Tax Day — the infamous day when personal income taxes are due is just around the corner.
This year, it’s April 18th. But taxes aren’t the only thing due on Tax Day.
Contributions to a qualified retirement plan, like an IRA, must also make it in by then.
Is that really the best place to invest your money, though?
Before you lock your money into a retirement account, let’s take a closer look:
It’s bound to happen this time of year: someone will recommend that you invest money in an IRA before the tax deadline.
Maybe it’s a financial advisor, your tax preparer, or just a well-meaning friend or brother-in-law.
And it’s true, you can delay taxes by investing in an IRA. But why not permanently reduce your taxes, build a financial foundation, and/or accelerate your business growth instead?
The IRS allows you to put $5,500 per year into Individual Retirement Accounts (IRA). Or $6,500 if you’re age 50 or over.
And the money you invest in an IRA is tax deductible — at least it is the tax year that you put it in. The catch is, you’ll have to pay taxes later when you withdraw the money in retirement.
(And do you think taxes will be higher or lower in the future? With the current direction of entitlement spending and the national debt, our bet is taxes will be higher.)
You can try and get around this by using a Roth IRA, where you invest after-tax dollars upfront so you don’t have to pay taxes upon withdrawal.
But if you’re single and your modified adjusted gross income (AGI) is more than $132,000 per year, or you’re filing jointly with a spouse and your modified AGI is more than $194,000, then you can’t contribute to a Roth IRA.
(If you think you’re close, here’s a worksheet to figure out your modified adjusted gross income.)
Even if you can invest in a Roth IRA — do you really want to invest in a myriad of mutual funds you don’t know, control, or understand — and that are sometimes invested in companies completely opposed to your values?
(It’s common, through their mutual funds, for people who hate smoking to be invested in tobacco companies, or advocates for renewable energy to be invested in big oil, etc.)
Plus — the returns aren’t as great as advertised. As we’ve documented before, the DOW hardly moved from 2000 to 2015 when adjusting for inflation — and that was after a substantial rally.
So we strongly recommend investing elsewhere. But even if you do choose to invest in an IRA, you still need a place to invest after you meet the $5,500 per year cap.
And that means finding better, smarter ways to invest that deliver tax advantages and a generous return.
Where’s the Opportunity?
Here are 10 ways to invest instead of contributing to an IRA:
Wise Investment #1: Pay Down Inefficient or High Interest Loans
Some people are so convinced that they need money invested in an IRA that they neglect to pay down inefficient or high interest loans.
Because for the dream of 8-10% returns in a retirement account, they continue to pay 12-30% interest on credit card loans.
The math simply doesn’t add up. For example, paying down a credit card with a 15% interest rate is a guaranteed 15% return.
So instead of speculating on lower returns, take the guaranteed return instead.
Note: We recommend paying down your most inefficient loan first, rather than the loan with the highest interest rate, because it frees up cash flow faster and still gets you that guaranteed return.
Wise Investment #2: Start or Add to Your Rainy Day Fund
Do you have 1 month’s worth of expenses set aside? 3 months? Maybe even 6 months?
If not, then start there. Because why invest in your future when your present is in jeopardy.
All it takes is one unexpected event — such as a job loss, losing a major customer, or a major car or home repair — to put a major strain on your cash flow and finances.
Sure, you can make a withdrawal from your IRA if you need cash in a pinch, but you’ll be hit with a 10% penalty in addition taxes.
And when you compare the stress of being hit with a penalty for clearing out your IRA to the peace of mind of having a rainy day fund — it’s really a no-brainer.
That’s why we look at building a rainy day fund as “earning your right to invest” elsewhere.
Wise Investment #3: Start a Wealth Creation Account
This applies to everyone, but especially to business owners.
If you’re a business owner, why put your money in an IRA full of mutual funds that invest in businesses other than your own?
Why not instead put your money somewhere it can earn interest and be utilized to invest and grow your business?
That option is available to you with our Cash Flow Banking system — which is our preferred system for your Wealth Creation Account.
Cash Flow Banking uses financial technology that lets your money be in two places at once.
First, your money earns a consistent, guaranteed, tax-deferred return no matter what the stock market does — historically around 4-5% annually.
And second, your money grants you access to cash to invest in your business anytime you want — for any reason. Need a new computer? New vehicle? New equipment? Or need to hire someone for a special project?
Cash Flow Banking’s special financial technology gets you the cash, while your money continues to earn 4-5% annually.
It’s the perfect wealth creation tool for entrepreneurs.
Wise Investments #4-10: Invest in Your Business
The great thing about investing in your business is it’s a true tax deduction,
You spend the money, you get the tax deduction, and it never comes back to haunt you.
But when you invest in an IRA, the IRS lets you use it as a tax deduction this year — but one day down the road, when the money is withdrawn, you have to pay the taxes.
So it’s not a true tax deduction, it’s a tax deferral.
The next 7 wise investments are true tax deductions:
#4: Marketing Content
Want to grow your business? Then spread your message. Hiring a marketing consultant to help position your business in the marketplace, or a copywriter to craft a compelling sales message, is money very well spent.
#5: New Software or Apps
New software has revolutionized industries. Just think of how spreadsheets exponentially increased the productivity of accountants, who used to manually write down numbers in ledgers with pencils.
Today, software and apps are still changing industries. So think of a problem in your business and search the web for a solution — there may be an app for that.
#6: New Equipment
Just like new software can make you more productive, there may be new equipment that can get the job done faster for your business, too.
Or maybe there’s new equipment out there that will allow you to provide a new product or service.
Have you looked lately?
On that note…
#7: Develop a New Product or Service
If buying new equipment won’t help you create a new product or service, what will?
Hiring a writer to create content to sell? Buying new materials or ingredients to invent a new creation? Hiring a new employee that will expand your services?
#8: New Training/Education
Everyone needs training and education to grow — that includes you and your employees.
Investing in education is one of the best investments you can ever make.
#9: One-on-One Coaching
Hiring a mentor for one-on-one coaching is next-level education. Instead of absorbing information and trying to correctly apply it to your business, a mentor will look at your unique situation from the outside and give you tailored advice.
This is extremely valuable, because as an outsider, they’ll often see things you won’t.
#10: Hire Your Kids
You can pay your kids up to $6,300 per year without triggering an income tax for your kids. As long as they’re doing legitimate work in your business, that’s appropriate for their age-level, you get the tax deduction and they get the tax free income.
And since you’re still their parent, you can decide whether that money goes into a college savings account rather than clothes or video games.
What To Do Next
As you can see, investing in an IRA is not the no-brainer Wall Street would like you to think it is.
And now, the next time someone advises you to put money in an IRA, you have 10 reasons to say “No thanks.”
So pay down those high interest loans. Grow that rainy day fund. Start your Cash Flow Banking system.
And last but not least, get a true tax deduction by investing in your business.
Build the life you love,
The Builders at Wealth Factory
What is Living Wealthy Weekly?
Each week we share timely trends, news stories, and current events that affect your life. We help you see the impact, personally and socially, and give you possible solutions to avoid any negative effects. We also give you additional links and resources if you want to investigate further. The purpose is not to be the last word on any topic. Rather it’s to help us all stay informed of what’s going on in the world without letting those events negatively impact your lifestyle. Our goal is to help us all live richer, fuller lives from a position of financial strength. This allows you to weather economic hard times, and seize whatever new opportunities arise in our changing world.