Build Wealth Using Your Loan-Out
“If you build it, he will come.” - FIELD OF DREAMS
Book by W.P. Kinsella, Written & Directed by Phil Alden Robinson
(3-minute read)
I’ve helped numerous writers and directors establish their own Loan-Out companies. We turn them into S-Corps for a few reasons and whether they fully understand those reasons doesn’t seem to phase them. They were just told that it was a good idea by their colleagues and agent.
I try my best to educate them as much as possible before they make the final decision. As much as they’ve heard about the tax advantages, there is another advantage that NONE of them have ever heard before. I happen to believe it’s the most important and impactful reason to establish a Loan-Out yet everyone seems shocked when I bring it up: Investing. More specifically, you can establish your very own retirement account and begin a tax-advantaged investing plan for the rest of your life. Oh, and your contributions are TAX-DEDUCTIBLE BUSINESS EXPENSES!
YOUR BUSINESS IS MORE THAN YOU
The two different accounts that I encourage are a Solo 401(k) and SEP IRA. You’ve probably heard of a 401(k) but maybe not a SEP IRA. The SEP stands for Simplified Employee Pension. I like it because, well, it’s simple. The set-up paperwork is less than one page and you don’t even have to file it! You only have to keep that one page for your records or in case the IRS ever asks for it. They really put the simple in Simplified. A Solo 401(k), on the other hand, has set-up costs, annual fees, and more involved administration.
So how exactly does this help you build wealth? Let’s start with the amount you’re able to contribute. In 2024, you’ll be able to contribute $7,000 to a Roth IRA or a tax-deductible contribution to a Traditional IRA (add $1,000 if you’re 50+). But if you have a SEP IRA you will be able to contribute up-to $69,000. Nice. Let’s do the math:
I’m using a conservative rate of return of 7% for a 50/50 portfolio according to Motley Fool (https://www.fool.com/investing/how-to-invest/stocks/good-return-on-investment/).
If you made a one-time contribution of $7,000 next year into a Roth IRA, and didn’t contribute a penny more, after 25-years it would be worth approximately $38,000. But if you made a one-time contribution of $69,000 next year into a SEP IRA, and didn’t contribute a penny more, after 25-years it would be worth approximately $374,000.
If you contributed those amounts annually for the next 25-years then your Roth account would climb to approximately $443,000 while your SEP IRA would be approximately $4.3 million.
YOU MIGHT BE MAKING TOO MUCH MONEY
If you are single and earn more than ~$150,000 (modified AGI) then you are unable to contribute to a Roth IRA. Married couples have a taxable income (modified AGI) threshold of ~$220,000 before they can no longer contribute to a Roth. So if you make more than that, you’re out of luck. Also, if your spouse is covered by a retirement account at their workplace then you CANNOT make a deductible contribution to your Traditional IRA either based on this threshold.
But SEP IRAs have no such limits. The limit imposed on a SEP IRA is that your contribution can’t exceed 25% of your salary and no more than $69,000 in 2024. So if you’re single and make $160,000 then you cannot contribute to a Roth IRA. But if you have a SEP IRA then you can add $40,000 to that account.
I obviously can’t guarantee any investment results but I hope the lesson is clear: you can save more by using your Loan-Out company. Like, WAY more!
If you’d like more information about a Loan Out and/or investment accounts you can schedule a Complimentary Meeting HERE.
Join the email list and receive the NO NOTES! newsletter with blog/video updates.
For disclosure information: Website Disclaimer
—
