All Forum Posts by: Max Gallagher

Craig - Great question and congratulations to your father on the business sale. That's a significant transaction, and it's wise to tap your network for a full understanding of opportunities available. On insurance protection.. if a brokerage firm fails and assets are missing, SIPC coverage is what will be used to protect up to $500k, including $250k limits for cash. Most major brokerages also carry excess SIPC coverage which will cover significantly higher limits. Policy limits vary but your father will have adequate coverage with Vanguard, Fidelity, or Schwab. Fidelity and Schwab policies are slightly more robust but you're likely fine with any of the three. In my opinion, the risk of custodial failure is low and the protection is high.. not something to focus too much on in this decision. 

As to the best place to park funds, with a known $1m tax liability coming due, safety and liquidity are priorities. Money market funds (ie. VMFXX) will offer some of the best yields (ie. 4.24%) and daily liquidity. These yields do fluctuate daily so you may also want to explore a liability-matching strategy where you buy t-bills at a specified duration (ie. 1 year) to match when your tax bill is due (ie. 1 year-ish). You may sacrifice some yield but you lock in a solid interest rate (ie. 4.05%) without having to worry about potential declining interest rates over the next year. 

For the remaining $2M, a money market fund is a temporary solution. You would need to consider your dad's overall financial goals, other assets, income/expenses, etc to determine the best course of action. A financial planner can help immensely on the investment, taxes and estate planning front. 

Finally, regarding the $1M tax liability, there are several advanced tax planning strategies I'd highly recommend exploring that have the potential to significantly reduce that bill. These aren't just about deductions; they involve strategic structuring and timing. For example, we could look at utilizing specific types of trusts, charitable giving strategies, or even exploring opportunity zone investments. This is an area where proactive planning can make a substantial difference. I have seen clients reduce tax bills by very large percentages through proper planning.

Let me know if you have any questions or would like to talk in a bit more detail. 

Matt - First, it is vital to remove the excess contributions from both your Fidelity and Acorns Roth IRA accounts. Google "Fidelity return of excess IRA contributions" and you'll find the workflow to take you through the process. Acorns likely has a similar process or form.

Once contributions are backed out, you might consider an alternative way to fund your Roth IRA for 2024.. by making a backdoor Roth contribution prior to 4/15. To do this, you'll make a non-deductible contribution to a Traditional IRA and immediately convert that contribution to your Roth IRA. Since you made the Traditional IRA contribution with after-tax dollars (ie non-deductible), there are no tax implications of converting that contribution to Roth.

To supercharge your retirement savings moving forward, especially in higher income years, I'd recommend looking into a Solo/Individual 401(k). This account can be a great tool to defer and grow income.. ultimately helping to lower taxes paid in the current year and over a lifetime. This also doesn't prevent you from continuing to fund your Roth IRA via backdoor Roth contributions.

ITS VERY IMPORTANT TO NOTE that the backdoor Roth strategy only makes sense if you have zero balance in Traditional/Pre-Tax IRAs (including SEP/SIMPLE). Otherwise you will be subject to the Pro-Rata Rule and there will be tax consequences on the conversion. To get around this, you could look into rolling over your Pre-Tax IRA balance into the Solo 401(k) mentioned above which is not subject to the pro-rata rule. The Pro-Rata Rule applies to Pre-Tax IRA balances as of 12/31 of the tax year in question so if you have/had any balances in a Pre-Tax IRA, a backdoor Roth conversion for 2024 will likely result in taxable income. 

Make sure you get professional guidance on the corresponding reporting and let me know if you'd like to talk any more details. Hope that helps!

Hey Kashyap - Yes, it's possible but will depend on a lot of different factors such as your definition of conventional, the bank, history of your LLC and business, loan program, collateral/guarantors, etc. I'd setup a call with both a local community bank or CU and a national bank, give them some details on your business, and take notes on available loan programs and options. You'll get more tailored advice than what you're able to find online.

If you're struggling to find a good option after calls with banks try finding a quality broker. They'll be slightly more expensive but they have the ability to shop around and should have options for alternatives. 

Hey Amber - You're asking the right questions—selling multiple properties creates both tax planning opportunities and reinvestment challenges, and the best approach depends on your long-term goals and overall financial picture.

If your priorities are reducing taxes, maintaining cash flow, and moving to a truly passive structure, you may want to take a second look at passive exchange vehicles like DSTs and 721 UpREITs. Like any investment, due diligence on the market, asset, financing, and sponsor is critical, and working with an advisor to vet these options is worthwhile.

I’ve recently helped several investors transition into 721 UpREITs as a gradual tax-deferred exit from direct ownership. The process starts with a 1031 exchange into a DST, which holds properties pre-identified for acquisition by a private REIT. Over time, you can exchange your DST interest into REIT shares (via 721 exchange). This keeps your cost basis and deferred gains intact while offering liquidity and flexibility—you can sell shares gradually to spread out taxes and still receive passive cash flow, often exceeding current rental yields.

A pure DST strategy can also work for passive income, but as you noted, not all DSTs are created equal. Some are overly leveraged, while others focus on stability and income production—alignment with your goals and timeline is key.

While 1031 and 721 exchanges are great tax deferral tools, they’re just one piece of a larger strategy. There’s no one-size-fits-all answer, but a quality advisor can help evaluate the best path forward based on your specific needs. Let me know if you'd ever like to chat further.

The cost associated with true anonymity is far more than the benefit you receive (or the need in 99.9% of cases). There's a certain firm out there I've seen that advertises this and uses scare tactics to sell expensive estate/legal packages. As Josh mentioned, an LLC owned by a living trust is the typical structure that I'd recommend to most people.

Given the cost of LLCs in certain states and the maintenance/headache required to keep your books in order, there should be a good reason for you to pursue a separate LLC for each property. Owning a few long-term rentals in one LLC usually makes a lot of sense and will save you a lot of time and costs. If, for example, you're looking at a larger, commercial deal with or without partners, it would make sense to have a separate LLC for that property.

The last thing I'll add is that a great liability/umbrella insurance policy is usually one of the best (and cheapest) things you can do to protect yourself and your assets. If there was ever an incident and legal action was taken against you, your defense team is the lawyers from a big insurance company and they're in the business of paying as little as possible. 

Jeremah - First off, congrats on what you and your wife have already built—it’s no small feat managing W-2 income, business income, and rental properties while thinking strategically about tax planning. It’s great that you’re being proactive, especially as you scale up your real estate portfolio.

You're right in noticing that higher W-2 income creates some barriers when it comes to offsetting taxes through real estate, especially due to passive activity loss limitations. As you've figure out, there is no magic strategy to eliminate your tax bill. Real estate presents opportunities for tax planning which essentially boil down to depreciation/cost recovery. This phantom expense (not an actual $ outflow) reduces and shelters real estate income. While this helps shelter real estate income, you'll need someone in your household to meet Real Estate Professional status to start using depreciation to offset W2 and other ordinary income. Pairing this with a multi-year acquisition/cost seg strategy (accelerating depreciation) is how high earners in growth mode can significantly reduce their tax bill. 

While you both are working a W2 job, it can be extremely difficult to qualify for REPS. That's why many investors have turned to short-term rentals and the "short-term rental loophole." The key here is that STRs are treated differently from long-term rentals for tax purposes—they're not considered passive if you materially participate and the average rental period is less than 7 days. This means you could use STR losses to offset W-2 income without qualifying for REPS. Combining cost segregation with STRs can lead to large first-year write-offs.

I'd also want to know more about the benefits available to you through work and your self-employment/business income. There are many other tax strategies you could be taking advantage of outside of the real estate world and a good financial planner will help you identify and maximize these benefits in the context of your overall goals. For example, if tax minimization is a priority and you're already maxing out your employer sponsored 401(k)s, you can look at deferring self-employment income through SEP IRAs and an individual Defined Benefit Plan. 

A qualified CFP or CPA should be able to pay for themselves and I'm glad you're starting to think about this as an investment rather than an expense. Talk to a few and get details on the specific strategies that could make sense in your situation. 

Hi Trevor! Great question and I completely get the appeal of wanting to prioritize portfolio cashflow once your paychecks stop. That said, it would be hard to determine if this is a move that will help or hurt you with such little information. 

While a more robust conversation around your entire financial picture would be required, here are a few questions that I'd want to double click on first:

Where is Your War Chest? - The type of account(s) that hold your life savings is important in this decision (ie. savings, brokerage, pre-tax retirement, Roth retirement). I assume that since you're waiting until 59.5 that at least a decent bit is held in retirement accounts and you're hoping to avoid early withdrawal penalties. Either way, there are a wide range of tax consequences associated with big withdrawals from any of these accounts that can't be ignored.

What is Your Current Plan? - Say you decided not to go all in on real estate, do you have confidence that your current nest egg would be enough to protect your retirement spend? If not, is this decision an attempt to step away from work sooner than you would otherwise be able to? Do you have clarity around different options there are to create cashflow besides pure yield/interest/rental income?

What is Your Real Estate Experience? - Are you considering using your war chest for your first real estate investment or are you experienced in this space? Make no mistake, shifting a "big war chest" from liquid investments and cash into a cash flowing real estate portfolio is not a passive endeavor. Assuming you're getting into deals that can perform above what the market will deliver (the only reason you would do this), there is still going to be a lot of work involved. Granted, this may be what you're looking for in your ideal "retirement" but worth noting!

My personal opinion is that, while shifting investments into real estate may be the right move for your situation, there is likely a lot of work to be done before you get to that step to avoid a potentially costly mistake. Retirement income can be created in many different ways and the tax implications of all options should be carefully thought through. You only get one shot at retirement so I'd highly advise at least having a conversation with a financial planner. Feel free to message me if you want to talk more details. 

Juan - Congratulations on your first rental property! While some get into investment real estate for the tax benefits, I'd venture to say nobody gets into it for the tax compliance and bookkeeping work. That said, figuring out if and what to outsource is important to make sure you're spending your time doing high impact work.. This is fluid and will change depending on where you're at in your investing journey. 

I'm typically an advocate for hiring a CPA once a Schedule E or C is involved. With one long-term rental and a full time job, advance tax planning opportunities are going to be limited. That said, staying on top of losses and basis is important and worth the cost of a CPA. I've had bad experiences with H&R Block but there are many firms out there that will file your return for $1,000. 

As I mentioned, advanced tax planning opportunities are going to be limited so finding a highly specialized CPA is probably unnecessary and going to reduce your pool of otherwise qualified accountants. The tax prep work is straightforward (assuming its just a W2 and a long-term rental), and your priority should be to find a qualified CPA that communicates and responds in a timely manner. Let me know if you'd like some recommendations for a few firms that I think do a nice job. You can also use the BP Tax & Financial Services Finder.. some good options on there!

Lastly, bookkeeping.. Bookkeeping is the process of recording and organizing income and expenses for your rental. Most bookkeepers have minimums, which will lead to quotes like $6,000 per year (high but not out of the ordinary). If you were going to focus your time on learning something, I'd say getting familiar with a bookkeeping platform (like Quickbooks Online) would be the best bang for your buck. There are tons of articles and Youtube videos to help you with setup and monthly management. 

As you continue to grow your business you may consider outsourcing the bookkeeping work! For right now, I think you're better served handling that yourself and partnering with a CPA on the tax work. 

Paul - Firstly, congratulations on accumulating a strong (and diversified) financial foundation. You're at the net worth level now where detailed investment and tax analysis can have large impacts to your overall ability to retire and spend. 

A few quick notes before I go into more detail on how I approach situations like this:

- As mentioned in other replies, a 401(k) match should (almost) always be taken advantage of. It's a guaranteed rate of return above and beyond anything you can get in the market or real estate. 

- The 4% rule is a helpful benchmark but leaves a LOT to be desired in terms of projecting retirement income from a liquid portfolio. It will depend on your goals (leave a large inheritance versus spending your money over your lifetime) but your portfolio likely will be generating average returns in the 6-8% range while retired and if you're only withdrawing 4%, even after factoring in inflation you're really not spending down your nest egg. You can likely withdrawal more than 4% without having any concerns of running out of money. Detailed financial planning analysis can hone in on the actual number with a high degree of accuracy. 

One of the things I love most about this community is that people are not afraid to challenge the status quo (ie. the smart thing to do is contribute to your 401k). While I certainly think that reducing retirement account contributions and investing in real estate could be a great option for an early retirement, it requires honest conversations and detailed projections around your current portfolio's performance and expected rate of return on future acquisitions. I say this because every investment is an opportunity cost, and if you're going to take money out of stocks (whether in a brokerage account or 401k) that could be earning 8-10%, you should have confidence that your acquisitions are going to perform better to account for the additional risk. 

Performing "better" should also be analyzed on an after-tax basis. Understanding the tax benefits of pre-tax contributions, cost recovery, real estate professional status, legacy goals, etc are all part of the equation and should be considered. 

I know I didn't give you a direct answer to your question but the reality is that we're just at the tip of the iceberg. Anybody who says this is a good or bad idea without any more information isn't doing you any good. Let me know if you'd like to chat further about this and put some projections together. 

Maybe a few days late to this post but thought I could provide some clarity as a Certified Financial Planner. I'm a big fan of Mega Backdoor Roths if your plan allows for it (ie. automatic in-plan Roth conversions). 

In a head to head comparison of pure after-tax growth, MBDR wins as all of the earnings on contributions are tax free whereas earnings in a taxable account are subject to capital gains upon sale. For example, say you contribute $30k via MBDR to your Roth 401(k) this year and over the next 15 years it grows by 8% annually to ~$100k. If this $30k was invested in the Roth 401(k) you could withdrawal $100k with no tax consequences. If this $30k was instead invested in a taxable brokerage account, you'd pay capital gains taxes on the $70k of growth and be left with a tax bill as high as $14k. That's a sizeable tax bill that can be avoided just by investing in a different type of account. 

Now we know there are no free lunches, so it's important to understand the tradeoffs. Withdrawing from retirement accounts in your 40's is not as easy as made out in your post and pointed out in some replies.. there likely would be a 10% penalty associated with withdrawals even if its contributions. While you might have more flexibility in avoiding the penalty if structured as a 401(k) loan or a hardship withdrawal, I would only recommend contributing to a Roth if you have confidence that you won't need to touch it until 59.5. 

Seeing as you mentioned you have very little liquidity in after-tax and savings accounts, I'd likely recommend focusing on building up a buffer of accessible and liquid dollars in an after-tax brokerage account prior to maxing out a Mega Backdoor Roth. It also doesn't need to be all or nothing.. if you have the ability to save an extra $30k per year, you can save half of that into a brokerage account and the other defer into a Roth 401(k) via MBDR. My main priority (knowing very little outside of what you shared) is to make sure you have funds liquid and available so that you may weather a potential emergency.