Should I convert some of my passive income to active?

Question

All of my income is passive from rentals. Therefore I do not pay any self employment taxes (15.3%). Since I have no active income, I cannot contribute to any retirement accounts.

Does it make sense to convert some of the income to active by forming a property management company. Taking a salary and using this active income to fund IRAs, Coverdell ESA or an HSA?

The new salary would be subject to the 15.3% SE tax. Is there an income bracket or income threshold that makes it beneficial?

Holly Chan · Answer

There are a lot of considerations here so it's not feasible to offer a particular income bracket or threshold where this would be beneficial. You should consult with your CPA - when you do, consider the following topics -

• SE income vs. a salary
• Qualified Business Income Deduction
• types of retirement plans and various limitations (SEP IRA, 401(k), Roth IRA, etc)
• how the property management company will be treated for tax purposes (partnership, S corporation, single-member LLC, etc)
• passive vs non-passive income/losses (are there passive losses which could be limited by converting some of the passive income to active?)

@Chase Lowry, diversification is an important strategy for many people and retirement plans offer significant tax and other benefits which real estate investing cannot always provide.

Chase Lowry · Answer

Why put money in retirement accounts when you are already successful in the GREATEST WEALTH BUILDING TOOL IN THE WORLD... smh.