How to Tax shield my yearly Bonus?

Question

Hello,

I am a new investor and I have a question for the BP community.

This year I will receive a sizable salary bonus from my employer.  Through our retirement program we have the ability to defer 100% of our bonus to our 401k TAX FREE!  Now, I recently found out about using a self directed IRA to invest in real estate.

So here is my question to all of you... Is there any reason why I cant defer my bonus to my 401k (to avoid taxes) and then roll that money into a self directed IRA and use that money to invest in real estate?  This would avoid a 50% loss on my bonus which would be so wonderful!

Are there any hang ups im overlooking?

Thanks in Advance for any advice!

Charles East · Answer

Contribute 100% to your 401k and then take a loan out if your plan allows.

Taylor L. · Answer

The problem with W-2 income is it's pretty darn un-tax shelterable. The 401(k) is probably your only option, depending on where you stand versus the max annual contribution limits. You won't be able to move the money into a SDIRA until you leave the employer - which is how I built most of the initial balance of my SDIRA.

Jaysen Medhurst · Answer

@Richard Pince, what's "sizable?" There's a $19k limit on 401(k) contributions.

You may have trouble getting the money into an account that you can use to invest in a rental property.

The other thing to keep in mind is that ALL the gains made in a tax-deferred retirement account can't be accessed until you retire and start taking distributions.

Elina Solaita · Answer

@Jaysen Medhurst

All the money (employer contribution) can’t be used as a part of a loan. If you rolled any funds from a previous employer, all of those funds are eligible for use.

My current employer allows 2 loans on 401k funds. There is interest on these loans, BUT the interest is paid to the 401k. Option is for a regular loan or a home loan. There are additional requirements for the home loan that need to be met, but the term period is longer. The downside is that the loan is paid back from your payroll deduction.

Elina Solaita · Answer

@Charles East

That’s exactly what I would recommend. There is a timeframe that the money has to be left alone and I know my 401k requires 30 days before funds can be requested again as a loan.

Richard Pince · Answer

Awesome thanks for that info... These are the exact kind of stipulations I need to know about!

Ashish Acharya · Answer

Unless, you terminate your employment, you generally cannot withdraw 401k balance as distribution. Generally, If you were separated/terminated, you could do tax free rollover and accomplish what you were trying to do and defer taxes, not avoid.

I am sure experts on the retirement will chime in.

How to Tax shield my yearly Bonus?

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