Back in my lawyer days, clients would come in and ask how they could make sure they would not have to pay taxes. “That’s easy,” I would tell them, “Just don’t make any money!” I would go on to tell them that they were thinking about it all wrong, “You should want to pay more taxes than anyone else because that means you’re making more money.”
Now I know there are charlatans out there selling ideas about how corporations, trusts, special purpose entities, insurance companies, etc. allow you great ways to avoid paying taxes. The simple rule is this – generally if you make money, you owe taxes. This has been going on for thousands of years and certainly since 1986 in the US.
However your munificent US government does allow for tax free business opportunities. Yes, you can create a tax free business opportunity and not run afoul of the current tax code. There are definitely restrictions on this and details that need to be followed to do this correctly but it is certainly worth your time to learn how to do it correctly.
One of the requirements is that you can not be paid a salary or as a contractor from the business. So in order to make this work, you will need another source of income from another business or from your assets. As a Business Godfather LLC Family Member you are already working on developing multiple businesses so this should fit into your overall Success Plan.
Keep in mind that you would not be able to derive any benefit from the business until you are 59 ½ at the earliest. For some of you that may be a long way off but for others this may be a great strategy for you to add to your overall Success Plan.
The mechanics of this are first you would need to establish a self directed Roth IRA. If you have a Roth IRA with a traditional financial institution you simply need to transfer the assets from the established Roth IRA into the Self Directed Roth IRA. You can do the same thing with a Roth 401K from a previous employer or from a Roth 401K if you are already 59 ½ in most instances.
If you do not already have assets in a tax free account, you can contribute to a Roth IRA if contribution limits allow or you can convert from existing traditional IRAs, 401Ks (and the like) from a previous employer or 401Ks (and the like) if you are over 59 ½. These assets will have a 5 year delay on when you can realize benefits from this account even if you are over 59 ½.
After you establish assets in a Self Directed Roth IRA, the assets in the Self Directed Roth IRA would be used to purchase original issue stock or other equity interest in a new corporation or business entity. The new corporation or business entity would then use the assets to establish or purchase a business. This needs to be arms length so don’t get any big ideas about selling your existing business to the IRA entity as this is a prohibited transaction. You can serve as Director of the company as long as you do not receive compensation for doing so.
Now I know you’re thinking “Great, my Roth IRA owns a company that can’t pay me anything – Why would I do that?”
Well the company can pay dividends or profits to the Roth IRA. This money can be used to invest in other businesses or can be distributed to you as beneficiary of the IRA once you are 59 ½ or, if the 5 year holding period applies, after five years of your initial deposit.
This strategy can work well for a cash flow business that others manage for you. Imagine a franchised convenience store (or some other business) that generates a decent return on capital and then imagine a tax free income stream from that business throughout your retirement. Probably a better return than your balanced portfolio that your financial services professional is producing.
For specific guidance on the mechanisms, join the Business Godfather LLC Family or review Swanson v Commissioner 106 T.C. 76 https://scholar.google.com/scholar_case?case=15277963416926279130&hl=en&as_sdt=6&as_vis=1&oi=scholarr
IRS Field Service Advice Number: 200128011 http://www.irafinancialgroup.com/IRAFinancialGroupFSA200128011.pdf