If you're getting a bonus around this time of the year, what are you planning spending it on?
I got my bonus numbers last Tuesday, immediately spoke with Payroll to shift 100% of the dough to my 401(K). I am building up my 401K (trying to max it out to USD $16,500 per year) so that I can eventually take a loan against it and buy some cash flow producing Real Estate. No doubt I'm light years away from you location independent fellas, but I'm working with what I got in front of me.
Let me break it down:
Bonus $s -> Into my 401K (Pretax) -> Tax Free Loan from my 401K (50% of the account value) -> Down payment for cash flow producing real estate -> Pay back my OWN 401K (with 3% interest to MY OWN account) = More money in my 401K + 1 Cash flow producing RE asset
Benefits:
- You are avoiding the tax man at several instances 1. Bonus (its taxed at 40-50% rate/bullshit) 2. Early 401K withdrawals (Again taxed at 30-50% rate).
- Your borrowing AGAINST your own 401K account which means that paying back principal + interest is going back to you without dealing with any penalties.
- When you pay back the loan, you are using pre-tax income (Gross income) to pay back your 401K, so this reduces your taxable income.
- Using the tax free funds (401K loan) to leverage a Real Estate investment that produces more cash/reduces your taxes.
Risks:
- If you F up at your job and can not pay back your loan. You are hit with plan penalties + the tax man will want his share.
- You buy an alligator property, which basically sucks your paychecks instead of cash flowing every month.
I got my bonus numbers last Tuesday, immediately spoke with Payroll to shift 100% of the dough to my 401(K). I am building up my 401K (trying to max it out to USD $16,500 per year) so that I can eventually take a loan against it and buy some cash flow producing Real Estate. No doubt I'm light years away from you location independent fellas, but I'm working with what I got in front of me.
Let me break it down:
Bonus $s -> Into my 401K (Pretax) -> Tax Free Loan from my 401K (50% of the account value) -> Down payment for cash flow producing real estate -> Pay back my OWN 401K (with 3% interest to MY OWN account) = More money in my 401K + 1 Cash flow producing RE asset
Benefits:
- You are avoiding the tax man at several instances 1. Bonus (its taxed at 40-50% rate/bullshit) 2. Early 401K withdrawals (Again taxed at 30-50% rate).
- Your borrowing AGAINST your own 401K account which means that paying back principal + interest is going back to you without dealing with any penalties.
- When you pay back the loan, you are using pre-tax income (Gross income) to pay back your 401K, so this reduces your taxable income.
- Using the tax free funds (401K loan) to leverage a Real Estate investment that produces more cash/reduces your taxes.
Risks:
- If you F up at your job and can not pay back your loan. You are hit with plan penalties + the tax man will want his share.
- You buy an alligator property, which basically sucks your paychecks instead of cash flowing every month.