Thursday, June 20, 2024
Hawai'i Free Press

Current Articles | Archives

Sunday, September 26, 2021
Tax Planning with the Rich and Famous
By Tom Yamachika @ 6:00 AM :: 1886 Views :: Taxes

Tax Planning with the Rich and Famous

by Tom Yamachika, President Tax Foundation Hawaii

Occasionally, all of us wonder what it’s like to be rich and famous, or at least act like it. “Those people,” you might think, “have at their disposal so many ways to flummox the tax authorities if they want to. Panamanian bearer shares corporations. Dutch sandwiches. Entities from the Isle of Man, the Caymans, or Bermuda perhaps.”

It turns out, however, that there are some very potent tax planning devices easily and legally available to Americans. They’re called Individual Retirement Accounts, or IRAs.

IRAs come in two basic flavors. The first, the conventional IRA, is an account that you fund with pre-tax money. You take an income tax deduction when you put money into it, meaning that money escapes tax for the time being. That money stays in the account and grows, assuming it’s invested wisely. The tax needs to be paid whenever that money comes out of the account. It can come out when you are quite a bit older, perhaps when you are retired and aren’t making tons of other money so the tax bite won’t be bad as it would have been if you paid the tax on it when you earned the money back in the days when you were working.

For most people, there is a limit of $6,000, varying by year, that can go into an IRA of either flavor. But there are exceptions. If you are self-employed, for example, the annual limit can be quite a bit higher.

The second flavor is the Roth IRA. This account is funded with money you already have paid tax on. But it gives you tax-free growth and tax-free distributions for the rest of your years. And then, when you die, your heirs get to live off a Roth IRA’s tax-free money for up to ten years. Again, there are annual limits on how much you can throw into this kind of account.

Finally, if you have a conventional IRA but you really want the benefits of a Roth, it’s possible to convert. The price, however, is that tax needs to be paid on the money that goes from the conventional to the Roth IRA, the same as if the money simply had come out of the conventional IRA as a distribution. If you are in a situation where your business has operating losses and the losses are just sitting on your income tax return gathering dust (which is not a terribly uncommon situation given the COVID-19 pandemic and the related lockdowns and restrictions in 2020) then converting your conventional IRA to Roth might simply result in absorbing the losses and not payment of lots more tax. The interesting thing is that there isn’t a limit on conversion, as long as the tax gets paid.

Perhaps the most extreme example is tech investor Peter Thiel. According to an article from ProPublica, Thiel parlayed a modest investment in a Roth IRA by having the IRA buy some shares in startup companies, one of which was PayPal. PayPal exploded in value, some of the PayPal shares were sold to invest in other startup companies, like Facebook Inc., and the cycle continued. That Roth IRA is now worth $5 billion. Not a penny of tax will be charged when the money comes out, as long as he doesn’t touch the account until he is aged 59-1/2.

Sure, he was one lucky (or brilliant, or both) fellow to be able to pick the winners successfully. But the point is that IRAs are available to ordinary people as well, and can yield decent tax benefits for ordinary people as well.

Tax is an extremely complicated beast, but it does have occasional features that can help many of us. It’s up to us to learn what they are and use them for our own advantage if appropriate. 


TEXT "follow HawaiiFreePress" to 40404

Register to Vote


Aloha Pregnancy Care Center


Antonio Gramsci Reading List

A Place for Women in Waipio

Ballotpedia Hawaii

Broken Trust

Build More Hawaiian Homes Working Group

Christian Homeschoolers of Hawaii

Cliff Slater's Second Opinion

DVids Hawaii


Fix Oahu!

Frontline: The Fixers

Genetic Literacy Project

Grassroot Institute

Hawaii Aquarium Fish Report

Hawaii Aviation Preservation Society

Hawaii Catholic TV

Hawaii Christian Coalition

Hawaii Cigar Association

Hawaii ConCon Info

Hawaii Debt Clock

Hawaii Defense Foundation

Hawaii Family Forum

Hawaii Farmers and Ranchers United

Hawaii Farmer's Daughter

Hawaii Federation of Republican Women

Hawaii History Blog

Hawaii Jihadi Trial

Hawaii Legal News

Hawaii Legal Short-Term Rental Alliance

Hawaii Matters

Hawaii Military History

Hawaii's Partnership for Appropriate & Compassionate Care

Hawaii Public Charter School Network

Hawaii Rifle Association

Hawaii Shippers Council

Hawaii Together


Hiram Fong Papers

Homeschool Legal Defense Hawaii

Honolulu Navy League

Honolulu Traffic

House Minority Blog

Imua TMT

Inouye-Kwock, NYT 1992

Inside the Nature Conservancy

Inverse Condemnation

July 4 in Hawaii

Land and Power in Hawaii

Lessons in Firearm Education

Lingle Years

Managed Care Matters -- Hawaii

Missile Defense Advocacy

MIS Veterans Hawaii

NAMI Hawaii

National Parents Org Hawaii

NFIB Hawaii News

NRA-ILA Hawaii


OHA Lies

Opt Out Today

Patients Rights Council Hawaii

Practical Policy Institute of Hawaii

Pritchett Cartoons

Pro-GMO Hawaii

Rental by Owner Awareness Assn

Research Institute for Hawaii USA

Rick Hamada Show

RJ Rummel

School Choice in Hawaii

Talking Tax

Tax Foundation of Hawaii

The Real Hanabusa

Time Out Honolulu

Trustee Akina KWO Columns

West Maui Taxpayers Association

What Natalie Thinks

Whole Life Hawaii