The $7 Million 7 Years Wealth System

@ Scott – The issue isn’t really “how much is in your 401k?” – as that’s just a question about tax efficiency – it’s really about “what’s in your financial future?”.

I’m not terribly worried about you achieving A number … you’re on a high income and save a large %; for you, it will be more about how do you achieve THE Number 🙂

Is the $151k in ‘Other’ [ https://www.networthiq.com/people/abundantlife ] where some of these “appreciating assets that include a mixture of real estate, small businesses and stocks” reside?

The “other” category is actually where I figured on keeping my business values, business shares, business interests, If I buy a car wash or laundry center, etc.. I wasn’t sure where to put those at first. Since there is already a distinct location to report cash, stocks, bonds, annuities, etc… I also figured I would keep investment real estate in the “other real estate” category and just let them add up there.

“I kept getting images of me at 65, in really scary looking plaid golf pants ”

LOL

I like this, Scott. I’m still in the “paying off debt” stage, but I don’t see how a 401K or similar retirement account would get the job done for most of us. I think for many people these accounts are good as “part of” their investment strategy- especially people who get an employer match (free money). Unfortunately, I think many people just expect their 401k plan to be the answer but find out it’s not enough and by then- they may not have the time or desire to do much about it.

How do you pick your appreciating assets? Do you spend a ton of time studying your options and calculating potential returns? I think another reason people stick to the basic formula (get a job, contribute to 401K, hope it’s enough) is because they don’t know how… and what else… to invest in.

Scott, I understand where your coming from, but once you obtain THE number, do you have any concerns about the tax burden on your investments and the possibility of avoiding some of that burden if you simply put some of the money into a different type of account?

@ Moneymonk – I know, I have no idea where that came from in my mind, hehe.

@ Debbie – As far as picking investments, I guess for me right now, it’s pretty much like this MIT experiment. I’m learning as I go! Fortunately, i’m learning a LOT of really good information relatively quickly. The next few years i’m sure will be a bit scary when investing, but according to the Zurich Axioms, it should be! I think it will keep me on my toes and make darn sure I do my research each time I purchase an investment!

As far as using the 401k, I’m not judging it, I just don’t think it will ever get me to my number in this lifetime. I agree with you that for those who don’t spend the time getting out of their comfort zone and learning how to really invest, a 401k or other retirement account might be a safer choice. Just like anything in life, it’s only truly risky if you don’t know anything about it!

Think of a major league baseball player stepping up to the plate to hit a home run. If he’s spent a long time studying how to hit a baseball out of the park, has lots of experience in dealing with it, stepping into the box against a 90 mph fastball doesn’t feel like a risk to him. It is actually fun! He’s probably got his ‘risk’ calculated in numbers, such as his batting average, rbi’s, on base percentage, chance of hitting a homer, etc… But try and get your average Joe or Jane up into that box against to face that 90 mph fast ball!!….a much more “Risky” proposition 😉

@ Josh – Are you referring to me putting some of my monthly ‘life’s purpose’ money each month into a 401k or Roth IRA after i’ve reached my number (instead of using it toward my life’s purpose each month at that time) and not being able to touch it until i’m in my 60’s? If I did that, then I A) wouldn’t be living my life’s purpose B) probably not be utilizing sound money making 301 principles at that time and would need to study a bit better and C) waiting to probably get hit to death with fees and taxes on that money MANY years from now when I did get a chance to use it anyway, of which case, it probably wouldn’t be an overly significant amount anyway worth going through the trouble for.

Why not purchase terrific commercial properties as a Money Making 301 move with the life’s purpose money anyway? Utilize tax deductions instead, especially when you depreciate the property. AND you can raise rents each year with inflation to keep you living (and maybe increasing!) your life’s purpose spending if your portfolio performance allows(or simply reinvest it), while at the same time getting a nice appreciation on the property, since your buying and holding for the long term?

Scott – I share your distaste for 401Ks, and their fee’s and penalties, but I have to believe that there is some advantage to having tax shelters (be them 401k or not). Otherwise, won’t the government just take all of your hard earned (and passively earned!) money?

@ Ryan – LoL, all of it? If so, maybe I should move to a different country that doesn’t have a 100% tax penalty! Seriously, everyone knows by now in what they’ve studied that the rich aren’t the one’s paying the lion’s share of the countries taxes, it’s the middle class and working class high income earners.

I thought it was interesting that before I had an investment property and business ownership, I watched a large portion of taxes come out of my income per month, then had to pay Uncle Sam thousands in April. Now, after getting use to using many different deductions, I pay virtually nothing this April, despite my income gradually increasing.

The only thing that changed is I went from being a ‘high income earner/spender’ to a ‘high income earner/investor’.

Maybe Adrian can shed a little more light on how Robert Kyosaki states that the wealthy aren’t the one’s paying the lion’s share of the taxes. The middle and upper middle class do.

@ Ryan – Robert Kyosaki states that the wealthy aren’t the one’s paying the lion’s share of the taxes. The middle and upper middle class do. 😉

Seriously, a 401k, ROTH, ROTH IRA, etc., etc. are all simply methods of protecting assets from taxes to a greater or lesser extent … the problem for you and the other 7MIT’s is not with these ‘shelters’ in themselves, it’s in their design. You see, they were designed for the ‘average American’ to encourage them to save for retirement. You and the other MITs are NOT average Americans and will hit the ‘roof’ of these vehicles very quickly …. it’s why I don’t even bother.

Scott has hit the nail on the head: these aren’t the ONLY tax shelters available, or even the BEST tax shelters available … investing in income-producing assets via corporate structures (LLC’s; trusts; C- and S-Corporations; etc.; etc.) and taking advantage of all the tax deductions available to you (e.g. depreciation, 1031 Exchanges; etc.; etc.) will blow away any ‘tax advantages’ of 401k’s and similar.

The point is to FIRST look at the types of investments that you need to make in order to reach your financial objectives – be they long term (i.e. your Number) and/or short-term (e.g. flipping a house / trading some stocks and options) – THEN look at the best ‘vehicle’ to house them in. As an extreme example, if you decide that a business is the way to go – and, put up 100% of your savings as ‘seed’ capital’ – then having a 401k is hardly going to help you, is it?

Scott, Ryan’s question better represented what I meant to ask.
I see what your talking about and I definitly need some more insight into using tax deductions.
I found a CPA to do my taxes this year and picked his brain for a while concerning tax and how to minimize it. Seems like if you were going to buy something, and can make it into a business purchase, then do that. But it’s never worth spending (losing) 70% to save (earn at tax time) 30%.

Is this the same pricipal just applied to your plans of owning commercial propery or are there other ways as well?

Those are pretty much the only principles I know at this time. I know as I get close to achieving my number, my focus will switch much more to my number preservation in Money Making 301. There’s a ton that I still have to learn about that. Heck, i’m still learning Money Making 201! lol.

@Scott – I don’t personally subscribe to the abandonment of tax-deferred savings vehicles. I use several as you’ll see when it comes time for my post. What I don’t understand is why you wouldn’t try to use every tax-advantaged savings and investing opportunity you can first. And then branch out into the non tax-deferred vehicles after the tax-advantaged ones are maxed. Maybe you are doing this in other ways that didn’t come through in the post.

I don’t fall near the income limits for contributions (maybe you do and that could be an issue). But I don’t get any deductibility from my 401K or IRAs on my taxes either. What I do get is tax-deferred growth (401k and Traditional IRAs) and tax-free growth and withdrawals when I’m old (Roth IRA). OBTW, you forgot the white shoes and black socks in your retirement uniform. 🙂

The tax-deferred and tax-free elements are great benefits of these programs. On the downside, as you mention, you do have to agree to leave the money alone for many years. Maybe plaid pants will be en vouge by then. 🙂

Despite the time requirement, IRA’s are pretty flexible in terms of what you can invest in. Mutual funds, individual stocks, and even real estate can all be a part of your IRAs. I don’t think these programs are as bad as we are making them out to be here. Then again, maybe I’m just poor. 😉

@Adrian – It’s my understanding that the deductions you mention (depreciation and 1031 real estate exchanges) are open and available to real estate investors, regardless if they’ve formed an LLC, S or C corp etc. My wife and I own our rental property directly in our names and we will be using the depreciation benefits you mention next year on our tax return and I intend to use a 1031 exchange on one of my properties some time in the next three years.

That is unless I can figure out how to take advantage of the homeowner’s “2 in 5” tax free capital gains rule twice. 🙂

What I don’t get to take advantage of as an individual, however, is the expenses before taxes benefit that these entities can provide. This is a huge reason why Kyosaki beats the drum of business ownership (i.e. LLC, S, C corp).

Buy a ________ (insert whatever you need for your business, an airplane for me 😉 or a BMW for most of my 7MIT friends), subtract the expense from your business profits, then pay taxes on the remainder. I can’t argue with that.

As soon as I find a bit more direction with my online activities, I intend to form an LLC to continue the process and start taking advantage of the tax benefits.

As always, another great discussion, thanks everyone.
Jeff

Yeah, I can’t utilize many of the retirement accounts because of my income level and the one’s that I can, I max so quickly that it just seems mute. For example, right now, i’m saving up cash as fast as I can to purchase the entire building that my practice is located in. This building also has another business next door(that will be paying me rent, and in essence, will drop my personal mortgage significantly, while it’s getting paid off in a few short years, then I own the commercial building, not pay rent, AND receive passive income! We haven’t even explored what this building may be worth down the road in 10 years).

So my question to you would be; Should I delay the purchase date to buy this building and all the above said benefits to first max out retirement accounts that I can’t touch for 30+ years, AND get taxed on them when I do.

Which gets me to my Number faster? Purchasing commercial real estate NOW as fast as I can in my 30’s, particularly one’s that I would normally have to pay rent on and actually begin RECEIVING rent on as well, or fund a retirement account to shed some tax now?

I’ve already cut my taxes tremendously since i’ve become a business owner and rental property owner, so what kind of additional tax break will I receive when I own the commercial building that i’m currently paying rent on now, when I can even deduct the interest I pay on that leveraged money as well as depreciated it, etc…?

And I might add, after this purchase, i’m simply going to be gearing myself for the next big asset purchase, or 2nd practice startup(meaning tons more cashflow coming in)and so on, and so on, like a giant snowball.

I guess, if I can see where the numbers on using a retirement account get me to my Number faster, i’ll do it. I just haven’t computed it that way yet with my current asset purchasing goals.

If my plan was to not move this aggressively, continue just running someone else practice for several years, etc..I could definitely see the need for a retirement account.

But right now, dealing with retirement accounts just feels like focusing on just swatting and killing the mosquitos, INSTEAD of focusing on and bagging the big game!

Does that make sense?

@ Jeff – I think it was you who mentioned on my post on dividends that it’s like investing for the purposes of tax deductions: it’s putting the tax-saving cart before the investing horse 😉

I agree with Scott: choose the best investment first, then the most tax-effective vehicle after i.e. simply choose the best after-tax return.

The argument for max’ing out your 401k’s etc first is probably best mounted on the basis of “forced savings”, “having a backup plan”, “if all else goes to pot, at least I’ll have my 401k” etc, which are all valid – but, not necessarily ideal – arguments.

What do you think?

@ Scott – Note to self: remind Scott not to pay down commercial building 100% 🙂

@Scott – I didn’t mean to sound critical. I hope I didn’t come across that way. I think the commercial real estate approach and buying your business is great. If it were me, I’d be trying to do that and fund the retirement accounts. Old habits I guess.

@Adrian – Yes, I did comment on your dividends post. I guess I didn’t express myself clearly. My point was that investing in a stock for the sole sake of receiving a dividend is very similar to buying and renting a real estate property solely because of the tax benefits. In both cases, I think you need to analyze the underlying fundamentals first and base your decisions to buy on those fundamentals.

For stocks, it’s all the good Rule 1 stuff and a value based approach that we’ve discussed before.

For real estate, it’s a property that cash flow’s positively…on its own, not because you get to deduct expenses and depreciate the property.

If you find a stock or a property that measures up under that analysis…then a dividend (for a stock) or the tax benefits (for the real estate) are icing on the cake.

I don’t believe that either dividend or the tax benefits are the primary reason to decide to buy a stock or a piece of real estate.

From you posts, I thought you felt the same, but maybe I misread your articles.

Adrian, I agree with you on investments…pick the best first, look for tax advantages second, but I think you can do that with the tax-deferred vehicles that are available here in the US. Maybe I’m being a bit thick in this conversation, but aside from the businesses, I haven’t heard us discuss any investments that couldn’t be part of a self-directed IRA.

If you are an investor with a long time horizon, which I have been, which would you prefer to do?

1. Hold that investment in a personal account that was taxed (at 15% or more) each time you bought and sold it.

Or

2. Hold that same investment in a IRA/ROTH IRA/401K/403B etc, which will allow you to buy and sell as you like while deferring the taxes til a later date or in some cases never pay them at all (like a Roth IRA).

I’m sure my choice will not surprise anyone, I’ve been choosing the tax-advantaged approach (option number 2).

The only reasons I can come up with right now to not invest in these types of accounts first is either:

1. The amount you want to invest is greater than the annual contribution limits.

Or

2. You don’t like the age restrictions and early withdrawal penalties that go along with these accounts.

Those are both very valid concerns and certainly reasons to not use typical retirement accounts.

Whew…Scott, I’m sorry for hi-jacking your post. I’m enjoying this conversation greatly and look forward to continuing the dialogue.

Adrian, thanks again for setting up this crucible for us to forge our futures within.

@ Jeff – Well said! This is exactly what this forum is for 🙂

No Jeff, your not hi-jacking the post at all, that’s awesome. That’s what we are hear to learn. I total understand your points about retirement accounts and don’t think the idea of sheltering some of my income in these hasn’t crossed my mind a few hundred times.

I just keep stepping away from the whole picture to get another perspective and all I keep thinking about is;

What did the people that I want to be like do?

Did they get ‘rich’ on retirement accounts, or did they get rich buying and starting businesses, buying real estate and buying stocks in well-run, under-valued companies? What was their focus?

Then I come back to my senses then gear myself up to do what they did.

@ Adrian – I slipped up and you caught me! I’ll hang on to that commercial mortgage as long as I can!

Scott – I’m with you on the…

“What did the people that I want to be like do?

Did they get ‘rich’ on retirement accounts, or did they get rich buying and starting businesses, buying real estate and buying stocks in well-run, under-valued companies? What was their focus?”

I absolutely agree with trying to do that which others have done successfully.

I’m trying to tackle the REI and business stuff as well and am envious of your ready made solution of buying your own practice. Despite all the financial benefits that have come from being in the military, it’s left me a little perplexed about starting/buying a business.

I don’t see myself buying an aircraft carrier and air wing anytime soon. 🙂

I’m struggling with the what should I do/buy dilemma. What do I have to offer?…What do I want to do?…What can I realistically start?…etc.

Who knows what I’ll do retirement account-wise once I get more involved in building a business and deeper into REI. My perspective may change significantly.

I think the hardest work for us here is going back to the mirror and figuring ourselves out to the point where we know just what we are good at. Our gifts, talents, knowledge and how can we package that up into a great business idea/model. How can we sell that part of ourselves? What kind of great product, service or information can we turn into a great business and how can we develop that into a fantastic model that can be repeated over and over again and then sold for top dollar.

Those are the multimillion dollar(or billion dollar) questions and those who look to that area the most and tackle it are the one’s who get to living their life’s purpose the fastest.

The more one does that, the less they even think about retirement accounts and safe fall-backs.

@Jeff – I thought Roth IRAs were funded with post-tax dollars, not tax-free dollars. Traditional IRA were tax-free til withdrawn. Where’s our resident financial whiz?

@Scott – definitely agree with learning from those that have gone before. I would suggest all the things Adrian wrote in his post (trusts was the one I thought of but he named more) were some of the more detailed things we should all be so lucky to have to learn about, you quicker than the rest of us.

Hey Jeff – why couldn’t you buy a professional office building and rent it? Doesn’t have to be owned by one of the professionals. I think Scott was hitting it when he went back to our list of things we’re good at. I believe yours was leading and motivating others. Are there perhaps other things you left off – like physical fitness or being able to handle G-forces without throwing up (can I say that here)? Maybe that would be a good amusement park-like ride you could develop and sell? (Just get good liability insurance.) I throw that out as stimulus for thought, not nec. a serious suggestion.

@ Di – LOL.

You are correct, Roths are funded with post tax dollars. I hope I didn’t misspeak somewhere above when my fingers were flying on the keyboard.

Roths then grow tax free after that and its my understanding that withdrawals later in life are not taxed. I think there may be minimum ownership time requirement of 5 years before the account is eligible to be withdrawn tax free. But with the time horizon of many investors that shouldn’t too difficult a hurdle to jump.

[…] Scott – Not everybody chooses to have a 401k – or, any type of retirement account, for that matter – and some even do it because they feel that they have an even better ‘retirement plan’. Scott is one such example … what do you think? Is he doing the right thing? […]

[…] says: I share your distaste for 401Ks, and their fee’s and penalties, but I have to believe that there […]

[…] I thought that I would pick up on a great discussion going on over at my other site, where Scott says that he has no use for a 401k: I can’t utilize many of the retirement accounts because of my […]