A large number, if not the majority of our clients at InSight come to us looking for ways to mitigate their tax liability. While a CPA will find backward-looking ways to lower your tax liability, our clients are working to build a tax ecosystem that mitigates current and future instances of tax risk.
Although their salary and bonuses are high, their take-home pay is a mere fraction of that. Now, I am no Allen Weisselberg, but I have found many ways after a decade in the industry to help clients pay far less in taxes than they do today. This article will provide several solutions that you’ll need to investigate further and talk with your tax professional more if you’re trying to implement them.
Cash Balance Plans
Are you a business owner or high-income earner at a small business? Implementing a cash balance plan in conjunction with a 401(k) profit-sharing plan can help high-income earners defer more than $400,000. Now many may say deferring just means I have to pay it later which is correct, however, later also means you get tax-deferred growth and that same person will also most likely be in a much lower tax bracket once they’re retired and not taking a salary.
Come on, really? Absolutely! Do you ever wonder how the rich stay rich? They own permanent life insurance that enables them to borrow against their own money while simultaneously getting tax-free income. Additionally, providing a death benefit for your heirs means helping pay estate taxes with a lump sum death benefit for those lucky enough to have a very high net worth and want their legacy to live on for generations. Additionally, some banks enable you to use life insurance as collateral for loans which is a win-win especially if you have a non-direct dividend policy.
Mega Backdoor Roth IRA
Ever wondered how to get more money into your Roth 401(k)? Wouldn’t it be nice to add up to $64,500 into your Roth 401(k) each year? The answer is a resounding YES. At InSight, we help business owners change their 401(k) plans to enable after-tax contributions and in-plan rollovers so that you can store away an incredible amount of money today and get TAX-FREE money back in retirement. This strategy combined with a Cash Balance Plan is the one-two punch you’re looking for.
Opportunity Zone Funds
Use your capital gain proceeds from a recent sale and invest it into opportunity zone funds, real estate or businesses. The benefit now is the ability to defer your current tax liability until 2026 while also receiving tax-free growth on your investment after holding it for 10 years. This is a program that allows them to mitigate the past liability and avoid some of the taxes they will owe as the new asset grows in value.
Private Placement Life Insurance
An incredible way to fund a life insurance product that gives you tax-free growth and access to the cash value. The reason the rich like using this form of tax-free growth is it gives them the freedom and flexibility to fund other real estate ventures, grow their brokerage, or find other investments. This is only available for ultra-high net worth individuals.
It’s no surprise that those that have an appetite for risk and the ability to take it, accrue large amounts of debt instead of selling appreciated assets to grow their net worth. Most people want to pay off their debt as quickly as possible and this usually makes sense for those with high-interest erosive debt. However, if you accumulate accretive debt at extremely low-interest rates then your probability of success in terms of appreciation in net worth is high. For example, if you can borrow money against a business, bank, home, friend, etc at 2%-6% and reinvest that into something that averages 8%-12% then you have a positive delta in your return and you didn’t have to sell anything (i.e pay taxes on gains) to grow your net worth.
These are just a few of the popular strategies we’ve implemented for clients in the past but they’re not appropriate for everyone. Make sure you speak with your CFP® and tax professional before implementing any of these strategies as they’re complex and if done incorrectly can be extremely detrimental.