Here is a surprise for you: America favors people who have money already, not people building their wealth. If you want to build and preserve wealth in modern day America I can boil down the correct methodology in words a caveman could understand: Assets good, income bad.
Example 1: Income Taxes versus Capital Gains & Estate Taxes.
While your assets are private information, the government (and sometimes the public) has full knowledge of your (legal) income. Try it: Google your favorite sports star and see how much income they earn, then find out how much they are actually worth; I will be shocked if you see a net worth that is not noted as an “estimate.”
Governments also know people focus on earning income instead of growing assets, and taxes income to no end. Federal, state, and sometimes city income taxes all eat into their denizen’s plentiful bounty created by sweat labor.
Meanwhile, capital gains tax rates are significantly lower than income tax rates, meaning people who own assets and earn money from them pay lesser taxes than people who earn it through labor. And while estate taxes are some of the highest rates of all taxes, there are many exemptions, exceptions and planning mechanisms to minimize transfer taxes. In fairness, there are too many people earning income for governments to avoid assessing income taxes on most workers to some extent…but the fact that less than one tenth of one percent (1/10 %) of people pay a federal estate tax when they die should shed some light into how much we prefer successful families transferring wealth over struggling families creating a decent living wage.
Example 2: Government Programs.
I knew a family with $2,000,000 in the bank that was receiving food stamps. No joke. The food stamp program has an income and asset limitation, but the family’s matriarch (who was “not quite” residing with her children) was able to “feed” money through to the family. Other families are able to save money (I.e. assets) in trust for disabled family members so they may continue receiving Medicaid benefits without surpassing its own asset and income limits. And another client is living in a rent controlled apartment even though he has hundreds of thousands of dollars because his income is minimal. And this is ALL legal.
The truth is that most government programs favor people with assets over income. Medicaid is the best example: Families have 5 years to transfer any and all assets to avoid Medicaid liens being placed on their property, but people with large incomes, such as former employees who did not have great savings potential while working but instead now receive pensions, face a very hard time preserving the fruits of their labors: Income must be paid over to pooled trusts or directly to the government to qualify for Medicaid. Meanwhile, those people with assets can transfer them with proper planning. Which leads me to the last point:
Example 3: Income is Inflexible and Difficult to Transfer
Your income is usually set in stone: You can’t earn more of it at your job (unless you are a sales person or get performance bonuses, but these are not guaranteed). When you retire your income also remains somewhat static between pensions, Social Security, and interest or requirement minimum distributions. Because income is stable there is little we can do to plan for changes. And you can only really transfer income to one person: A spouse.
Yes, you can transfer rental real estate or investments you own that generate income, but again you are actually transferring an asset. Indeed, most real estate investors will tell you they hope their income just covers their costs, and make their big gain on the appreciation of the asset. Because (as we have already seen) taxes and government programs typically punish income earners over asset owners, people who have been taught to focus on stable or growing income-based wealth get stuck in a position where they lose much of that wealth, and have no options.
People with assets, however, can change the nature of their assets within a few days, or transfer them quite easily by just writing a check to another person, or both.
The moral of the story: Learn to build assets, and avoid turning them into irrevocable income generators when you can, especially in this low-interest rate environment. Consult with professionals as to lump sum retirement plan options, and remember that the government has taxing priorities that may not coincide with your best interests.
Q FOR U: When was the last time you considered turning an asset into income?