When it comes to building a financial legacy, working a typical nine-to-five just doesn’t cut it. In order to build wealth – the kind of wealth you need to retire early and provide stability for generations to come – you need to take control of your finances through smart investments, entrepreneurship, and strategic tax planning.
While there is no single path to wealth, there are a number of different strategies that have proven to be consistently effective in helping people find financial independence. Combining some or all of these strategies can help you maximize multiple streams of income and get you on the fast track to seven-figure status.
1. Lower Your Taxes Legally
If you are like most people, when it comes time to filing your taxes, you plug the information from your W-2 into a computer program and see what it says you owe. Or, maybe you work with an accountant (not a tax advisor, there’s a difference) who collects your financial records and comes back a few weeks (or months) later saying that you are entitled to a refund or that you still owe more to the taxing authorities. In either case, if you are not taking advantage of strategic tax planning solutions, there is a good chance that you are paying the Internal Revenue Service (IRS) and your state and local tax agencies more than you legally owe.
From maximizing the benefits of your health savings account (HSA) to setting up an S-corporation to avoid corporate tax liability for your business, there are numerous legal strategies for reducing your tax liability. Giving away less of your money is one of the easiest ways to start growing your wealth.
2. Build Assets that Grow Tax-Free
As a United States citizen, you have an obligation to pay income tax on an annual basis. But, this assumes that you have taxable income. Many types of assets grow tax-free, allowing you to accumulate wealth without taking a hit every single year. Some examples of assets that you can use to invest and earn long-term income without incurring annual tax liability include:
- Retirement accounts (including 401(k)s, individual retirement accounts (IRAs) and Roth IRAs)
- Education savings accounts (including Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) and 529 savings plans)
- Health savings accounts (HSAs)
3. Pay Zero Capital Gains Tax
Currently, the maximum capital gains tax rate in the United States is 20 percent. If you are in the top tax bracket for ordinary income, you have to pay this 20-percent tax rate on any capital gains you realize (e.g., by selling a stock) during the year.
But what if you or your loved ones could benefit from your investments’ growth without any tax liability at all? Imagine that you build up a $1 million investment portfolio. If you cash out, you could owe up to $200,000 to the IRS. Or, you could owe nothing if you:
- Gift your capital assets to a low-income family member (just be aware of the potential gift tax implications). Individuals in the lowest ordinary income tax bracket do not owe any capital gains tax on most assets.
- Leave your capital assets to your loved ones in your estate plan. When you die, the family member(s) to whom you leave your assets will receive a “stepped-up” basis in your investments, which means that any potential capital gains tax liability is wiped out completely.
4. Avoid Liabilities with Asset Protection
Along with paying unnecessary taxes, one of the biggest setbacks to accumulating personal wealth (and one of the biggest potential barriers to financial independence) is facing personal liability. Once you begin building your wealth, you need to protect it. In fact, ideally, you should set up an asset protection strategy before you start getting wealthy, as you want to make sure your future assets will be secure.
There are several asset planning strategies and tools available. Which are right for you? It depends. Broadly speaking, however, anyone with plans to accumulate substantial assets over his or her lifetime will benefit from:
- Separating business assets from personal assets through the use of limited liability companies (LLCs) or other business entities.
- Using asset protection trusts to shield personal assets from creditors.
- Buying liability insurance sufficient to cover any potential liabilities.
Don’t think you need to worry about liability? Think again. Do you drive? Are you married (or do you plan to get married)? Do you own property? Do you provide any type of service to businesses or consumers? If your answer to any of these questions is “Yes,” you need to take appropriate measures to ensure that your assets will be secure.
5. Think Big. Think Global.
As a general rule, US citizens must report their global assets to the IRS. However, there are two critical exceptions: foreign real estate and precious metals held overseas. If you focus on building an international real estate portfolio and use appropriate asset protection strategies to secure gold and other precious metals offshore, you can legally build your wealth without having to worry about selling assets in order to pay the IRS or personal or business creditors.
6. Build Your Self Worth Before You Build Your Net Worth
In order to be successful, your wealth-building strategies need to be reflective of your personal creativity and aspirations. Building wealth isn’t easy. It requires commitment, desire, and the willingness to do what it takes to see opportunities through to the end. In order to maximize your financial potential, you need to figure out what speaks to you, and understand where and when you have the greatest potential to earn the greatest possible returns.
7. Seek Outside Investment the Right Way
If your passion leads you to start a business, leveraging your personal capital investment and your personal potential to their fullest most likely means seeking funding from outside investors. When seeking outside funding, there are right and wrong ways to go about it. If you need money in order to make money, these resources will help you hit the ground running:
- 10 Things You Must Know About Raising Money from Angel Investors and VCs
- Startup Guide: How to Structure Your Company for Outside Investment
8. Hire Help When Your Time is Better Spent Elsewhere
In our earlier discussion about taxes, we said that saving money is one of the easiest ways to start building wealth. While this is true in most circumstances, you also need to know when spending smart is the right decision to keep your wealth-building strategy on track. From hiring professional advisors (such as attorneys and financial advisors) to hiring independent contractors, there are many circumstances in which the most economical solution is to seek outside help.
9. Monetize Your Intellectual Property
Whether you are an inventor, investor, entrepreneur, or some combination thereof – as you build your wealth, you will also cultivate various intellectual property assets. Understanding and utilizing the strategies for monetizing these assets (such as licensing) can help you establish passive income streams that will deliver profits for years to come.
10. Build (and Segregate) Multiple Income Streams
While it is important to focus your efforts in the areas where you are most passionate, it is also important to keep your eyes open for new opportunities. The wealthiest people in the world have multiple income streams, many of which are either entirely passive or managed by trusted advisors. As you build your income streams, it is important to keep them segregated – this is a basic tenet of asset protection. If you take appropriate steps to keep your income streams separate, a liability in one stream will not put your others at risk.
Wealth Building and Asset Protection Strategies from Jiah Kim & Associates
If you would like more information about how to build and protect your wealth, we encourage you to contact us for a confidential consultation. To speak with a wealth counseling and asset protection lawyer at Jiah Kim & Associates, please call (646) 389-5065 or get in touch online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.