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Discuss Latest WCI Blog Post: How the Wealthy Can Avoid Paying High Taxes

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  • Discuss Latest WCI Blog Post: How the Wealthy Can Avoid Paying High Taxes

    Just because you're ultra-wealthy doesn't mean you'll have a big IRS bill. Here's how some rich people could avoid paying much in taxes.

    The post How the Wealthy Can Avoid Paying High Taxes appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.



    Click here to view the article!
    Helping those who wear the white coat get a fair shake on Wall Street since 2011

  • #2
    Interesting post. My question is how did doctor 3 get 15 million into a Roth IRA? Did he do a Peter Thiel plan? He/she still has 8 million in a traditional IRA should more have been converted?

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    • #3
      More interested in how they got $50m.

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      • #4
        Originally posted by Tim View Post
        More interested in how they got $50m.
        Certainly not hard to get a $15m IRA when you have $50m is it?

        I had someone leave a comment today about how they put 4 investment properties in an IRA. Use a bunch of leverage there and do really well it wouldn't take long to get to 15m.
        Helping those who wear the white coat get a fair shake on Wall Street since 2011

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        • #5
          How does one build such large muni portfolios? Slow gradual accumulation with after income dollars? Or sell of a portion of your portfolio or appreciated assets to buy the munis? In the later, there were still a significant amount of taxes paid, no? In which case, might no you be better off having held the assets and paid whatever taxes you might have owed?

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          • #6
            What I got out of this is how tax efficient a real estate portfolio can be during retirement with depreciation sheltered distributions. Then add in $80,800 of capital gains at 0% for MFJ plus whatever basis you had and you can pull many 6 figures without tax in retirement.

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            • #7
              Originally posted by The White Coat Investor View Post

              Certainly not hard to get a $15m IRA when you have $50m is it?

              I had someone leave a comment today about how they put 4 investment properties in an IRA. Use a bunch of leverage there and do really well it wouldn't take long to get to 15m.
              Well, just saying, the other $35m is a heavy lift.
              It would take guts to invest real estate in IRA’s and bypass all the tax advantages. All those RMD’s will come out top marginal tax rates eventually.
              Hey, the examples were theoretically correct. $50m of assets don’t need to generate high taxes.
              You win, no debate! I will simply say $50m counts. Great problem to have.

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              • #8
                Originally posted by Tim View Post
                Hey, the examples were theoretically correct. $50m of assets don’t need to generate high taxes.
                You win, no debate! I will simply say $50m counts. Great problem to have.
                I think this is right. Hypothetical. But interesting insights on how to set things up.

                I'm not sure how my experience applies to the broader group, but in general my tax situation will be much worse than these examples on a relative basis because I have a pension, plus (eventually) social security plus RMDs. All are taxable and this will fill my first IRMMA bracket pretty quickly, so it is the 24% bracket for me pretty much no matter what. Or, so I think. I'd love to be wrong. I plan to level income across my post retirement eras by selectively using tax deferred before RMDs, use Roth at the margins (cliffs like IRMMA income limits), and take advantage of LTCG and qualified dividends. Any other insights out there?

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                • #9
                  Originally posted by burritos View Post
                  How does one build such large muni portfolios? Slow gradual accumulation with after income dollars? Or sell of a portion of your portfolio or appreciated assets to buy the munis? In the later, there were still a significant amount of taxes paid, no? In which case, might no you be better off having held the assets and paid whatever taxes you might have owed?
                  Put $200K into munis every month for a few years. It adds up pretty quick. People with $50M probably had a pretty big income at some point, or else they sold a very valuable asset (like a lucrative practice or successful small business) and then invested a big lump sum in munis.
                  Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                  • #10
                    Originally posted by The White Coat Investor View Post

                    Certainly not hard to get a $15m IRA when you have $50m is it?

                    I had someone leave a comment today about how they put 4 investment properties in an IRA. Use a bunch of leverage there and do really well it wouldn't take long to get to 15m.
                    I’m not sure how this would work. You can’t put anything other than cash into an IRA, not properties. You could use your cash to buy properties, but IRA funds cannot be used as loan collateral, and I don’t know how you could personally guarantee loans in the IRA with property outside of the IRA without running afoul of the rules. Furthermore, one of the biggest advantages of real estate is depreciation, which would be worthless in an IRA.

                    Someone may have made the claim, but it sounds unlikely to me. Do you have any details?




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                    • #11
                      Originally posted by The White Coat Investor View Post

                      Put $200K into munis every month for a few years. It adds up pretty quick. People with $50M probably had a pretty big income at some point, or else they sold a very valuable asset (like a lucrative practice or successful small business) and then invested a big lump sum in munis.
                      200k/mo from after tax earnings? Most doctors can't do that. Or 200k/mo from selling assets? You're still paying tax on the later. So you haven't really escaped taxes, just that you're getting an arguably lower ROI from munis to avoid taxes.

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                      • #12
                        Originally posted by burritos View Post

                        200k/mo from after tax earnings? Most doctors can't do that. Or 200k/mo from selling assets? You're still paying tax on the later. So you haven't really escaped taxes, just that you're getting an arguably lower ROI from munis to avoid taxes.
                        Completely agree. Nobody asked how can the typical doctor build such a large muni portfolio so I didn't answer that question. The answer to that question is, of course, that they probably can't.
                        Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                        • #13
                          Originally posted by PHANTASOS View Post

                          I’m not sure how this would work. You can’t put anything other than cash into an IRA, not properties. You could use your cash to buy properties, but IRA funds cannot be used as loan collateral, and I don’t know how you could personally guarantee loans in the IRA with property outside of the IRA without running afoul of the rules. Furthermore, one of the biggest advantages of real estate is depreciation, which would be worthless in an IRA.

                          Someone may have made the claim, but it sounds unlikely to me. Do you have any details?



                          Your IRA absolutely CAN buy properties. Obviously you're not going to contribute a property $6K at a time.

                          All expenses have to be paid from the IRA, all income must stay in the IRA, you can't use the property yourself etc. With an IRA there is UBIT (not there in 401Ks). Sure, you lose depreciation, but one might argue the additional benefits from being in an IRA outweighs it.

                          As far as the loan guarantees, yes, you'll only be able to get non-recourse loans.

                          Personally, I don't really like equity real estate in tax protected either. I like putting debt real estate in there and keeping equity real estate in taxable for simplicity and the tax benefits. But just because I don't like it doesn't mean it can't be done much less that it can't work out very well.
                          Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                          • #14
                            I guess I should have said you can’t make in-kind contributions to an IRA that didn’t come from another eligible account. You can’t contribute properties. That means buying a property with assets in the IRA. If you have to buy the whole property outright, or only have access to (more expensive) non-recourse loans, then you are losing the primary advantages of real estate investing: leverage and depreciation. This doesn’t seem like the recipe for an unusually large IRA balance. If there is something I’m missing, a way to make this work, I’d love an example.

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                            • #15
                              Originally posted by PHANTASOS View Post
                              I guess I should have said you can’t make in-kind contributions to an IRA that didn’t come from another eligible account. You can’t contribute properties. That means buying a property with assets in the IRA. If you have to buy the whole property outright, or only have access to (more expensive) non-recourse loans, then you are losing the primary advantages of real estate investing: leverage and depreciation. This doesn’t seem like the recipe for an unusually large IRA balance. If there is something I’m missing, a way to make this work, I’d love an example.
                              I"m not sure why you need someone to point this out, but okay, here we go.

                              You have a $100K Roth IRA. You use it to buy a $400K property. It's slightly cash flow positive. You continue to make BD Roth IRA contributions each year. Your property is in a rapidly appreciating area and within just 3 or 4 years has appreciated to $500K. So now you go buy another property with the IRA using $100K in equity and another $30K that you have contributed to the IRA. This time you buy a $600K property which is again just slightly cash flow positive. You now have $1.1 million in property in the IRA with mortgages of about $725K. 3 or 4 years later, your original property is worth $600K. The second property is now worth $750K. You refinance them both, freeing up another $250K in equity. You've made some more contributions and they've had a little cash flow, so you put $300K into a $1.2 million property. You now have $2.55M in property in the IRA with mortgages of $1.8 million. 3 or 4 more years ago by. Your properties have continued to appreciate. You have continued to pay down some debt and accumulate cash. Perhaps you now have $500K you can invest in another property. This time you buy a $2 million small apartment building. Rinse and repeat. Over 20 to 30 years, you've got an 8 figure IRA. Now if you're also periodically rolling over 401(k) money in there? It goes even faster.

                              You're not losing the benefits of leverage just because you're paying a little more for it just because you have to get a non-recourse loan. Real estate investors don't get rich because of depreciation. They get rich because the properties appreciate and produce cash flow. Add leverage and it all happens relatively quickly.
                              Helping those who wear the white coat get a fair shake on Wall Street since 2011

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