Sophisticated investors distinguish themselves from the crowd by implementing a multifaceted investment strategy – not the one-dimensional buy and sell strategy favored by most of Main Street.
- They’re not speculators.
- They’re not merely content to acquire an asset with hopes of selling it to someone down the line at a higher price.
- The next big thing and shiny objects don’t appeal to them.
They like consistency, growth, and security.
Sophisticated investors are OK with boring as long as their cash flow appreciates and is backed by a hard asset. Those elements are all essential for building and maintaining wealth while providing a shield against recession.
While income, growth, and security are all vital components of a sophisticated investor’s investment strategy, one often overlooked component is tax planning.
Wealthy investors all started young.
They understood from early on that becoming wealthy would require creating a passive income stream that made them money while they slept.
The more capital they could divert to these passive income investments, the sooner they could achieve financial independence. That meant reducing expenses and minimizing debt to have more to throw into the wealth-building machine.
One major strategy the wealthy have always used to their advantage for preserving capital for investing in tax planning.
By taking advantage of all available tax deductions and incentives, the wealthy can extract every bit of capital possible to divert to their passive income-generating activities.
And what’s better than passive income? Tax-free passive income.
Sophisticated investors have long gravitated towards the tax elimination benefits of self-directed retirement plans. Because many retirement plans impose annual contribution limits, sophisticated investors start early to maximize the amount of capital that can be contributed to these self-directed plans for investment in alternative assets.
If done right, capital contributed to a self-directed retirement plan can grow and be withdrawn tax-free.
A Solo 401(k) plan is an IRS approved retirement plan suitable for business owners who do not have any employees, other than themselves, and perhaps their spouse. It is a traditional 401(k) plan covering only one employee.
A Self-Directed IRA is an IRA that gives you control over your investments. Unlike other IRAs held at banks, brokerage firms, and other institutions, you’re not limited to stocks, bonds, or mutual funds.
The Solo 401(k) and the SDIRA allow you to invest in alternative assets, including real estate, private investments, limited partnerships, commodities, etc. This is what distinguishes Solo 401(k) ‘s and SDIRAs from 1031 exchanges, which are limited to direct real estate investments.
The beauty of both the solo 401(k) and SDIRA is that both offer traditional (tax-deferred) and Roth (tax-free) options.
The wealthy favor the Roth options because although contributions are with after-tax dollars, the capital can grow tax-free with distributions also able to be taken tax-free.
The long-term tax benefits of growing assets tax-free in a Roth option far outweigh any tax deductions pre-contribution in a traditional option.
Think about it. Would you rather have deductions on the $10,000 you contribute in year one or withdraw your $100,000 in appreciation tax-free in year 10?
The following table compares the Roth Solo 401(k) ‘s with Roth SDIRA’s:
You might be thinking this just doesn’t seem fair. Let me get this straight. So not only do the wealthy make above-market returns insulated from market downturns and volatility, but they also don’t have to pay taxes on that income?
That’s right, but the good news for the rest of us is that these tax strategies are open to everyone. Whether you make $100k/year or $1 M a year, there’s a Roth retirement plan that works for everyone. Additionally, with the recent relaxed federal securities regulations, alternative investments are also now available to more qualified investors than ever.
Investing like the wealthy is no longer a pipe dream.
Qualified investors of all stripes can now invest in passive income-producing alternative investments offering growth backed by real assets that were once exclusive to those with blue blood and the well-connected. And just like the wealthy, any investor can take advantage of the tax code to generate this passive income tax-free.
But don’t wait. Take a cue from sophisticated investors and start NOW to maximize your contribution window.