Pat Flynn
This is a Guest Post from RJ Weiss. RJ is an aspiring financial planner, who runs his own website, Our Financial Planner.
Passive income doesn’t have to stop once the money is earned. Wouldn’t it be nice to earn passive income, off passive income?
This step isn’t for beginners. If your passive income isn’t enough to cover your bills, continue using this website for guidance to get you there.
Since the title of this blog is Smart Passive Income, this post will show you the most efficient way of turning passive income into more passive income.
The probable structure of your business, being that you’re a “solopreneur,” allows you to receive an extraordinary tax break, plus a great investment opportunity. Due to your structure, you’re allowed to create and design your own retirement plan, known as an Individual or Solo 401K.
Eligibility
Individual 401K’s are for individuals, partners, and their spouses only. If you’re just starting your business, and plan to grow it with employees, don’t start a Solo 401K.
Businesses whom are likely to take advantage of this opportunity are freelancers, solo proprietors, owners of S Corps, partnerships, and LLC’s.
The Benefits
You create your own retirement plan. Everything from picking the provider, to “employer” contributions, you have complete control over everything.
The biggest benefit an Individual 401K has is very high contribution limits. The amount you can contribute to an Individual 401K trumps other options your business has for retirement savings like SIMPLE and SEP IRA’s.
In 2009, if you’re under 50, the maximum contributed to an Individual 401K isn’t to exceed $49,000. This consists of your salary deferral plus the business’s contribution. You’re salary deferral is maximized at $16,500. The business can then contribute any amount, but not to exceed $49,000 including your salary contributions or 25% of W-2 earnings.
To sort all this out, let’s look at a real life example of someone who owns their own corporation making $40,000 a year.
| No Plan | Solo 401K | |
|---|---|---|
| Net Income | $40,000 | $40,000 |
| Less Salary Deferral | 0 | 16,500 |
| Less Company Match | 0 | $10,000 |
| = Taxable Income | $40,000 | $13,500 |
Your $25,500 investment is then able to grow tax deferred. Meaning in 15 years, at 8%, $25,500 turns into $808,903 before tax. Imagine the results if you’re able to do this year after year.
Where to Set One Up
Use a low cost investment provider like Vanguard or Fidelity. The benefits of having a tax savings vehicle can quickly be washed away by paying extraordinary fees. These two companies provide plenty of investment options, with minimal account fees.
What to Invest In
Just like passive income, passive investing also has its benefits. Using a passive strategy for investing equates to picking a well diversified portfolio of index funds. Over the long term-term, you’re able to minimize costs, and most importantly, take your irrational behavior out of the equation.
The true passive option, when it comes to investing is selecting a target retirement fund. All you need to do is pick a date. The rebalancing and asset allocation is done for you automatically.
My Experience
Most of this information was obtained from a course I’m taking to get my CFP certification. Before you make any changes, check with your CPA. This is a great example of how a good CPA, can easily pay for its services with one decision.
There is a lot more to know when it comes to taxes and investing. The purpose of this post, was to introduce you to something new, that you might be able to take advantage of. For more information visit:
Feel free to read more from RJ at his website, Our Financial Planner.
