[Music] in today's episode I'm going to share with you the strategies the top 1% of Traders are using to pay zero income tax on their trading profits this is huge I have implemented some of the strategies I'm going to share with you in today's episode in my own trading and I have saved literally millions of dollars in taxes now it doesn't matter whether you're making 25,000 a year 50,000 a year 100,000 a year or you're making millions of dollars a year in trading profits there are steps that you can take to reduce the amount of tax taxes that you're paying and not only are these legal they're encouraged there are systems and strategies that have been set up that regular Americans are supposed to be using that allows you to put aside some of your income totally tax-free so you can reinvest that long-term in your retirement in the form of supporting the economy buying stocks bonds and real estate if you're not doing any of this you're missing out so let's get with the program and let me walk you through these strategies now what I'll share with you first of all is that as many of you know I turn an account with less than $600 into more than $10 million of verified and independently audited trading profits and when I did that naturally I had to hire a pretty good accountant to file my taxes now it's not really that it was all that complicated but I want to make sure I was doing everything the right way and I had the money to afford it so some of the things that I'm going to be sharing with you came from high- Paid accountants who know everything about how to be as tax efficient as possible so the first thing I learned and this is the strategy I'll share with you it's the first strategy it's not going to be the most popular I'm going to sa the most popular one for last but the first strategy that was shared with me is my accountant said Ross how do you feel about moving to Puerto Rico and I said well that's not going to work so well cuz you know my family lives around here but tell me more and he said well here's the thing with living in Puerto Rico there's no short-term capital gains tax you would literally have zero income tax on your trading profits and that means if you make 100,000 you make a million whatever it is you could spend that right away and you don't pay any income tax on it and I said well geez that mean I I I'm no longer a US citizen I said no it's not like that if you move to Puerto Rico you're still a US resident because Puerto Rico is part of the United States but if you're a Puerto Rican resident which means you live there for 6 months and one day each year then you pay no federal income tax and you're able to benefit from all the tax savings that Puerto Rican residents enjoy that's why so many very wealthy people move to Puerto Rico and spend 6 months and one day there and they have to make sure they document each one of those days that they're there because if they ever get audited they want to be able to prove no no I'm really a Puerto Rican resident so most of the people that are down there for tax benefits are saving so much money in tax that the savings alone is enough to pay for the mortgage of of a property of a house now that's not going to be the typical Trader it wasn't me when I was getting started although it probably could be me today the life change of moving to Puerto Rico isn't something that makes that strategy doable for me but an episode on how to pay zero income tax on your trading profits would be incomplete if we didn't at least mention the option of moving to Puerto Rico so if you move to Puerto Rico you could live there and at any time you can move back to uh you one of the 50 states in the US and it's no big deal you can just move you you switch States just like you move from New York to Massachusetts or from New York to California so that's the first strategy move to Puerto Rico some of you guys are like sold I'm moving I want to live near the beach and that's great but for the rest of you let's talk about the second strategy so the second strategy is to take advantage of what are called tax deferred retirement accounts which are traditionally called individual retirement accounts and these are the abbreviation is the IRA okay so an IRA is an account that uh anyone in the United States can open in a lot of other countries you have government sponsored uh retirement savings accounts as well that you can utilize to invest in the market but I'll I'll speak specifically to what I know which is being here in the United States so in the US we have the IRA now you can make contributions to an IRA each year but there are limits to how much you can contribute now the cool thing about the IRA an individual retirement account is all of the growth inside that account however much that account grows each year you don't pay any income tax on it and you can actively trade in an IRA now well bear with me for a second this is really incredible if you set up a business as a a small business whatever you're a plumber you're an electrician or you mol Lawns or you plow all of the money that you earn in that business while you can do some things which we'll talk about a little bit later in this episode to create uh a retirement account for the business most people won't do that and most people are not going to be able to save all of that money that they're earning through a retirement account they're just going to end up paying tax on it but as a Trader every day that you're trading you can sit down and you could be trading just in a retirement account which allows you to grow this account at what is really an incredible rate so here's the way it works when I turn that $600 in the first year I started with $583 in year one $583 15 by the end of that first year the account had grown to $335,000 which was huge and out of that I was allowed to make a maximum contribution of $6,000 to a traditional traditional IRA now a traditional IRA and this is probably the most common Ira in the United States the cool thing about traditional IRA and the reason that a lot of people like it is that when you make a contribution to a traditional IRA the amount that you contribute comes off of your total taxable income so let's just say for instance your taxable income was $100,000 $100,000 you do a $6,000 IRA contribution now your taxable income is $94,000 so it saves you a little bit of tax but the problem with doing that is that then when you eventually take a distribution from your IRA which you can start doing at 592 years old all of the distributions are taxable and that's a little bit of a problem because if you've grown this account from 6,000 up to 10 12 15 then up to maybe 50,000 100,000 200,000 up to a million then you're going to pay income tax on a million dollars when you're 59 and half years old and you're taking out those distributions now the theory behind this is that by the time you're at retirement age you'll probably be at a lower income bracket but that's not always the case sometimes by the time you're at retirement age you've made so much in your account and your cost of living has gone up that you're still in a very high tax bracket so in the US we have two different types of IAS we have the traditional IRA and we have the Roth IRA so we have the traditional IRA here and we have the Roth IRA here now the Roth IRA has a um has a maximum income limit of $153,000 per year which means if you make more than $153,000 you're not allowed to contribute to a Roth IR why is that well a Roth IRA does something kind of special a Roth IRA allows you to grow the account totally taxfree and when you take the profit out at 59 and a half years old and you're taking distributions those are also completely taxfree whoa okay so a Roth IRA is definitely better than a traditional IRA no question about it but wait shoot there's a minimum there's a there's a Max maximum income of $153,000 clearly I made 335,000 in this first year of trading that's right and that's why we have something called the backdoor conversion this makes no sense I mean you guys I it goes without saying that our tax codes incredibly complicated but what we have in the United States is the back door conversion and this very silly um thing that exists allows you to make a $6,000 contribution to a traditional IRA where there are no income limits and then you can convert a traditional IRA at any time to a Roth IRA you just do a conversion and they call it a backdoor conversion because it allows you to get around this maximum income or this the maximum income of $153,000 so when you do the conversion remember how I said that $6,000 comes off your taxable income well when you do the conversion you have to pay income tax on the amount you convert okay no big deal so I paid income tax on $6,000 and I converted it into a Roth IRA and that gave me with year one $6,000 in my Roth IRA $6,000 at year one now in year two this was year one of the small account in year two I produced uh $498,000 of profit I contributed another $6,000 to to a traditional and then converted it to a Roth in year three I made about $365,000 and I did it again $6,000 contributed into a traditional converted it into a Roth which left me with $188,000 in a Roth IRA with $188,000 at that point I decided to begin trading with it because what my um accountant said is he said Ross if you trade in the Roth IRA you're not going to have any income tax and here's the thing you're making more money trading than you need so if you're making more money than your cost of living what do you do and for me I I wasn't going to stop trading I wasn't going to trade less but the result was that when I was making half a million dollars I was making more than my cost of living so if my cost of living and let's just say for the sake of argument my cost of living is $10,000 a month so cost of living $10,000 a month all right that means I need $120,000 a year to cover my cost of living so once I've made the first $120,000 each year I'm good in terms of taxable income now this $1 120,000 I'm going to pay income tax on it but I'll be able to spend it for my cost of living so once I cross over $120,000 in income to cover cost of living everything from that point forward I can start using my IRA for so that's what I did and what I ended up doing was turning an $118,000 Roth IRA into over $6 million now it sounds like a lot and it is but for what it's worth um there's a fellow um Peter Peter teal he was an early investor in PayPal and early investor in Facebook he took a $2,000 Roth IRA and turned it into $5 billion this is insane5 billion he may have the record set on the biggest Roth IRA that's totally tax-free income totally taxfree when he retired and now it's allowed to keep growing and growing and growing so obviously there's been some criticism over how the Roth IRA is used by some extremely wealthy people to put away a lot of money totally taxfree and certainly I use the Roth IRA to put away money taxfree to the tune of millions of dollars and you can do it as well now you may say look I got to First cover my cost of living okay so this is what I would do if I were you I would say all right you've got your cost of living right right here make the minimum amount you need for cost of living and then trade in the Roth IRA now what you could do is you could have two accounts and you could switch during the day let's say each day you trade until you make your first $500 in a traditional account and then once you've made 500 you switch the rest of the day and trade in the Roth IRA or you could trade just one day a week in the Roth IRA Fridays whatever day it is it doesn't matter how you do it but in a way to me it's a no-brainer not to do it as as long as you have as long as you can put aside enough money just to start the Roth IRA you could start trading in it and so one of the things that I do is I can actually trade in both of my accounts at the same time I could switch back and forth very easily I press the buy button in my Roth I press the buy button in my main account so I could take basically the same trade into accounts if I want I just have to press the buy button twice and I'll do that all the time now is it initially a little more difficult to trade into accounts yes but we're talking about a huge tax savings and to me it's a Nob brainer okay so the second strategy and this is to me a no-brainer is to set up create a Roth IRA create it for yourself now the nice thing about a Roth IRA is that there are no minimum distributions you are not required to take distributions you can pass the whole account um in part of your estate planning to someone else your your children perhaps uh unlike a 401k now in the United States these are the two sort of uh tax deferred accounts that we have IRAs and 401ks so let's talk about strategy number three the third strategy is to start trading in a business account now this is where things get a little bit more complicated but accountants love this and the reason they love it and the reason they'll encourage it is because it can allow you to do some really incredible things okay so let's say you you're making a little bit of money each year trading and you're you're doing relatively well again doesn't matter it's all relative doesn't matter if you're making 50,000 a year you're making 250,000 a year you're making money let's just let's just call it $100,000 a year in trading profits all right so you've got $100,000 a year now if you had that $100,000 a year in a traditional taxable account you're going to pay income tax on 100 Grand and that's at short-term capital gains tax rate which is the same as your income bracket so you're going to pay as if you have W2 wages at $100,000 now one of the things that's nice is that $100,000 of income from Trading is not the same as $100,000 of income from a W2 because trading income is not considered earned income so you don't have to play pay self-employment tax which means you're not paying Medicare or social security so you save a little bit but you still would pay income tax on it okay so let's say you've been doing this for a couple years you're making money consistently and you're thinking all right uh how do I you know Pay Less in tax so what you could do and this is what a lot of people do is they'll create a corporation and they'll specifically create a corporation with s status selection this means all of the income tax will pass through to your personal tax return it's not a C Corp with that files its own tax return and pays its own income tax it's an escorp Now with an escorp you're going to be an employee of the escorp and so you have to take a W2 of what's called a reasonable salary now you should have an a tax attorney or an accountant give you a recommendation of what the proper reasonable salary would be relative to the income that the business is producing but let's just say the income is the company is producing $100,000 a year and let's just say you have some expenses associated with the business so what are some expenses associated with it laptop maybe your desk maybe the percentage of home office space that you're using right because you've got how many square feet how let's just say how many square feet of your home office are you using maybe your home office is 10% of the square footage of your entire house well 10% of the utility bill 10% of the um of of really all of the utility bills 10% of the internet bill all of those can be factored in for your uh expenses associated with with the business so now you take your percentage here you add all those up you've got maybe some other equipment you use for trading you've got some dues You' you've got some subscriptions different Services you've got your continuing education services right so education um courses things like that so you've got your courses whatever it is so youve got all these different things that you've got on your esort so let's say this reduces these are expenses and they total out to let's just say $115,000 a year and there'll be people that try to push the percentage you've just got to make sure it's reasonable and make sure you have an accountant that reviews it and feels good about it so you're taking let's say $155,000 to now you've got your 100 Grand and you're taking $115,000 off the top for expenses all right so you've got your expenses now you've got $85,000 left let's say you pay yourself a salary of $50,000 so you take a W2 salary of $50,000 now you can do something kind of interesting here you can set up a solo 401K a solo 401K with the company is the same as a 401k that you would have with an employer except exep you're the only employee and so you may decide that you want to also pay out a percentage of company profits as a match to the 401K and this is what a lot of people will do so let's actually change this number for a second so let's change it to uh you're going to do a $40,000 salary let's just put it at that for a second okay so of the $40,000 salary $23,000 each year can go directly into a solo 401k so that's your solo 401k and remember when you do a traditional 401K that's going to reduce your um income down to $7,000 so You' actually only be paying income tax on your W2 on 17,000 because of the 23,000 going into the 401K but the company still has what is it $40,000 left in profit so the company can actually do a uh a match of profit share into the 401K and they can go up to $69,000 per year total comp between your own contributions and the company match $69,000 a year could be going into a 401k now look you still need to make a certain amount of money just to cover your cost of living but one thing that that I've learned over my years is that the wealthiest people not only stay wealthy but they get even wealthier by being Frugal especially early in their careers I have a neighbor who passed away in his '90s but he worked as a janitor and he worked uh he worked at a um a gas station as a auto mechanic for his whole life basically he had those two jobs and he ended up amassing a Fortune of over $8 million even though he never had a fancy sixf figure salary or anything like that he was Frugal a penny saved as a dollar earned and he put that money away he put it away and it grew and it grew and it grew and it grew now a lot of times people who are young and come into a little bit of money they spend it very quickly they want to keep up with appearances keep up with the Joneses you know the the Kardashian you know what I mean they want to keep it keep up look very wealthy and they spend all that money and it's gone so the the less you can live on the more you can put away because the money that you need for your cost of living that is it's that's taxable you're going to pay income tax on that so this is a strategy that uh that a lot of people will use and is it a little bit more complicated it is is it going to be something you'll do if you're making only 70,000 a year I don't know 50,000 probably not 20,000 no over 100,000 well now it's just a cost benefit analysis how much am I paying in tax how much would it cost to have an accountant set this up for me because once it's set up once it's done and then you just fund it each year and the nice thing now is that you've got a solo 401k and you can use that for investing and you can invest it not just in the stock market you can invest it in real estate and in all sorts of things so if you are a Trader and you have some degree of success and you're trading in your personal name it's really worth spending a little bit of time getting some advice from an accountant to figure out if it would make more sense to trade in an escorp now regardless of whether you're trading in an escorp or you're trading your personal name if you have not done Mark tomarket election for your taxes you could be subject to wash sales so a wash sale is when you take a loss and 30 days late within 30 days you buy back a position that is more or less similar or the same in the older days what people used to do is on December 30th or whatever 31st they would sell all the positions they were holding at a loss so their statements would show these big losses and then they would just buy back the same position on January 1st so they would book the loss and then they would buy it back on January 1st and the IRS was like no no no no no no no that's you can't do that so that would be called a wash sale to sell and then buy back the problem is as a Trader we're often buying and selling the same stock all the time we're getting in we're getting out we're getting in we're getting out and so sometimes a Traders will get subject to seeing a wash sale which means you'll have some losses that you're not allowed to write off and the problem is in that tax year you have to wait for the next tax year and the problem is that's going to make your income tax higher than you actually than what you actually made so it's very important to do Mark to Market status election on your return and you have to do it by January sorry April 15th of the current tax year in order for it to work for that tax year so you can't do it like I can't do it right now for last year it's too late you have to do it before April 15th of the current tax year in order for it to apply so that's something that's really important now by the way in this scenario right here this $40,000 is a tax um deduction for the es Corp so they deduct your payroll they deduct the profit share and so in total the es Corp has zero income because we all Bal we balanced out to zero right you you we have 40 40 15 so we balanced out to zero so we actually are 5,000 so let's just make it 20 whatever so you balance out to zero so the business actually produces no income and the only income that you had was the $177,000 in wages now again $177,000 okay maybe that's a little extreme that's not going to be enough to live off of for everyone but depending on where you're at maybe it is and if it were then you're still saving $69,000 each year in the 401K and you're using the company to pay for some of your business expenses and this is something that a lot of Traders don't even think of they're just trading from their home office and they're like oh no it doesn't you know it doesn't matter I oh I didn't even think of that and you know that's all fine and well but at the end of the year how much are you paying for that office space how much you paying for your equipment for your computers how many monitors do I have here how many laptops do I have here right all of this stuff is part of the cost of running a business as a Trader something I shared with all of my students at Warrior trading is that I had a goal early on in my career and this was after some advice from some really great accountants it was that I'm going to focus on trading as much as I can in my tax-free account and what I want to do is I want to grow that account as much as possible because I know that if I grow it to 8 to 10 to 15 million I'll get to a point where that money invested in the market or invested in real estate invested in other things has the potential to earn more each year than I could ever make actively trading now in my best year I made over5 million actively trading so realistically I would have to grow this account to like $50 million for 10% to be 5 million that isn't going to happen anytime soon that might probably never happen but I I think the point is there are going to be some years that are going to be really great like that year was and then there'll be other years that are a little slower where I might make $500,000 that's totally within the re realm of of reasonable that I could have that type of flux between years that are hot and years that are cold and so on a year where I make $500,000 well now $10 million that produces 10% 12% return that's $12 million a year and it's growing taxfree which allows that interest to continue to compound and it gets bigger and bigger and bigger and bigger so I really think the sooner you start putting some money into these tax deferred accounts the better whether you're going to use a solo 401K you're going to set up a business you're just going to do a typical Roth IRA or well if you want to move to Puerto Rico move to Puerto Rico but there are strategies that are right in front of you that so many people are utilizing and certainly the top 1% are using them to pay almost nothing on their trading profits I encourage you to take a deeper look at the way you're allocating what accounts you're trading in and how much you're paying in tax and as always reach out to a CPA and get some really good advice because a good CPA is worth their weight in gold I hope you found this episode helpful I hope you hit the thumbs up I hope you subscribe to the channel and I'll see you for the next upload real soon [Music]
