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WHAT TO DO WHEN YOU MAKE TOO MUCH MONEY TO INVEST IN RETIREMENT ACCOUNTS

9/4/2014

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Editor: Crass Cash
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So you've reached the point in your life when you're finally a big deal.  You're such a big deal that you actually make too much money to invest in government sanctioned retirement accounts.  Things like traditional and roth IRAs exclude any benefit because your income is over the limit.  WTF do you do now??

Well thanks to this newish type of financial product called an ETF (Exchange Traded Fund) you now have the ability to earn a very nice return and also to delay the capital gains recognition until you want to.  By buying into ETF on a dollar cost average or even at a lump sum, you're still going to have to pay tax on dividends, but at least you won't have to pay tax on the capital gains until you sell it.  This allows for you to defer capital gains for decades.  You're also not required to sell or take mandatory minimum distributions at 70.5 years old like with a traditional IRA or 401k.  And if you ever do need the money for whatever reason you're not going to pay a penalty to cash out the account.  Hmmm, I've almost talked myself into doing this instead of a retirement plan. Maybe this is why Robert Kiyosaki is a Debbie Downer on govt sanctioned retirement plans? 


The other category could be real estate. The government gives big tax breaks in the form of depreciation and also like kind exchanges.  The depreciation is a sort of a ficticious cost that the govt allows for you to lower your income for in exchange that you pay it back via a capital gains later.  The really nice thing is that your ordinary income rate is going to be higher than your capital gains rate (according to current tax law).  Here's an easy example:

Buy a $100k house that is depreciated over 27.5 years.  Annual depreciation will be $3,636 which brings down your taxable income by that amount.  However, if you sold it a year later for say what you bought it for, then you'd owe $3,636 in capital gains ($100,000 - ($100,000-$3,636)=$3,636).      

The 1031 like kind exchanges allow for you to essentially trade up a property and to completely avoid paying capital gains tax until it is sold for cash.  Google 1031 exchanges because it can get complicated and shouldn't be done by real estate novices.  

*Note there are other options, but there will get you started.  When you start making so much money that govt sanctioned retirement plans don't apply to you, then you need to see a CFP (Certified Financial Planner).  
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    This website was created due to the atrociously misguided financial advice that I've heard over the decades.  Financial freedom is not intellectually strenuous, but it takes discipline. 

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