Minimizing Taxes in your Retirement Plan
By Tim Berry, Esq.
Many people get involved with activities in their retirement plans that create taxation – That is not all bad if you figure that into your yield. There are ways to minimize the taxation. We asked a noted Tax attorney Tim Berry to comment on this. Here is what he said.
Flipping houses in your retirement plan?
Using leverage to buy property in your IRA?
You can probably cut the taxes due on those transactions in half.
Background: If the IRS thinks your retirement account runs an active business the IRS is going to say your retirement plan needs to pay taxes on the profits generated by that business.
Example 1: Your plan flipped 10 houses last year and made $200,000. The IRS is probably going to consider that a business and want some money.
Example 2: Your IRA bought a house for $100,000 a few years back. It sold the house last year. When your IRA sold the house it still had $80,000 of debt on it. Tax code says that 80% of the profits from the sale of the house are going to be subject to taxes. (By the way if you used a 401k for this deal there probably wouldn’t be any taxes. 401ks are a lot better to use than IRAs.)
Ok, so some taxes are going to be due. But the big question is how much?
For 2017, any taxable income in your retirement plan over $12,500 is taxed at 39.6%. O U C H.
For 2018 the tax code changes made things a little easier, the 39.6% rate plummeted to 37%. Still ouch.
However there was another big change in the tax code that will help you if your plan is generating taxable income. C corporations are taxed a flat 21% for federal income tax purposes. That means that you could have $100,000 of taxable income within your retirement plan and the tax hit to your plan is close to half of what it would be if you didn’t use the C corp. Now some of you might be thinking to yourself, don’t C corporations create double taxation? Answer is for regular folks they do. The corporation pays taxes and then it distributes it to you by way of a dividend, on which you, personally, have to pay taxes. Keep in mind though that your retirement plan doesn’t have to pay taxes on dividends and so it only has to pay taxes at the corporate level. The flat 21%.
If your plan is generating taxable income and you want to see if there are ways to fix that, give us a call, we are more than happy to try and help.