Are you a YouTuber who’s now making 6 or 7 figures from your YouTube channel? If so, do you want to invest and grow your hard-earned YouTube money, tax-free? If your answer to both questions is yes, then this article is for you. I’m going to be sharing three tax-free investment options for YouTubers.
Tax Free Investment Option #1: Open a Solo 401(k)
If your YouTube channel is mainly run by you – may be your spouse helps, maybe you have a couple of independent contractors, but you have no W-2 employees – then you may want to consider a Solo 401(k).
You can pretty much open one through any brokerage firm, including Etrade, TD Ameritrade, Vanguard, and the like. The most important thing that you want to do here is to open a Roth Solo 401(k) so that you can invest and grow your money tax-free.
The beauty of doing a Solo 401(k) or Roth Solo 401(k) is that, in addition to being able to contribute as the employee (in 2020, the maximum IRS limit is $19,500), you can also contribute as the employer. Because you’re running your own business, you’re both the employee and the employer, so you can do both. In 2020, the maximum you can put in this Roth Solo 401(k) is $57,000.
So consider this: your friends who have regular jobs at companies or nonprofits are only able to contribute as an employee, up to $19,500 for 2020. But as a YouTuber and small business owner, if you want to and if you’re eligible, you might be able to potentially contribute up to $57,000 this year. That’s mind-blowing!
Let’s do some math. Assume that you do that for a period of 10 years and you hire a financial planner to help you invest it. And assume that in line with historical averages, you make a 6% return on market investments. At the end of 10 years of contributing $57,000, investing, and growing your money, you would have made around $750,000… all tax-free. Now, again, this only works if you don’t have any W-2 employees.
Tax Free Investment Option #2: Open a Regular 401(k)
But what if you have one or more W-2 employees? Well, this brings us to Option #2. If you’re a YouTuber and you want to invest and grow your money tax-free, but you have W-2 employee(s), then Option #2 is to open a regular 401k.
Now you’re probably thinking, “Alvin, a regular 401(k)? Isn’t that only for large companies?” In fact, that’s actually not true. Our company, District Capital, only has three owners, one W-2 employee, and two independent contractors, and we have our own regular 401(k) up and running.
But then again, maybe you’re thinking, “Alvin, that’s because you have a finance degree and you can navigate all this complex 401(k) stuff.” Well, I can relate to that. Several years ago, I used to work for a social justice nonprofit. And when I realized that our 401(k) plan was terrible, at the time, it took me a couple of months to do research and find the best 401(k) plan vendors. However, that was 10 years ago. Because of innovation and competition, you can now find a good 401(k) plan that’s affordable, has good tax-free investment options, and will take care of all the compliance work for you, much more easily than in the past. In addition, if you’re a client of District Capital, we’ll obviously point you to the best 401(k) plan vendor out there.
Like before, the key thing here is that you want to choose the Roth 401(k) plan option. If you open a regular 401(k), you want to have the ability to make Roth 401k contributions so you can invest and grow your hard-earned YouTube money tax-free. In addition, the other beautiful aspect of opening a regular 401(k) plan is that if you wanted to, you could do a profit-sharing option. This allows you to put more than the IRS limit of what an employee can contribute in a year.
Now the main caveat to opening a regular 401k is that you typically need to have a matching contribution for your W-2 employees. However, that’s not necessarily a bad thing. You want to be a good employer to your team members, who are helping grow your YouTube channel. And how big of a deal is, say, a 3% match, if that’s going to make them happier and maybe more productive? Not too big of a deal, if you ask us.
Tax Free Investment Option #3: Roth IRA or Backdoor Roth IRA
So far, we’ve talked about opening a Solo 401k if you’re a YouTuber, with no W-2 employees. You can also open a regular 401(k) if you do have one or more W-2 employees. But is there another way to grow your hard-earned YouTube money tax-free?
This brings us to Option #3, which is contributing to a Roth IRA or backdoor Roth IRA. Now don’t confuse this with tax-free investment options one and two above, a Roth Solo 401(k) or Roth 401(k). 401(k)s and IRAs are completely separate and have their own separate limits. You can contribute to both a 401k and an IRA. Again, as a reminder, the nice thing about a Roth IRA is that you’re able to grow your money tax-free.
That said, there are some income eligibility restrictions for contributing to a Roth IRA. What happens if you’re now above the Roth IRA limit? Indeed, let’s say your YouTube channel is really taking off and you’re no longer eligible for a Roth. If that’s the case, you can contribute to a backdoor Roth IRA. If this is something that applies to you, we created a free Youtube video that walks you through How to do a backdoor Roth IRA. This video breaks it down into three simple steps, so make sure you check that out. Thus, Option #3 for how to invest and grow your money in a tax-free manner is to contribute to a Roth IRA or a backdoor Roth IRA.
We hope that this has helped you learn what your tax-free investment options are.
In summary, if you’re a YouTuber and you’re making 6 or 7 figures and you want to invest and grow your money in a tax-free manner, you can choose to open a Solo 401(k) or regular 401(k) and supplement that by doing a Roth or backdoor Roth IRA option.
If you would like us to help set up and manage these tax-advantaged accounts or guide you in investing and growing your hard-earned YouTube money tax-free, you’re welcome to schedule a free discovery call with us. Here’s the link to schedule a free 30-minute discovery call and happy investing. Until next time!
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.