I’m 55 – what’s the smartest way for me to defer $2 million in compensation and minimize taxes?

A Redditor recently posted in the Fat FIRE subreddit about a large deferred compensation payment. The Redditor aims to retire at 55 with $2.5 million in deferred compensation. While the current plan is to defer payouts, the Redditor can take out a lump sum sooner with the right tax protocols in place.

I’ll share my thoughts, but it is good to speak with a tax professional if you can.

Buy a Rental Property

Real estate is one of the best investment opportunities for people who want to make money and lower their tax bills. They also work very well for people who receive lump sums.

If you buy a rental property, you can use cost segregation to depreciate the property’s entire value in one year. This strategy alone can give you all of the tax protection you need.

For instance, assume the Redditor receives a $2.5 million lump sum in one year. The Redditor can then buy a rental property for $2.5 million. If you make a 20% down payment, the Redditor only has to put down $500,000. Then, you can deduct the rental property’s entire $2.5 million value from your tax returns.

You don’t have to do cost segregation in the first year. The Redditor can also prepare for the windfall by purchasing rental properties in advance. Then, when the windfall arrives, they can use cost segregation to write off the entire value of their properties, knocking the tax bill down to zero.

If you have enough rental properties that you cost segregate when receiving the deferred compensation, you might even get a tax refund on top of the windfall.

Buy a Luxury Car

You can follow the same model for cars via Section 179 of the tax code. If you can demonstrate that you are using a luxury car for business purposes (i.e., business trips, boost the perceived value of your brand, etc.), you can depreciate the car’s entire value in one year. 

Some luxury cars appreciate, but if you wanted to get yourself a nice car anyway, you might as well do cost segregation when the big paycheck arrives.

Move to a State with No Income Tax

The Redditor is already planning to relocate to a state that has no income tax. This strategy will allow them to keep more of their money. 

While moving will result in significant changes, such as having to meet new people, it can also offer a fresh start. However, it’s important to look at how states collect tax revenue from other sources. For instance, Texas does not have any state income taxes, but its property taxes are some of the highest in the nation.

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