In this episode of Adam Talks, Adam Bergman, Esq. discusses two strategies utilizing the Roth IRA that will allow you to shelter your business profits from being taxed.
How to Shelter Your Business Profits from Tax
Tax attorney Adam Bergman discusses strategies for sheltering business profits from taxes using a Roth IRA and the ROBS (Rollovers as Business Startups) model. In the first scenario, Bergman introduces the Peter Thiel model, where individuals can invest their Roth IRA in a startup with low value and own less than 50% of the business. By paying the same value as other investors, they can potentially generate significant tax-free returns. He emphasizes the importance of staying below the 50% ownership threshold to avoid prohibited transaction rules. Additionally, setting up a C Corporation can help reduce the tax burden associated with unrelated business income tax (UBIT) for Roth IRA investments in startups.
Bergman acknowledges the high failure rate of startups but highlights the potential tax advantages if successful. By sheltering income from taxes, individuals can optimize their tax savings.
The second scenario, known as the ROBS model, is recommended for entrepreneurs who own more than 50% of a mature company. This model allows individuals to use their retirement funds to buy corporate stock in a business they control. By adopting a 401(k) plan within the business, the retirement funds can be used to contribute to the company in exchange for stock, and any profits can be dividend back to the Roth 401(k) tax free.
Both the Peter Thiel model and the ROBS model demonstrate how individuals can leverage their retirement funds to generate tax advantages and shelter business profits. Understanding the rules and regulations surrounding Roth IRAs, prohibited transactions, and UBIT is crucial in making informed decisions to maximize tax savings. These strategies offer entrepreneurs the opportunity to minimize taxes and optimize their profits. By utilizing the retirement system effectively, entrepreneurs can protect their gains from taxation. To learn more, be sure to listen to this week’s episode!