How to Start Generating Tax-Free Investment Income
The economic toll brought on by Covid-19 has been devastating. Unemployment has spiked with no relief in sight for many as lockdowns persist in many states.
Without downplaying the economic and social distress experienced by many Americans, there may be a silver lining in all of this.
There may never be a better time to shift your financial paradigm.
Back in 2008, in the wake of the meltdown of the financial markets and the onslaught of the Great Recession, many who lost their jobs wished that they had done more in hindsight to secure additional income streams to withstand downturns like the historic one they were living through.
Those who saw their retirements wiped out when the stock market cratered wished they had invested in alternative assets. Assets that had not been correlated to Wall Street and that were backed by tangible assets so that they didn’t lose everything overnight.
Many who lived through 2008, learned from their mistakes. They changed their investment strategy to be prepared for the next meltdown. So when Covid-19 descended on the world and devastated financial markets, these savvy investors were prepared.
But what did they change?
Savvy investors freed themselves from the collective madness of Wall Street.
They turned to alternative investments – preferring private passive income-producing investments providing long-term growth backed by tangible assets with long-term investment windows.
Why these types of assets?
To counter the very things that devastated them financially in 2008:
- Private offerings are uncorrelated to Wall Street volatility.
- Long-term windows prevent massive selloffs triggered by herd mentality.
- Cash flowing assets ensure multiple streams of income to protect income in a downturn.
- Tangible assets prevent investors from ever losing their entire investment as many experienced in 2008.
For those who are finding themselves at a crossroads as many did in 2008, there is no better time than now to pivot away from Wall Street towards income-protecting alternative private investments.
Best of all, there has never been a better time than now to start generating that income tax-free.
Those who have recently lost their jobs can now roll over their 401k’s into either a Roth SDIRA or Roth Solo 401k – with neither option available while still employed.
When life gives you lemons, make lemonade.
This is a prime opportunity to take control of your financial destiny, but:
- Why rollover?
- Why choose a Roth SDIRA or Roth Solo 401k over traditional options?
Because with the Roth options where contributions are made with after-tax dollars, the capital can grow, and income can be generated tax-free.
The long-term tax benefits of growing assets tax-free in a Roth option far outweigh any tax deductions pre-contribution in a traditional option.
Think about it this way: Would you rather have deductions on the $10,000 you contribute in year one or withdraw $100,000 in income and appreciation tax-free over the life of your investment?
Savvy investors favor the Roth options for this very reason.
By pivoting to private alternative investments offering above-market returns, they know that the tax benefits of generating tax-free income and appreciation far outweigh any deductions they might be able to take pre-contribution with traditional IRA’s and 401k’s.
Those who recently lost their jobs and finally took the step of starting their own companies stand to gain the most.
Those who take this opportunity to start their own companies with only themselves and their spouse as employees may be qualified to start a Roth Solo 401k, which has tax benefits that trump all other retirement plan options.
Because while Roth SDIRA’s have contribution limits of a maximum of $7,000 annually with income limitations, the Roth Solo 401k has a maximum annual contribution limit of $60,000 with no income limitations. That’s huge.
The owner of a Roth Solo 401k can contribute nearly 9X to the owner of a Roth SDIRA.
Of course, there are tax consequences to rolling over a 401k or even a traditional IRA (consult your tax advisor) into a Roth SDIRA or Roth 401k. Still, because of recent cuts in tax rates due to the new Tax Reform, there truly has never been a better time to convert to a Roth retirement plan – even for those who have not lost their jobs but currently have a traditional IRA.
The wealthy are wealthy because they’ve learned to generate multiple streams of passive recession-insulated income that make them money while they sleep.
Combined with advanced tax strategies using Roth retirement plans, they’re able to generate income and appreciation tax-free, which will augment the compounding effect of their wealth-building exponentially.
This may seem unfair, but these strategies are available to everyone, not just the wealthy.
So why now – post-Covid-19 – is it a great time to act on your impulse to pursue private alternative investments?
Opportunities abound as companies – turned off by constrained conventional lending sources – turn to private capital markets for their fundraising needs and because the tax climate is ideal for rolling over your current retirement plan into a Roth SDIRA or Roth 401k.
Learn from the past and prepare for the next meltdown now.
Michael Foley, president and CEO of Humabilt Capital, oversees the entitlement process, funding, and operations for Humabuilt Capital. Mr. Foley has been a full-time real estate investor since 1995 during which time he has developed hundreds of single-family homes, townhomes, condominiums, and apartments. Mr. Foley started his investment ventures in Long Beach, California, and has expanded to Apex and Durham North Carolina. Mr. Foley is a graduate of the University of California at San Diego.