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How to get Tax Free Wealth in Retirement



Nothing is certain but death and taxes, unless you’re a billionaire or if you read the book, Tax-Free Wealth^1. The latest revelations of leaked tax returns of the most famous billionaires demonstrate the tools available to all US taxpayers, albeit not as easily accessible for the vast majority of Americans who are not in the same wealth category. Highlighted here are example strategies to build wealth on a tax-free basis, allowing you to reap the benefits in retirement.


The average tax paid over a lifetime in California is $710,881^2, which includes taxes on earnings (income tax), buying things (sales tax), and homeownership (property tax). NY “residents will pay, on average, $931,968, an approximately 49.51% on $1.88m in lifetime earnings” according to the New York Society of CPAs^3.


Billionaires including Jeff Bezos and Elon Musk create a tax-free situation by borrowing against their assets; something everyone is able to do if they have a similar pool of available capital. Borrowing against an asset isn’t taxable income and with the dramatic rise in Amazon and Tesla stock, they, I’m sure, are happily realizing the benefits without needing to sell any stock, therefore never having to pay a capital gains tax. Also recently discovered, Paypal co-creator, Peter Thiel, has $5b in a Roth IRA. He injected pre-IPO Paypal shares into a Roth (the annual contribution limit at the time was $2,000), the stock price ballooned considerably, all within the tax-free shelter of the Roth IRA, allowing for forever tax-free growth and withdrawals. Although, there is currently some debate if his pre-IPO shares were really worth as low as he says they were at the time.


Tax-free wealth is still possible for normal people, however, some sacrifice now may be needed to get to a completely tax-free situation in retirement, as should be expected. The book, Tax-Free Wealth, highlighted some of the most beneficial strategies, including holding investment real estate, never selling, and using depreciation to keep profit low and not taxable. Exchanging a rental property or another like-kind investment (1031 exchange) is also a worthwhile consideration, in order to avoid a capital gain. The author says that any cost activity you do that generates income is deductible. Business owners benefit by being able to deduct expenses against their income, investors might be able to deduct the cost of their trading activity (although normal investors may be limited in their deductions). The selection of investments also makes a difference. State and local municipal bonds are both federal and state tax-free, while commodities, such as gold, are taxed at the higher 28% capital gains rate (almost twice as much as regular stock investments).


Financial planners like to think of the future while a tax advisor usually looks at the current year (and past) to best utilize the tax code as it’s currently written. Thinking forward, however, it’s necessary to make an active effort to fund a Roth IRA for $6,000/year (plus the $1,000 catchup for people 50+), Roth 401(k) for $19,500/year (plus the $6,500 catchup for people 50+), and Health Savings Account (HSA), for $3,600/year (plus the $1,000 catchup for people 55+). All of these types of accounts can house investments and distribute tax-free in the future, although there may be limitations depending on your situation. Cash-value life insurance can also be used to supplement a tax-free retirement.


Living overseas, you may be entitled to take the Foreign Earned Income Exclusion or use foreign tax credits to offset your US taxes. Keeping your investments in the US will help prevent double taxation on investments derived overseas (PFIC).


At Eureka Wealth Management, I work in conjunction with your tax advisor to devise a tax-free retirement plan. I also manage investments and can broker life, disability, health, and long-term care insurance. Call for a free, initial consultation at (760)537-0791 or book online at eurekawealthmanagement.com.




Sources:

^1 Tax Free Wealth by Tom Wheel Wright, CPA link

^2 https://www.usatoday.com/story/money/2021/04/01/irs-tax-season-2021-how-much-do-you-pay-taxes-over-lifetime/7016671002/

^3 https://www.nysscpa.org/news/publications/the-trusted-professional/article/study-average-american-will-pay-525-000-in-taxes-over-lifetime-ny-and-nj-residents-will-pay-much-more-022521