Dr. Harold Wong
For many, most of their liquid assets are inside their traditional IRA or 401(k). However, this is a mistake, because you are creating a ticking tax time bomb.
Example: An engineer, age 35, contributes $10,000 a year to his IRA and/or 401(k) each year. He’s in a 25% tax bracket and saves $2,500 of tax. After 30 years, he’s contributed $300,000 total and has saved $75,000 of tax. At age 65 the stock market has done well and he now has $1 million. He doesn’t need the money until age 75, when it has doubled to $2 million.
When both parents pass away, the $2 million is distributed to their two kids, and each has $1 million taxable income, in addition to their normal taxable income. If the combined federal and state tax rate is 40%, the kids pay $800,000 versus the $75,000 that their dad saved. It’s always a losing game if the family eventually pays 10 times the tax that was saved over the decades of contributions.
Here are two advanced IRA strategies that are rarely used:
Roth IRA Conversion: If you convert that $1 million (at age 65 in the previous example) to a Roth IRA, there is no income tax no matter how high it grows. There is also no Required Minimum Distribution. In the last 15 years of giving tax and retirement income seminars, I find that only 2% have more than $30,000 in a Roth IRA. The reason is that they can’t stand the pain of paying tax on $1 million taxable income created by a normal Roth IRA Conversion. However, I had a client in 2023 who was able to distribute over $1 million from his traditional IRA and not have to pay any income tax. He used massive solar energy credits and deductions from the Aug. 16, 2022, Inflation Reduction Act to eliminate his income tax.
True Self-Directed IRA: Many Wall Street firms claim that you can have a self-directed IRA, but it only means that you can pick from thousands of stocks, bonds, mutual funds, and other Wall Street products. A true self-directed IRA allows you to buy non-Wall Street assets, such as real estate and stock in private companies. In 2024 I found two investments where the upside in 5 to 10 years can be as much as a 100 times return. So, I bought private stock in these two companies through my Roth self-directed IRA so that there will be no income tax on the profits.
Attend my Free Live Seminars: Tuesday, Feb. 18, or Thursday, Feb. 20, starting at 6 p.m. at Hyatt Place, 3535 W. Chandler Blvd., Chandler, AZ 85226. The seminars are followed by a free catered meal. The topic is “Advanced Tax Strategies: Secrets of Roth & Multi-Generational IRAs!”
To RSVP for the seminars or to schedule a free consultation, please contact Dr. Harold Wong at 480-706-0177 or [email protected]. His website is www.drharoldwong.com.