March 28, 2022

On today’s episode of the LearnLikeaCPA podcast, I answered your questions on the 121 exclusion, house hacking, self directing your IRA, and the difference between traditional and roth investing.

The 121 Exclusion

This exlusion allows you to walk away from the sale of your primary residence tax-free (up to $250k if you’re single, and $500k if you’re married filing jointly). This is a wealth hack because you can build equity in your home, capture the appreciation, and walk away without the massive tax bill that might otherwise hit you.

It’s important to note that this rule is limited to primary residences. You have to own and use the property as your primary residence for at least two years in order to take advantage of this rule.

House Hacking

House hacking is where you find a primary residence, typically 2-4 units, and you live in one unit while you rent out the other unit(s). It’s a great way to lower your monthly cost of living, and potentially even create some positive cashflow on your primary residence. Oftentimes it’s used as a way to buy your first property without having a large down payment. By getting an FHA loan, which requires only 3.5% down (as opposed to the 20-25% typically required for investment properties), you’ll minimize the amount of cash you have to save up, and by renting out the extra units, you’ll get that cash flow as well.

Self-Directed IRAs

This is one of the least talked-about ideas in the financial industry, and it’s because the professionals don’t make money off this. Instead of relying on Wall Street for your retirement accounts, you can broaden your horizons and invest in real estate, crypto, non-IPO businesses, and more.

Traditional vs Roth Investing

Let’s define our terms:

Traditional retirement account: a retirement account where you pay taxes on the backend. You can write off the money you initially invest, and you’ll pay taxes on your withdrawals down the road.

Roth retirement account: a retirement account where you pay taxes on the frontend. You’ll pay taxes on the money you initially invest, but when you withdraw from the account down the road, your initial investment AND your growth are completely tax free.

Roth accounts sound pretty great, right? Generally, yeah they are! But there’s certain situations where a traditional account might actually be preferable. If your tax rate will be lower when you’re withdrawing money from the account, then you might actually be better off investing in a traditional account.

If you want to learn more about this powerful tax savings tool, be sure to check out today’s episode!