A Short “Tax” Story
As my wife and I got deeper and deeper into financial difficulty, we had to decide what we were going to have to do to pay our bills and even more important how we could even live a comfortable life style. Using our retirement pensions was one option. Our rent was $1,250 a month and our utility bills were another $200. The cost of our auto, gas and maintenance was going through the ceiling and due to the political turmoil and rising taxes in the United States, it became very obvious that we could not afford to live, let alone pay bills and have a social life. We had to come to some reasonable assumptions to survive.
Social Security for myself would start at $2,000 per month and my spouse at $1,200 per month, but we had to survive for another 10 years, until I reached age 65 and my spouse age 62.
We had heard from a friend that it was a lot cheaper living out of the U.S. He had showed us a newsletter from International Living that showed the cost of living to really be less in Mexico.
Our art sales and book royalties were barely enough to have a reasonable life style. $20,000 each per year, for a total of $40,000.
Our 401K and IRA accounts were around $250,000. How could we utilize these without paying too much in penalties and taxes?
As we thought how we could move to get to more reasonable living costs, our accountant came up with a plan.
Set up a C Corporation to run our art and book business and rollover our IRA’s and our 401K to a new profit sharing plan. We then could take what he called a 72T distribution from the new plan. A 72T Distribution allows you to distribute money with no penalties, for 5 years or until you reach age 59 ½. We would have to pay taxes on our 72T Pension Distribution. We could even borrow $50,000 from our plan and pay it back over 5 years. If used for a personal residence it could be paid back over 15 years.
The C Corporation could be established to handle our art and book business. Tax on the 1st $50,000 in a C Corporation would only be 15%.
Being in Mexico for over 330 days would allow us to take salaries and not have to pay Federal income tax as we could excuse up to $87,600 each from our U.S. tax return income.
We would only have to pay social security and Medicare taxes of approximately 15%, this would save us at least 10 to 15% in taxes. Our corporation could pay our medical costs and other acceptable business expenses, and maybe even moving expenses.
Our accountant warned us that we must establish residency in the foreign country for at least 330 days each year. Our business could not just be a hobby and we had to be engaged in a real trade or business and there would be additional accounting and tax return preparation costs.
It became evident that revising our living costs and our taxes would allow us to have a great life in many cities in Mexico as well as other areas in the Caribbean and South America. Also, as we built our business we could maybe even save some money.
At age 65 we both could start taking social security and retire in the sunshine.
