Why You Want to be a Business Owner or Investor?

How are you making money?

The Power of Leverage

As business owner or investor, you generate passive income through leverage.

This is what separates the LEFT from the RIGHT quadrant. The RIGHT side of the quadrant, you are trading TIME for MONEY; on the LEFT, you are LEVERAGING other people and/or money for money.

This also explains why everyone has the same 24 hours a day, but some makes millions a month, and others barely scrape by each month.

A business owner owns a system that generates income. An investor owns investment that generates income.

Tesla

Tax Benefits for Business Owners and Investors

As an employee, can you deduct your car expenses, driving mileage, dining out, country club membership, entertainment, life insurance premium, laptop, smart phone?

Let’s see what kind of deductions employees are allowed. Let’s use me as a demo.

I have a regular full-time job as a pediatric dietitian. Each year my tax deductions in job expenses includes any fees I paid for continuing education, conferences that I attended, professional membership fees, professional re-certification exams, licensure renewal. That’s about it.

I purchase a car to commute back and forth to my job, put gas in the car so I can drive, pay for registration, safety check, insurance and whatever maintenance fee for my car, just so I can get to work. As a professional, I have to wear nice clothes to be presentable to my patients. I buy lunch in the hospital or I may bring leftover from home for lunch. All these are other expenses that I cannot deduct.

Now let’s look at my tax deduction as a business owner.

I’m in the financial and real estate business.

For my business, I deduct any fees I paid for continuing education, conferences that I attended to learn more about personal finance to help more families, professional membership fees, professional re-certification exams, licensure renewal, laptops and cell phones to write contracts, articles, advertising and contacting clients, legal and professional fees for professional advices, meals when I’m out meeting with clients, part of my car expenses when driving to meet clients, travel expenses when visiting my rental property in California, which happens to be where my daughter goes to college.

I can keep going on with this list. Business owners and real estate owners enjoy tax benefits that employees do not. And the impact of tax on your income can significantly affect how fast your wealth accumulates.

Learn about WFG Business Opportunity

How to Maximize Your Tax Benefits?

Tax and Death

“In this world, nothing can be said for certain, except death and tax.” Benjamin Franklin.

As savvy tax payers and entrepreneurs, we take any deductions and credits to lower our taxes. We’re not trying to avoid taxes, we’re just trying to minimize what we have to pay in tax legally so with the tax money we saved, we can use that to generate more wealth.

Let’s start with the tax basics. Watch this video to learn how to calculate your taxes.

Tax Deductions vs Tax Credits

Tax Deductions are expenses that the US government allows to reduce your taxable income. For example, you make $70,000 a year, and incurred $10,000 in medical expenses. The $10,000 medical expenses are deducted from the $70,000. So instead of paying tax based on $70,000, your tax will be assessed based on $60,000 income.

Medical expense is only one of many allowed tax deductions.

Tax Credits are “free money” that the government gives you. Remember, back in 2008 when Obama was dishing out $8,000 tax credit to all new homebuyers? I’m a beneficiary of that credit.

Between tax deductions and tax credits, I’ll take tax credit anytime. It’s like free money, but, of course, you have to meet the criteria. And usually, it is a one-time deal.

Impact of Tax on Your Income

Tax and Inflation

As the above illustration shows, if you’re not careful, your income tax and inflation can eat up your savings like termites.
None of us can control inflation. But we can at least do something with our taxes to lessen the impact.

Tax now

Tax now…

Brokerage account

Checking account

Certificate of deposit

Savings account

 

Tax later

Tax later…

401k/403b

Annuity

Pension

SEP IRA

Traditional IRA

Tax never

Tax free…

529 College Savings Plan

B.Y.O.B. (life insurance)

Coverdell

Health Savings Account

Roth IRA

Roth TSP

How to Create an Endless Stream of Retirement Income?

Will you outlive your retirement income?

Before answering that question, we need to first figure out what is your retirement income goal.

The rule of thumb is “twenty (20) times of your current income” is required for a comfortable retirement.

Are you saving enough? Do you have a retirement plan? Do you have a pension plan? Is your social security enough? Can you family or children support and care for you? Can you continue to work?

True story…

The mother-in-law of a friend of mine was recently “fired” from the company she has been working for many years. Of course, there is no pension. She’s always been a good worker. But the company has started picking on her trying to find ways to fire her because she’s older now and slower compared to her younger co-workers. So she made one mistake and she’s fired.

Do you think at age 65, you can easily find another job to support your living, let alone retirement income?

Do you think the story would be have been different if she has a retirement plan in place with an endless stream of retirement income that she can’t outlive?

In that case, she’ll be working because she loves her job so much, not because she HAS to.

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Income for life…

Annuity is an income insurance that guarantees a retirement income stream for as long as you live.

Never lose money…

Indexed annuity has a guaranteed “FLOOR RATE”, so you’ll never lose money even when the stock market tanks 50%.

Beats inflation…

An indexed annuity captures the upside of the stock market so your money grows risk-free, beating the inflation of 3.3% per year.

Beats taxes…

You defer income tax on interest credited to your policy, allowing your interest earned to compound every year until you start withdrawing income.

Tax-Free Retirement Plan

As a financial advisor, it is my duty to provide my clients with information and strategies on how to accumulate wealth so their money grow safely and be protected from market volatility while maximizing tax benefits.

Impact of Tax and Inflation

I just don’t like sharing my wealth with Uncle Sam, who’s not even my real uncle.

By maximizing your tax benefits, you’re also maximizing your savings. US debt is currently $19 trillion, do you think tax rate will be up or down when you retire. So do you want to pay tax now or later or never?

TAX NOW…

Brokerage account

Certificate of deposit

Checking account

Savings account

TAX LATER…

401k/403b

Annuity

SEP IRA

Traditional IRA

TAX NEVER…

Health Savings Account

Life Insurance

Roth IRA

Roth TSP

 

Max out all tax-free retirement account to reap the biggest tax benefits.

There are many wealth-building vehicles with tax benefits that can be used for personal wealth accumulation, retirement planning, college savings, estate planning, etc. And there are a few that you should pay attention to because of their additional benefits.

The Four Cornerstone Characteristics of a Safe and Sound Investment

4 Cornerstones of Safe & Sound Investment

Let’s see how the common retirement accounts compared with the lesser-known indexed universal life insurance.

IRAs vs IUL

From the table you can see that both Roth IRA and Indexed Universal Life Insurance (IUL) offer great tax-free benefits, which is important when it comes to wealth accumulation.

If you have children planning to go to college, cash accumulation in both life insurance and retirement accounts are excluded as assets when calculating for financial needs.

The IUL insurance, by far, offers the most benefits. Seriously, it is life insurance on steroid. You have all the benefit of a traditional or Roth IRA but none of the restrictions.

You get to accumulate wealth in the cash account protected from loss (no market volatility to worry) with guaranteed growth earning a handsome rate of return up to 15%.

You can also access your money whenever you need during your lifetime tax-free as emergency fund, such as medical expenses, long-term care, vacation, invest in real estate, etc.

Related article: Be Your Own Bank

Not only that, your young family will be taken care of financially if you passes too early. The death benefit pays out to your family tax-free.

It is also the choice for many who has a large asset portfolio and makes too much income to invest in an individual retirement account IRA. An IUL provides excellent asset and wealth protection and there is no limit on your contribution, but certain guidelines do apply.

One drawback of the life insurance is that you need to have good health to qualify. Therefore, start early when you’re still young and healthy.

The Individual retirement account (IRA) is great investment vehicle for retirement savings because of tax benefits.

The Traditional IRA allows you to deduct your contribution on your tax return for the year you made the contribution, reducing your taxable income that year. However, you’ll pay income tax when you withdraw from the account because your contribution is pre-tax money.

Contribution to a Roth IRA, on the other hand, is after-tax money, so you cannot deduct your contribution on your tax return. On the bright side, your money grows tax-free until distribution.

However, there is no guaranteed risk-free growth with the IRAs. Your money is usually invested in stocks, mutual funds or bonds and is exposed to market volatility with no guaranteed growth and requires specialized knowledge in the stock market to make a profitable investment.

Related article: Invest in Real Estate with a Self-Directed IRA

With both IRAs, there is a 10% penalty on early withdrawal before the age of 59 1/2. There are exemptions to the 10% penalty. You can make an early withdrawal if you’re using the money to pay for college tuition, medical bills or down payment for your first home.

Even though you escape the 10% penalty, but the income tax still applies for withdrawal from the Traditional IRA.
There is also contribution limits to the IRAs: $5,500 a year or $6,500 a year if you’re 50 and older.

How do you want to save for your retirement?