Capital Growth,Cash Flow, Taxes And Timing: Planning for Your Retirement the Smart Way

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Show of hands — How many relish the thought of shellin’ out big wads of cash to the taxman?

Yeah, me too.

On the other hand, we all wanna retire with the largest, most reliable AFTER tax income possible, right? So, here’s a poser for ya…

You have X number of years to go before you retire, usually 10-30 or so. You have the ability to rollover one or more of your current retirement plans — Sep/traditional IRA, former employer 401k, etc. — to a Solo 401k. You’d then move that money over to the Solo’s Roth ‘side’. Since you have an impressively high balance, all of which was originally contributed pre-tax, movin’ it all over to the Roth side means you’ll owe a painfully large pile of cash to the taxman. Ouch. “Why the #^$&#@ would I ever even consider doin’ that?!”

What’s Your Ultimate End Game?

If it’s after tax income in retirement, AND payin’ ONE hefty tax bill now will increase that number, why all the anxiety?

To be fair, I’ve been there and done that a few times myself, so I empathize big time. Regardless of what my head knew to be empirically factual, the very thought of writing a check for up to, and a couple times even over $100,000, will cause some very authentic anxiety. Let’s understand what’s behind any decision to purposefully force ourselves into payin’ hurtful amounts of taxes.

Remember, your end game is after tax income in retirement, about 10-30 years from now. If you can turn that income into tax free by IRS definition, more the better, right?

One of the little details investors often don’t wanna think about when investing for retirement, is that if they are indeed highly successful in creating impressive cash flow for that time of life, they’re almost always doing so without the slightest consideration of their income tax stance at the time. Imagine all the various tax shelters available to you today. The interest and property tax deduction on your home, for instance. Just the tax deduction will remain at retirement for most, as who wants a house payment in retirement? Your kids will be long gone, so no help there with deductions. Though most of your real estate investments will still supply a 30-50% tax shelter for the cash flow generated, most if not all of it will go bye-bye in a few short years after you retire. In other words, in retirement, every April 15th you’ll be reliving the wrong end of a good news/bad news joke.

What’s the good news? Man, we’re printin’ money in retirement. What’s the bad news? The IRS is our new partner.

In my state, California, income tax for a high earning taxpayer BEGINS at 9.3%. It then goes up from there to over 12%! Add federal rates in the 30s, and you’ll begin to see how quickly not having a solid after tax strategy for retirement income can, and likely will come back to bite ya where ya sit.  Let’s take a swipe at some numbers.

Retired in California in 2015 — Gross Before Tax Income of $500,000

Before we start with this, don’t begin with the thought that half a million is simply a pipe dream, cuz I’m hear to tell ya that if you have the time, the capital, and the right strategies, that could be you. Regular folk like you ‘n me often have humble beginnings for sure. But given enough time and wisdom, it’s likely you can retire with a five figure after tax monthly income. I see it all the time. Thing is, it’s boring as all get out, along the way. That is ’til the day you retire. 🙂 So, the tax bill for half a million a year income in this scenario would be around 37% overall, state and fed. That’s a net of roughly $315,000. Now, let’s go back to comparing ‘what ifs’ as it relates payin’ a huge tax bill today, in order to have much of your retirement income be viewed by the TaxMan as tax free.

NOTE: For the sake of this post we’ll assume all income is converted to tax free 15 years before retirement. That’s not the reality for most, but it will help illustrate the point. Also, and of paramount importance is this: The decision to pay a large tax bill today so that tomorrow’s retirement income is tax free, must, by definition be a Captain Obvious no-brainer. So, you paid the big tax bill, and it hurt like the dickens. But now it’s 10-30 years later, and time to retire. Your neighbor, whose income at retirement is completely taxable will need to receive about $185,000 a year more than you do, in order to end up with the same spendable income. They chose NOT to bite the bullet and pay taxes back in 2014. If taxes rise, their spendable income drops, but it’d have no impact on you whatsoever.

Furthermore, if your tax free income is derived 100% from discounted first position notes, secured by real estate, here’s what you’ll have to anticipate.

  1. Every time a note in your Solo 401k/Roth IRA or other tax free entity pays off, you will quickly and happily rinse ‘n repeat. That is, you’ll take the untaxed profits along with the original capital invested in the note and buy more notes carrying larger payments. This will lead to more AFTER Tax income.  Happy days.
  2. Your neighbor will have to make a ton more than you just to end up the same. After awhile he’ll not wanna talk about what coulda, should, woulda been the case had he done what you did, back in the day.
  3. If, as mentioned earlier, your tax free income derives from discounted notes, the time spent managing is significantly reduced, especially when compared to real estate. Is that an argument against investing in real estate? Not on your life. But, as good as real estate is, in the end, when it’s all free ‘n clear, it really defaults to being your ‘family bank’. Yeah, there’s the income for sure. Given all your tax free income, though, it’ll be great ‘walkin’ around’ money. 🙂

For those who’re still massively skeptical, let me put it this way. The neighbor in the above example will get to experience the following, while simultaneously realizing the depth and breadth of his fundamental mistake. That is, not paying the huge tax bill when it made sense. If his original tax bill, 10-30 years ago woulda been $250,000 — ONE TIME — he wouldn’t hafta pay cumulative tax bills in just his first decade of retirement at the income level mentioned, of not a whole lot less than $2,000,000! That amount only gets more depressing as his income rises, if it does. If the analysis is solid, and it screams at you to pay the taxes now, just this one time, and the result will be tax free income in retirement? For the love of all that’s sacred, DO IT!

Photo Credit: OhKyleL

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.


  1. Hi Jeff,

    What tree do these 1st position discounted notes grow on? I asked various people including you about the source of the notes but no one has showed me that source. I know about PPR but they only have 2nd position notes usually without any equity securing them. Where are the notes with 55% LTV and 12+% interest? Are they in the same secret place where Dave Ramsey keeps his “quality mutual funds” that return 12%?


    • Jeff Brown

      Please accept my apology, Nick. It was completely inadvertent. PPR now has a 1st position note fund, ironically named BawldGuy Note Fund. 🙂 It’s brand spanking new, and is a private, $5 million offering, operating under SEC regs. You must be an accredited investor per SEC definition. There are a couple ways to qualify.

      1) Income: Single must make $200k/yr. Married must have combined $300k/yr.

      OR . . .

      2) Net worth — exclusive of primary residence — of $1 million. Check with Dave Van Horn at PPR, but pretty sure that includes any retirement plans you may have, etc.

      A recent example of notes available in 1st position were notes paying an IRR the first year of just over/under 16%. Frankly, I think in the long run most of the notes will yield in the 12-15% range, cash on cash. If they pay before completely amortized, as the vast majority do, the yield will almost always rise.

      The LTV is a matter of your choice, Nick. For example, if you find a note for $100k face value, but whose security house is only worth $90k, your choice is as follows. If you pay $50k for the note, your LTV will be a tick over 55%. If you paid $60k, it’d be about 68%. Frankly, post bubble, I’d be comfortable at 70% and lower, as long as I ascertained to my satisfaction the value was there.

      • Hi Jeff,

        Thank you for replying. I am not an accredited investor by any stretch of imagination. That puts me in a disadvantaged position, doesn’t it? I cannot participate in your fund and can only hustle for notes on BP or elsewhere. That seems to be a high risk game, isn’t it?

        I like the way you put it that LTV is my choice. So, if someone holds a note with $100K face value on a $90K property, I can just offer them $50K and they will be happy about it? Why? What do they know about this note that makes it being worth 1/2 of the face value?
        Could it be that the note is defective, fake, non-enforcible? Or the borrower lost his job (and ability to pay) right after the last payment, and the note is about to become a non-performing?
        There must be something wrong with the note to force the seller to accept a big loss on it.

        This brings me to the source of notes again. Since I cannot buy from your fund, I have to trust a complete stranger who I may meet online. How can I verify that the note I am considering to buy is of a top quality? Do I have any recourse against the seller if I buy a note and later find out that it is defective in one way or another?


        • Jeff Brown

          My bad, Nick. You just can’t invest in the note fund itself, and reap two benefits non-fund members don’t enjoy. First, they don’t make the high preferred return rate fund members receive monthly, electronically deposited in the bank account they designate. They don’t even hafta ever buy a note and still receive that high preferred rate. Second, fund members will be notified of new available notes sooner than note buyers who’re not members.

          All that said, Nick, you can still buy notes from the fund, AND get all the benefits afforded members after they buy notes. So, to summarize, no preferred return for non-fund members, and you’ll hear about notes after fund members do. Otherwise you’re welcome to buy them. In fact, I invite you to my own blog site in order to subscribe to my newsletter, which will be giving much info to subscribers on this very topic, in much detail.

          Hope this helps.

        • Hi Jeff,

          What is that preferred rate? I wonder if I can combine my funds with one of the members and just get my share of the preferred rate.


  2. Jeff

    I was great talking to you the other day, and I just forwarded this article to my mother. I hope to invest with you when I’m able to, keep up the good writing

    Kevin Hill
    (also bald)

  3. Hey Jeff,

    Nothing but respect for ya, but I’m having a hard time following how this applies to the masses. While retiring with 500K in annual income is possible and I’m sure you have worked with several of these, that’s like 99.8th percentile stuff isn’t it? And I can’t imagine much of that .2% built their nest egg through traditional retirement tools.

    I’d love to see you model a more relevant example. Say Joe and his neighbor, who both make 150K a year and hope to retire in 20 years with 500K in 401K.

    • Jeff Brown

      Jeremiah — You just described the investor couple on which this post was based. They earn a combined annual pre-tax income of just over $300k. Your point, though, is well made, and I will do just that. I do think you’ll find that if you’re makin’ $300k/yr and not spending 99% of it, and not already too old, you to can retire with ridiculous amounts of income at retirement, a large portion of which can be tax free.

  4. Having 500k in income a year simply means that I worked too much in my life. 🙂 My goal is to not work until I’m too old to enjoy the money I’ve made and to retire with a modest income. Here’s a scenario that I worked out that applies to me and I would believe would apply to a larger percentage of the population than the 500k income scenario.

    Today my income is relatively high and as a result I pay higher income taxes. Because of this, I defer as much income as I can toward retirement and my assumption is that I will have significantly less income in retirement (since I save lots now). If I were to take 1 million of my deferred retirement funds today and convert to a Roth I’d be taxed around 44% leaving me with 560,000. If my goal was to retire in 7-10 years this money may double to 1.12 Million and would be tax free. If I kept it in my traditional IRA and it doubled I’d have 2,000,000. If I were to draw around 75k/year my effective tax rate would be just under 20% so I’d actually take home around 60k. This means that my 2,000,000 would probably last me a lifetime since I’d only be drawing 3.75%/year. With the Roth scenario I’d need to draw 60k/year which would be 6%/year of my overall funds and would last significantly less.

    • Jeff Brown

      Hey Paul — Some excellent point, but I have another view for you to ponder. If you put your $1 million from your Roth into my note fund, never buy a note, but simply take the preferred return, you’d earn more — TAX FREE — than the $75k/year in your example, which would shrink more after taxes. If, you DID buy notes with your million bucks, you’d be making roughly $10-12.5k monthly, again, TAX FREE.

      What am I missing here?

      • In my example I now have 560k tax free in a Roth or 1 million in a traditional IRA. If I were able to make 10% on buying your note fund I’d make either 560k * 10% 56k/year tax free or 1,000,000 *10% = 100k in my IRA. If I needed a net of 60k I’d take 75k from my traditional IRA (15k would go to taxes) leaving me with an additional 25k to add to my principal amount of 1,000,000 in my IRA.

        In the Roth scenario I’d only net 56k so I’d need to take 4k from my principal to get to the 60k needed. Over the long haul my traditional IRA will grow quite a bit and my Roth will slowly decline in value. If I’m missing something I’d appreciate showing me the error of my ways. Today I try and max out all tax deferred plans that I can (401k, SEP IRA, and using depreciation on my real estate holding). I’ve been doing this because my plan is that my income will be lower in retirement.

        • Jeff Brown

          If I understand it correctly, Paul, you’ve gone from your original example of 3.75% to almost triple that, 10%, a huge change from your first scenario. Better, too. 🙂 Which scenario do you wish me to use? I understand why you switched horses in the middle of the stream. We all would, right? Now, there are some cases, very rare, which make sense to stay, but I don’t think even your modified second scenario is an exception. Here’s why.

          If you retired at 65, less than 6 years later the gov’t would force you to begin cannibalizing your principal. There’s no escape at that point. You’d now be in the race between when you die, and when you ran outa money. What many people do at that point is to roll the money into a Roth, which then causes the big tax bill. Problem is, that tax bill is scarily higher than what coulda been the tax bill 10-30 years earlier. If, on the other hand you were in a Roth IRA to begin with, that rule ISN’T applied. Or, if you were in a 401k Roth, you would roll into a Roth IRA, before your birthday, (check with your CPA on that one) so as to avoid the black abyss of turning 70.5.

          Meanwhile, back at the ranch, those who paid taxes long ago and bought notes, using after tax Roth capital, don’t pay taxes in retirement, AND they aren’t forced to dine on their own capital just because they reached a certain age. Now, in your scenario’s timeline you only allow for a relatively short, 7-10 years. That might force me — all investment yields being equal — to leave the $2 million in the traditional, non-Roth vehicle. Though the vast majority of cases show it’s better to pay the taxes now, in your second scenario you made it a much tougher decision.

          Bottom line? I suggest to you that turning 70.5 with a traditional IRA will cause you more problems than you knew were there. Once you’re forced to consistently eat into your principal, the jig is up, and the pre-tax scenario falls apart. Remember, you’d be retired with virtually NO tax shelter, and VERY high income, not a solid combo. Still, to be my own Devil’s advocate, given your second, modified scenario, once your original notes paid off, your pre-tax yearly take would more likely than not exceed $30k/MONTH. 🙂 At some point, and it’s a different decision for all of us, you just don’t care any more, cuz you’re not spending even the much smaller after tax amount. Make sense?

  5. When I used 10% I was using your example. In retirement, I’d be very happy with a 10% return and was just trying to show that if the returns are 4% or 10-15% for the majority of Americans it makes more sense to defer the income since the income will be lower in retirement and the taxes would be significantly lower if you took the money out slowly. If I had 1,000,000 in traditional IRA and I was 70.5 I’d only need to draw a little over 35k and if I had 2,000,000 I’d only need to draw a little over 70k the first year. I don’t consider this kind of requirement a cannibalization of my retirement and I would draw more than the gov’t required minimum in my examples above. Perhaps it would be easier for you to show me how you’d be left with more money with a 560k ROTH vs a 1,000,000 traditional IRA even at a young age of 40 which will give over a 20 year timeline. Every time I put this (or something similar) into a spreadsheet I come up with having more after tax income using the Traditional IRA due to the initial tax hit and the reduction of the ROTH IRA.

    • Jeff Brown

      I get it, Paul. Here’s the reality. Well over 90% of retired Americans take the advise of the same guys who stunted their portfolio’s growth for 30+ years, which is to remove most risk. This results in, give or take, 4% yield. IF you can get the double digit returns, it sometimes, though not most of the time, makes sense, IF it’s long enough before retirement, to opt for the taxable income. Still, I’ve found most folks prefer an ever growing tax free income in retirement, vs a an income subject to a growing marginal tax rate, not to mention the trend for soak the rich taxation legislation. Then there’s the whole problem presented by merely turning 70.5 years old.

      But, you say you won’t mind the gov’t forcing you to begin eating your principal. Here’s the thing, Paul — Speaking only from my experience, the vast majority of folks would much rather not worry about living ‘adequately’ on $35k, when they can easily end up with a lifetime of a minimum of six figures annually, all of which would be tax free by the same government’s own definition. It’s a subjective choice to be sure, and contrary to what many think, it’s a decision based on each person’s comfort zone. Make sense?

  6. Jeff,

    Thanks for another great article! You are my favorite author on this site and you open my eyes to something new each time I read your wisdom. I can tell you that I am not in the one percent of income earners having never made more than 80K per year. However, I have managed to save 20% of my gross income per year since age 26. I have another 10 years until I reach the magical 59 1/2.

    When I read 500K per year, I did the math and determined I can get there rather easily! You are correct when you said that you can’t get there in a 401k. The best thing that ever happened to me was losing my job in ’08 and discovering SD IRA’s. I am one third each in Notes, physical RE and private placements/cash. I do convert as much of my traditional IRA each year (actually ~15 months) as I can to a Roth but it is difficult when my partner (Uncle Sam) takes a third of my income each year. Still, you reinforce my belief that I am on the right path and you incent me to try harder on my conversions. You would make a great college professor!

    • Jeff Brown

      Hey Chris — That sound you just heard was thousands of college profs groaning at the thought. 🙂 There are some tweaks you can apply to your plan, which, by the way, is better, and I bet far more consistently productive than your family’s and friends’.

      I try to persuade folks to avoid investing in real estate inside their SD IRA/401k. Instead, use personal capital to do that. I can make a case for doin’ it inside those plans, but not just to buy ‘n hold for retirement income. Your notes are outperforming any real estate you’d buy, with the exception of highly appreciating properties. But that’s another post altogether. The short version argument is that you’re allotting capital with an opportunity cost of 12-15% (discounted notes/loaning to flippers, etc.) in order to acquire single digit cash on cash from real estate. If you’re gettin’ equal yields, that usually means you’re buying in areas of low quality, which in my view is to be avoided. But that’s your call, your comfort zone.

      IF you can qualify for a Solo 401k, your mechanics would become simpler. Also, you’d be able to consider the option of converting more quickly to 100% Roth. You’re clearly a highly disciplined guy, which bodes very well for you. With a decade to go, I’d consider a few tweaks, but mainly keep on keepin’ on. I’d love to chat with you, as you’re the exact sort of investor that feeds my addiction. 🙂 Have a good one.

      • Jeff,

        Thank you for the feedback. I have 2 homes in my SD IRA. The first I got for 50% of ARV. I have that on a 2 year lease to own and I regret it daily. Dad was a landlord for 30 years and hated it as much as I do. The other I got at 45% ARV and is most of the way through a 6 month flip. In the end, both will return more than my performing notes.

        I have an agreement to buy 10 NPNs – seconds with some equity and the first is getting paid. I researched them for almost a year and watched/read everything David Van Horn ever produced (I met him twice – nice guy and another writer worth reading). It gets to a point where you just have to get out there and try it.

        My risk tolerance is higher than most and I got involved in an oil and gas deal that tied up less than 10% of my assets. It is managements’ second time around the block. If it is a home run, everything else is my daughter’s inheritance!

        • Jeff Brown

          These days, some of those oil/gas ventures can be phenomenally productive. Good luck for sure on that one. Also, if you have time this week, I’d love to chat. Send me an email and we’ll figure it out. You have me intrigued, big time. 🙂

  7. Nice one Jeff. I’d like to see you take on early retirement in a future post.

    I’ll even give you a sample scenario:
    40 years old.
    $1M in real estate with an equity of $500k cashflowing about 40k a year, all tax shielded.
    $500k in a traditional IRA.
    Paid off primary residence, so lets say shooting for $50k after tax income.
    Anticipate raises as rentals become free and clear.

    Get me out of this job ASAP with some help from SEPP, notes, EIUL, accessing equity, re-positioning real estate, roth conversion, etc etc.

    What do you think?

      • Early retirement as in no more W2 income required to cover living expenses.
        Free to explore some new ventures full time that may or may not earn extra income.
        Looking forward to your ideas.

        • Ah, my apologies, ASAP means retire now, age 40 – this should flex your brain a bit.

          $50k annual spending isn’t such a bad life and seems within reach. Will take some time, but as tenants pay off the $500k in loans, cashflow increases from the $40k to say $80k or so.
          Vacancy risk reduced with a sufficient reserve account.

  8. I think the issues most people are having is wrapping their heads around some of the numbers.

    Since most people barely have a pot to piss in for their retirements talking about all the taxes you can save on your $500,000 of passive retirement income doesn’t resonate. 🙂

  9. Jeff,

    I am with AJ, how do you do it sooner than 59. If you are not LOVING your job, working to 59 so you can make 500k a year is crazy. You can have a great quality of life on much less and be done at 40 or earlier.

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