All Forum Posts by: Walt Payne

Ok, let's look at this from a different perspective. If someone puts money into a 401k, how smart is it to pay earned income rates on investment income that would normally be taxed at a much lower rate? Where is the prudence in that philosophy? Why not pay the earned income rates up front and not pay any taxes on the investment earnings? And yes, that difference is seriously amplified at higher tax brackets, but even in the lower brackets it makes sense to use the Roth option. And, think about it, that then lowers your tax bracket for any real earned income you might have at that point.

AND, with a Roth account one can remove the deposited amount if needed with no tax or penalties after the account is 5 yrs. old (though not the earnings).  A definite advantage! That is considering a "likely outcome" that your philosophy totally ignores, emergencies.

There is an easy way to do what you want. Create a LLC that does the flips (or manages them), that has no employees except you, and possibly your spouse. Create a solo 401K for that company. Now you can put the max contribution in for yourself (and for your spouse?). After that max is hit, you can then contribute more under profit sharing up to the max. That is the route I took, and it works nicely.

BTW ask an accountant, but they will probably tell you to create an LLC that is taxed as an S-Corp. Since you do not yet have this LLC formed, do so and then contract with them to manage the flip on your behalf. Charge yourself lots of money so the company has a profit, so that you can contribute that profit to your solo 401K. Pay yourself a salary amounting to the amount you want to contribute to your 401K, therefore you have no additional earned income. If you elect to be taxed as an S-Corp the rest is profit for the company and paid as a distribution of profits and is taxed at a lower rate. So you reduce taxes in two ways.

@Westin Hudnall  There is financial book sense, and financial emotional sense. Your plan makes sense from an emotional sense point of view, and that can lead to a lot better sleep at night. Nothing wrong with that, I took a similar road even though I know the math behind the other methods make more sense on paper.

 As Jon said:

"Self direct!

Current plan won't let you? Start a business and roll it into a self directed solo 401k."

Turn an active part of your REI into a business with earned income, and pump as much as you can claim into a solo 401k. I do my own renovations, which is earned income, in a separate LLC which charges my rental LLC just the right amounts, coincidentally. That profit all goes to my 401k. Works out nicely!

Also, for a regular IRA, you can roll that into the 401k also, though for some stupid reason you can't roll a Roth IRA into a 401k.

@David C.  The anticipated tax rates are more because of recent investments going very well, and a business that I plan on phasing over responsibility to my son in exchange for a nice percentage of the profits. 

I have not given up a lot, just a few expensive indulgences. Things like a month long trip to Australia and New Zealand, a few expensive camera gadgets that I want, etc. But that is also why I am retiring at age 58, rather than the way most do it. I want to retire while still young enough to enjoy life.

That assumption is not necessarily true, I agree. And not one I was making. Just that there are activities and travel destinations that I have delayed until after retirement. So for me, the additional income is part of the plan and compensation for pleasures not indulged in yet. 

That said, too many people do just "get by" in retirement. Not by intent, but because of choices made before retirement. My choices will allow me to live without financial restrictions inhibiting my preferred activities.

@Vince Beusan 

Fallacy #1 - the 2.5% rule. My solo 401(k) pays 0% fees. Total. Sure, I had setup fees, and I have to do the managing, but it costs me nothing to run, or invest. I invest in whatever I wish, pretty much.

Fallacy #2 - The tax rate. I paid the taxes on most of my 401(k) investments (Roth plan), and therefore will not pay anything on the average of 15% annual earnings, compounded each year. My standard plan will pay my tax rate at retirement, true, but I have kept most of it as Roth, though it costs more taxes now. 

Food for thought on how a 401(k) can REALLY work for an investor.

@David C.  You are right, tax deferred will work best for the average investor or wage earner who plans on getting by on less than their current salary. And many do that. I plan on enjoying life when I retire.

@Jonathan Twombly  I would think it would work as far as taking possession of the property, but moving the tenants personal property out? That part could get into liability for loss or damages.

If it is a double pane, gas charged window that is not an unreasonable amount for repair, though it is usually significantly cheaper to order a replacement window and put it in yourself.

You do realize that you can have a Roth component within a solo 401k, which is what I was referring to. That can also be used to invest in real estate or whatever you want. I am not arguing against a 401k, just saying that paying taxes now on some of it in a Roth account makes sense. That way that money and all of it's earnings are tax free later.

The max for ONE 401k would be $55k, though I know the limit goes up a bit next year. But in theory if you have a 401k with different employers you could theoretically have $110k. Not likely because your personal contribution is the same total, but the company contributions could theoretically max out the amounts. And none of that includes spousal income.

Personally I can contribute the max to my employer's simple IRA ($22k? including catch-up), then transfer that plus employer contributions out to my solo 401k, plus my REI company can contribute $55k to my solo 401k, part Roth and part traditional. So for me I am contributing $77k this year to my tax deferred accounts. I am maxing out my 401k, my company simple IRA, plus making other investments. Does that make sense yet?