Content provided by Preferred Trust Company
Whether you are in the business of fix & flips or rental properties, we are all sitting in a world of unknowns right now. However, all politics aside, there are two things that are certain. First, is that the trillions of dollars in government aid will need to be paid back. Second, is that this expectation foreshadows what recourse will most likely be taken, taxes. So, in anticipation of this impending tax event, does your business plan also include an optimal tax shelter strategy?
The government has granted you the boon of many forms of tax sheltering vehicles, including the Simplified Employee Pension (SEP) IRA. It is no secret, and yet SEP IRAs are still one of the most underutilized vehicles for tax relief by new and even seasoned business owners, and it was wholly designed with you in mind! In 2020, contributions to a SEP IRA account could either be the lesser of 25% of business owner’s compensation or $57,000. For 2021, it increases to $58,000. That is a significant amount of income that could be sheltered tax deferred.
But once you funnel away that income it’s trapped it in a retirement account and you can’t use it for your next business venture, right? That’s not entirely true. A Self-Directed SEP IRA empowers you to you acquire real estate with qualified funds. Let’s put it into perspective by breaking down the numbers for investing with cash versus investing with qualified funds.
Let’s say you own 5 rental properties that earn a gross profit of $1,400 per month, that’s $84,000 gross profit per year. Then let’s also say you are in the upper tax bracket and your annual income tax is 30%. Uncle Sam collects his $25,200 and leaves you with $58,800 to put towards your next property. Now put this scenario in terms of a Self-Directed IRA. Your 5 rental properties directed through your SEP IRA produced $84,000 in gross profit for the year that is tax-deferred, so you have $84,000 in net income to put towards your next property. That is $84,000 in income that will be sheltered from taxes to keep compounding year over year.
So, can you say you are doing everything you can to protect your hard-earned business assets? If you can’t answer this question with confidence, you could be overdue on a visit with your tax advisor to discuss your options. To learn more about Self-Directed SEP IRAs, you can call Preferred Trust Company at 888-990-7892 or visit our website at www.preferredtrustcompany.com.