Hello from John. . . Like to ER to write / compose

[JohnR]

Hello John here.
Have literally saved everything since age 22, to become full time writer / composer. (I'm now 35 and not pretending to be especially talented or anything, just very passionate!)

Have paid up real estate, worth about $700-800k. But NO home, NO savings, and NO pension whatsoever. NO wife, NO partner and NO children either. Hence my motivation in part, as I never clicked with anyone in my past (mega-corp) working life.

$300-400k more needed to ER. Any suggestions how to maximize savings / reduce tax, on pre-tax yearly income of $80k-$150k. (Note dollars locked away till 50-65 MIGHT cripple me!)
thanks in advance. . .

 

[fletzie]

Re: Hello from John. . . Like to ER to write / com

Am confused since first you say you have saved since 22 but now have no savings

Just because you put money into a 401K (I am assuming you are still working and not self-employed)
doesn't mean it has to just sit there. Loans against ones
401K funds can be reinvested (more real estate, treasury bonds, anything stable). I borrowed against 401K to buy my house. You can even take a distribution from 401K BEFORE 59 1/2 to buy your FIRST residence with no penalty. The appreciation on my house has been well in excess of the ROI for the 401K
and the interest is still deductible come IRS time...
The 401K contributions are sheltered from taxation so that is a double savings in that you may get more back in your pay check since it may reduce you to another tax bracket.

You might want to look at commercial real-estate with current tenants (medical buildings, etc.)

Remember that if you retire say at 40 you still have to make the $$$ you have last that much longer...

Someone reminded me earlier today that anything related to entertainment is a precarious source of income...

Good luck...invest in yourself and find someone who shares your dreams!

 

[Martha]

Re: Hello from John. . . Like to ER to write / com

Loans against ones
401K funds can be reinvested (more real estate, treasury bonds, anything stable). I borrowed against 401K to buy my house. You can even take a distribution from 401K BEFORE 59 1/2 to buy your FIRST residence with no penalty. The appreciation on my house has been well in excess of the ROI for the 401K
and the interest is still deductible come IRS time...
The 401K contributions are sheltered from taxation so that is a double savings in that you may get more back in your pay check since it may reduce you to another tax bracket

Employers can restrict borrowing on 401(k)s and if you leave work you might have to pay the whole loan back immediately.

 

[JohnR]

Re: Hello from John. . . Like to ER to write / com

Am confused since first you say you have saved since 22 but now have no savings
Good luck...invest in yourself and find someone who shares your dreams!

Thanks Fletzie.
Yep should have said no other savings than what was poured into real estate!
Just a few clarifications on the 401k suggestion's :-

Any way to avoid the early withdrawal penalties? (10% etc?)
Any way to boost the yearly contribution limit, (12-14k etc is very low)?
Work 50/50 salary vs contract, need an IRA etc, Can you contribute more to an IRA than 401k?

thanks

 

[Martha]

Re: Hello from John. . . Like to ER to write / com

Any way to boost the yearly contribution limit, (12-14k etc is very low)?
Work 50/50 salary vs contract, need an IRA etc, Can you contribute more to an IRA than 401k?

thanks

Because you are self employed as well as employed you could look at establishing either an individual 401(k) or SEP IRA. These can be established for a sole proprietorship.

Otherwise, given your income and the fact you have a 401(k) through your employer, you probably can't contribute to a deductible traditional IRA. ROTH IRAs have an income phase out for single people of $95,000 to $110,000 so a ROTH might not work for you either.

Lots of options so be sure to do your homework.

 

[fletzie]

Re: Hello from John. . . Like to ER to write / com

Hi JohnR:

Just a few clarifications on the 401k suggestion's :-

Any way to avoid the early withdrawal penalties? (10% etc?)
Any way to boost the yearly contribution limit, (12-14k etc is very low)?
Work 50/50 salary vs contract, need an IRA etc, Can you contribute more to an IRA than 401k? Yes to a ROTH IRA. I say this because I have seen this on some IRA sites.

The only way to avoid the 10% penalty is what is called a hardship withdrawal or a loan for the purchase of your FIRST residence. Hardships are usually things like avoiding foreclosure, significant health/death related expenses and things of that nature. Someone mentioned earlier that employers can limit the number of loans you can have or your participation in the 401K for a set period based on the plan specifications.

The contribution limit this year is only 14K for people under age 50 (who can do catchup by 4K per year). But I was told by one of the financial institutions you can ROLLOVER your 401K money anytime...as long as you don't touch it and it goes into a similar qualified investment like a conventional IRA. Then you can take the tax hit on converting the conventional to a ROTH (now when taxes are lower).

As someone earlier said you can incorporate and pay yourself a salary out of your contract work proceeds. You can leave some $$$ in the 'business' and not pay it all to yourself.

I don't know if you would qualify for the Roth IRA since you have more income than the limit but maybe you can have thise AND a 401K. It might be worth your while to take the maximum contribution in the 401K to protect some of your income from taxes now. Then out of your contractual work open a ROTH IRA which is no taxes in future. Most large financial institutions (Fidelity, T Rowe Price, etc.) will even walk you through the process if you invest a minimum (I think the minimum is around 10K) and they can advise you better on the legal/tax issues.

You won't get the tax write off for anything except the limit on the ROTH but you will still get the investment.
Like the 401K you can't take distributions until 59 1/2.

You could also invest in Treasury bonds/notes through you local bank. These pay you some interest every six months and maybe you could stop working and start living as an ER! The minimum on a bond of this type is $1K. If you have income from your real estate holdings then you could invest that here if you don't use it for living and it sounds like you don't. I would even talk to
someone to see if you can contribute into an IRA a bit at a time and then convert it to ROTH even if you can't get the tax advantage right away.

Remember that bonds are good when the stock market is weak and vice versa.

Like Martha said, do your homework...and good luck!
8)

 

[Martha]

Re: Hello from John. . . Like to ER to write / com

The advantage for sole proprietorships in having a SEP IRA or solo 401(k) is the significant amount of money the business can put away towards retirement. The max can be as high as $42,000 for 2005, depending on your individual circumstances.

 

[JohnR]

Re: Hello from John. . . Like to ER to write / com

Thanks for the info Fletzie and Martha. . . and the well wishes which I'd like to return.
Wow many intricacies here. Pity about the 10% penalty and the 14k limit. I have purchased and lived in RE in the past (not using a mortgage), but likely forgo the 'First Residence' benefit.

Tax complexities abound, better for sole proprietor should that be where the work comes through. On the other hand if salaried ends up being the path, Would others consider me crazy to just pay all the Tax now - upfront, and be done with it?

It will mean working an extra year (maybe two) at the end to make up the shortfall, but at least then there won't be any restrictions on using the money thereafter. (I should state that I'm drawn to move overseas on reaching ER to make the $ go further).

One other idea is to try and offset Tax against a large mortgage. But maybe this is shortsighted, is there a maximum amount of mortgage interest that can be written off against tax?

 

[Mr._johngalt]

Re: Hello from John. . . Like to ER to write / com

Re. taxes; I honestly don't know which gives me more warm
fuzzies............keeping the money in my pocket, or
depriving the potential "collector" of his largesse.

JG

 

[fletzie]

Re: Hello from John. . . Like to ER to write / com

John:

As for offsetting against a really big mortgage remember the following (at least it applies in my state):

The deductibles include real estate tax in your state and interest on the loan:

Property loan interest rates are kinda low right now..but going up slowly... but could you then get cash out of the property by getting an equity loan and then investing that $$$...could your sole proprietorship buy the house(s)

Some states are trying to put ceilings on real estate taxes. This generally means there is less to deduct.

When I bought my first house I was told NOT to think of it in terms of just tax writeoff...

Another item to check out: Most of the people I know with own businesses are LLC and not sole proprietor but some of these distinctions vary state by state.

Hope you achieve your ER goals sooner than you think!

8)

 

[JohnR]

Re: Hello from John. . . Like to ER to write / com

Thanks fletzie.