1/3 Of My Income To Taxes If I Don't Do Something!

[Ashan D]

Guys,

I have been thinking about taxes lately and have come to realize that they will hit me very hard if I do not proactively find a solution. I trade the markets with with few expenses to deduct and will be in the 28% bracket. California tax is another 9.3%. This means that if I don't do something about 1/3 of my account is going to taxes

My initial plan was to wait a couple years and start straight by going into a good sized property, either a 15+ unit apartment or even better, a small strip center or office building.

But taxes will severely diminish this plan. I need to do something different to save my money for now.

I have less than a year of trading history so getting a residential loan will be difficult.

I live in Long Beach, CA so buying a house around here, at this time, is not a good option. I can not move for 2 years due to school.

I am considering buying a SFR for tax shelter purposes.

The closest areas that have cash flowing SFRs are about 70-100 miles away and these areas are not ideal (Lancaster has a high homeownership rate due to high average income, but also is a high crime city for some reason. Moreno valley is an outskirt area and also somewhat lower class)

DO you guys think going this route is even worth it in this climate, or should I just take the hit and pay full taxes for now?

[Jon Holdman]

If you think tax rates will remain the same, and you can make the same contributions, then a regular IRA and a Roth work out exactly the same. If you have $1000 pretax, put it into an IRA, and make 10% for 30 years you end up with $17,449. Then you pay 28% tax you end up with $12,563. If, on the other hand, you pay 28% tax right now on the $1000, and invest the remaining $720 in a Roth for 30 years at 10%, you end up with the very same $12,563. That's actually just the commutative law of multiplication we learned all those years ago.

However, the 28% is a marginal rate. So, while you're sure to pay the $280 before putting the money into the Roth, you would actually pay a lot less than 28% on the $17,449, if that was your total income. If you had other income, then you indeed might pay the full 28%.

On the third hand, tax rates are very low, on a historical basis. We could well be at much higher rates when you go to take the money out.

Yet another factor is the contribution limits. If you can contribute $1000 after tax in to the Roth, you can keep the entire R17,449 tax free. That's a $1389 pre-tax contribute, less the 28% tax. So, effectively, you're getting a higher contribution limit.

And even another consideration is that there can be taxes inside an IRA, under certain circumstances. Debt financed rental real estate for one. Most "active" businesses for another. Those incur "unrelated business income tax". Roths avoid that tax.