelerate your own wealth.
-Justin Ford
Dear Michael Masterson: "I need something that can get the cash flowing quick."
"I have been reading Seven Years to Seven Figures and your ETR for a couple of weeks now. I appreciate this information so much. It is allowing me to realize that I have endless financial possibilities that I didn’t even know existed for me.
"I am recently separated and a single mom. Money is very tight and my husband is threatening to stop all financial support. I can’t allow this man to blackmail me with money any longer. I have a good job that I love, with a bright future. Unfortunately, at this very moment, it isn’t providing me with a living. I want to stay where I am, but in the meantime I need to be able to support my family.
"I have been looking at the ideas to make money both in ETR & your book, and I guess I am a little overwhelmed with not knowing where to start. There are so many options, and they all sound like good opportunities. I need something that can get the cash flowing quick but will build residuals for my future. I am not afraid of hard work.
"My background is in architecture, kitchen & bath design, interior design, and drafting. I am pretty computer literate. I have no savings and am in debt from student loans. I am willing to do what it takes (legally) to ‘change my stars.’"
- Terry Jones
Vero Beach, FL
Dear Terry,
You are emotionally ready for a change, and you have a great attitude. But you have the personal challenge of a recent divorce and obligations to your children. I don’t have enough information to be certain the following advice will work for you, but it is a sensible plan for someone in your situation.
Make a five-year plan. Devote the first two years to working as an employee, learning as much as you can about an industry that appeals to you. Then, during the next three years, start to create a second stream of income and do some real estate investing. Plan to increase your income each year by at least 10 percent. And resolve to save 15 percent of your gross income, even if that means reducing your expenses now by moving into a smaller place and driving a less-expensive car.
Get an entry-level job in a great, growing company. You have skills and presumably some experience in design and architecture. This may be an option if you can find a company that is growing. But, given the current real estate situation, architecture might be difficult. You could also use your design skills to become a graphic artist, working on computers. There are all sorts of job opportunities in this field, many that don’t require you to be a gifted artist.
Become the best employee in your company. Follow the plan I outlined in Automatic Wealth for Grads to become a superstar and gradually work your way into a responsible position in sales or marketing. A combination of technical skills and sales/marketing skills puts you in the fast lane to becoming CEO one day.
While you work to take over the company, you’ll be learning the skills (and making the contacts) you’ll need to start your own side business. Most likely, that business will be in the same general industry that is employing you. That’s a good thing, because you will have the advantage of knowing how the business works (i.e. how sales are made) and - if you follow my book’s advice on mentors - you will have several influential people who will support you in your efforts.
Accumulate real estate slowly as you go, making sure to follow Justin Ford’s advice in ETR and perhaps taking his Main Street Millionaire program. The most important rule is to make sure your properties "wash their own faces." If you do that, you won’t have to worry so much about which way the market is heading.
Finally, spend your spare time learning. At this point in your career, learning is extremely important to your future success. Learn everything you can about how businesses operate - real world stuff, not MBA theories - and teach yourself the fundamentals of investing.
Don’t get crazy with your savings. Safe is better at this point.
Get started immediately… and keep up the good attitude.
- Michael Masterson
[Ed. Note: Have a question for Michael Masterson? Write to him at AskMichael@ETRfeedback.com.]
Learn how you can be part of an exclusive group of 25 to 50 ambitious businesspeople that Michael will be leading through an elite 5-day program that can help you dramatically increase the profitability of your business here.]
New Study: Alcohol Prevents Heart Attacks
By Al Sears, MD
Most doctors warn their patients that heavy drinking will raise their blood pressure. This is good advice. But a new study shows that a few glasses of wine a day raises your HDL (good cholesterol) and lowers your risk of high blood pressure and heart disease.
A team of researchers from the Harvard School of Public Health wanted to see if men with high blood pressure - who are generally advised not to drink - might safely enjoy a little wine, beer, or liquor. They looked at data from over 11,000 health professionals who were taking part in a 15-year survey. The men who had one or two drinks a day actually had lower rates of fatal and nonfatal heart attacks. The researchers also found that more than two drinks a day increased the risk of heart disease - findings that agree with those of other studies.
Of course, you can lower your risk of heart attack even if drinking isn’t for you. One reliable supplement you can take is cod liver oil, which ramps up your HDL and lowers triglycerides (blood fat). I recommend that my patients take at least 5 grams a day.
You can also improve your cholesterol by raising HDL and lowering LDL (bad cholesterol) with an interval exercise routine, like my PACE program. Interval exercise also expands your heart’s reserve capacity, giving it the power to pump more blood faster during times of stress.
[Ed. Note: Dr. Sears' PACE program is one of the most effective ways to prevent heart attacks. To learn more about PACE, click HERE.]
Unscrew Your Life: Dealing with Angry Customers
By Suzanne Richardson
You pick up the phone, give a friendly "hello," and furious words blare back at you. Whether or not you (or your company) have actually made a mistake, you’ve got one irate customer on the line.
Count to 10. Take a breath. If you deal with the problem effectively, you stand a good chance of keeping both your customer and your sanity.
Alberto Lugo, ETR’s Customer Service Manager, says you must first figure out why the customer is REALLY angry - and 90 percent of the time, this is different from what they initially tell you. "Sometimes, for example, they’ll tell you that they’re angry because they didn’t get a product they ordered or never received a response to their e-mail," says Alberto. "But when you dig a little deeper, you find that the real reason they’re so upset is because all they’ve been getting is excuses… when what they need to know is HOW their problem will be resolved."
Alberto remembers one customer who called to cancel her order because she hadn’t yet received it. Instead of giving her possible reasons for the delay - which would have only fueled her anger - Alberto asked her what it was about the product that convinced her to order it in the first place. This unexpected question calmed her down, reminded her why she wanted it… and allowed Alberto to reach the optimal solution: He would resend the product and extend her refund period so she’d have a longer risk-free chance to use it. She was happy, and Alberto managed to keep her as a customer.
"Some things are best left unsaid," Alberto explains. "If the customer complains about the fact that he had to talk to several people before reaching you or had been treated rudely by another customer service rep, of course you need to apologize. But don’t dwell on it. That can just make him angrier. By focusing on what he wants - rather than on his disappointments - you can save the sale and save the relationship.
"And then," says Alberto, "once you’ve satisfied the customer and ended the call, you need to address all the issues underlying his problem. Find out why the product didn’t ship on time… give your call center a refresher course on giving personal service… and make sure all e-mails are being responded to promptly."
[Ed. Note: Learn the keys to handling difficult situations in business, at home, and on the road. Just pick up your free copy of ETR's Unscrew Yourself e-book and get 223 pages of our most practical insider information.]
It’s Fun to Know: Where the Word "Stat" Comes From
The harried doctor runs into the hospital emergency room yelling something like "I need four ccs of morphine! Stat!" You’ve no doubt seen dramatic scenes like this many times onscreen - and maybe you wondered what "stat" really means. Well, it means "immediately" - from the Latin statim.
(Source: Dictionary.com)
Plug into Your Natural-Born Genius By Thinking Inside The Box
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Word to the Wise: Undulant
Something that’s "undulant" (UN-juh-lunt) - from the Latin for "a small wave" - resembles waves in appearance, motion, or occurrence.
Example (as used by Frances Mayes in Under the Tuscan Sun: "The undulant landscape looks serene in every direction."
[Ed. Note: Become a more persuasive writer and speaker ... build your self-confidence and intellect ... increase your attractiveness to others ... just by spending 10 VERY enjoyable minutes a day with ETR's new Words to the Wise CD Library.]
Michael Masterson
Copyright ETR, LLC, 2007