We have only covered EARNING income, we haven’t gotten into storing or spending! But in any case, once you have earned money it needs to go somewhere. And where that money goes, can drastically impact your tax obligation.
Here’s an example. Let’s say you have $10,000 AFTER taxes. Where do you put it? Well, if you put it in a savings account and earn more than $10 in interest congrats you will get a 1099 at the end of the year! You will owe taxes on that whopping $10 of interest, taxed at your highest marginal rate. Oh, and even if you didn’t withdraw that money or close that account and it just sits there, yeah you will still owe taxes on the interest.
But what if later on you find a money market account that gets a 100% return? So instead of $10,000 you now have $20,000
What if you put it in a brokerage account and hold some stocks? If you don’t sell the stocks, you will not be taxed as these are unrealized gains. So, there is one advantage over just a traditional savings account. Or you can put it in a Traditional IRA or Roth IRA for tax free growth. You can day trade, swing trade or buy and hold stocks and don’t need to worry about taxes with every transaction. I especially like Roth IRAs which I will cover more in this section.
Where else can you store your money? Well you could put it in hard assets. Let’s say that with $10,000 you put in a down payment for a $50,000 property. Fast forward 30 years, the mortgage is paid off and at a 6% annual appreciation, the property is now worth $287,175. Just from appreciation you have gained nearly a QUARTER of a MILLION dollars. Do you want to be taxed on it or have it continue to grow? You could sell property and you would be subject to long-term capital gains and at 20% about $50,000 would go to Uncle Sam. OR:
You could do a cash out refinance of the property and use the proceeds to invest again. Yes you would have debt payments and interest but if your interest rate is say 4% and you are able to reinvest at even an 8% return, that gives you a 4% arbitrage and positive cashflow. More wealth and no taxes!
You could perform a 1031 exchange and move the proceeds to a new property, say a down payment for a multi-family unit. The tax is deferred then. Say you can use that down payment for a $1 million property. Fast forward another 30 years and now the property is worth over $5.7 million. Now here’s the fun part. Over a 60-year period you have grown a $50,000 property to a $5.7 million property. If you were to sell, over $5 million would be subjected to tax and $1 million would go to Uncle Sam. But if your heirs inherit it, they can get a new step up in basis. Their “cost” is now $5.7 million, not the $50,000 that you started with. And then they can start the whole process over again. At 6% annually over 60 years the $5.7 million property could turn into a $188 million property and that is without any leverage! (Can you see why and how generational wealth is created? Over 120 years, a $10,000 investment grew to almost $200 million!)
Finally, another great way to store your hard-earned dollars and accumulated wealth is through an overfunded Whole Life Insurance policy, sometimes called a “Rich Man’s Roth.” In the cash value portion of the policy, the money grows tax free at 3-5% annually and can be leveraged at any time without involving bank
s or a credit check. You can read about this in detail in my Perpetual Wealth section.
Read Next: HOW are you taxed? Part 3
*Full disclosure I am NOT a CPA nor a certified financial advisor (or any other alphabet soup designation) and all of the information in this section is provided solely for educational purposes and does NOT constitute legal or tax advice. EVERYONE should consult their own financial advisors, CPAs and tax strategists to compile their own individualized plans.*