Self-directed IRA strategies that can explode your legacy – part 2 – Episode 44

If you haven’t heard part one of this show, go listen to episode 43 over on TheRealEstatePowerHour.com

 

Can you make money tax-free?

Double your monthly retirement incomeNow, we’re moving on to protecting your wealth. There are two choices. We can pay ourselves or we can pay taxes. What does it take to pay yourself? First, open a self-directed IRA and put money into it. You can do this by either contributing from earned income, transferring from another IRA, or by doing a rollover. If you have a 401k or similar plan, you can roll it over into your self-directed IRA. Then you need to use that money to make investments.

There are three ways you make money. The first is in a taxable environment. This is how you normally make money. With an IRA, you have two other options. You can take $5,000 and subtract that from your taxable income. You get a deduction. When you make investments, you don’t pay taxes on the income within the IRA. As long as the money stays in the IRA, you don’t pay taxes on that. When you start to withdraw money, that’s when you pay taxes on it.

Here’s the way to make tax-free money

The other way is to use a Roth IRA. Instead of making a contribution and taking a tax deduction, put money in after taxes. If you do that, you don’t pay taxes on the growth OR when you withdraw it. You paid your taxes on the original $5,000, so you don’t pay taxes on the back side. This can save you huge amounts when you go to withdraw it, which you can do as long as you’re 59 ½ and the account has been open for 5 years or more.

If your IRA grows to $1,083,000 and you make 10% a year, you can withdraw $108,300 a year without affecting the principle. If you did this with a traditional IRA, that means you’d pay taxes on the money which lowers the spendable amount to about $81,000.

If you do the same thing with a Roth IRA, you get to spend all $108,300 and not pay taxes. You don’t pay federal, state, local, Social Security, or even capital gains taxes. Don’t believe me? Let’s check with the IRS. Take a look at Publication 590 and what it says about distributions from a Roth IRA. When you take title to real estate in the name of your IRA, you’re protecting future earnings from taxes.

How to access money early

You can borrow money from the IRA by the way. You can borrow up to $50,000 a year from your IRA. You have to pay interest on it. The great thing is that you’re paying interest to your IRA, so you’re paying yourself.

How to create wealth for your children using this strategy

All a person needs to open an IRA is earned income. So, take some of their income from working at McDonalds, mowing lawns, etc. and put it into a Roth IRA. Some people say, “My kids are useless. I can’t get them to do anything to earn money.”  Here’s a strategy. I pay my kids for their likenesses that I use in my presentations. That money can then go into a Roth.

Now, imagine this. If you have a baby and open up a Roth IRA for them at age 1 with $5,000 and no one touches it again (including no more contributions) until they’re 65, they’ll have over $2 million. In a traditional IRA, a large chunk of that in taxes when they withdraw it. With a Roth, it’s all tax free.

What’s really exciting about this

When you die, the assets of the Roth IRA roll over to your spouse. That means that once the husband dies, the wife will have the same income and won’t need to depend on anyone. What happens when she dies, on average, ten years later? The money goes to your heirs. Since they inherited it, the money remains tax-free, but the minimum age for distribution goes away. On average, they’ll live another 55 years. All this money is growing for a total of over 100 years. You’re able to give the life you’ve only dreamed of to your descendents. Everyone should have this type of account.

Now for some questions

What are the fees? You have a set up fee for as little as $50. Annual fees are about $400 on a $100,000 IRA. If you pay fees outside the IRA, you can deduct them. So, in effect a $400 fee is only about ⅔ that amount. You can also pay the fee within the IRA, but that’s up do you.

Can Edwin’s company set up a solo 401k? Yes they can. In fact, it’s one of his favorite account types. It offers a great deal of benefits to his his clients. You can put more money in it. You can put Roth contributions into it. You can borrow from it tax free and pay yourself the interest, firing the bank.

What about required distributions? At 70 ½, the IRS says that you have to take a minimum distribution from a traditional IRA. With a Roth, there is no required minimum distribution, so you have more flexibility.

Can you take money out and put it back within 30 days with no penalty? The IRS has what’s called a 60-day rollover. The trick is that you can only do that once a year. If you need to take more money out, you can do a loan for up to 5 years. You can pay it back early. There’s no prepayment penalty. 60-day rollovers aren’t great if something happens. If you’re less than 59 ½, you pay taxes AND a 10% penalty. If you do a 401k loan, you have 5 years, not 60 days to pay it back. Most of the time, setting up a “solo k” and borrowing from it is the way to go. If you have a traditional IRA, that can be rolled-over into a solo k.

Can you self-direct an IRA to buy a property you already own? No. That’s called self-dealing and it’s specifically prohibited by the IRS. You could sell that property and buy another with your IRA, but you can’t transfer property from yourself to your IRA.

What are minimum costs to set up a self-directed IRA? You only have to pay the set-up fees and as little as a $500 contribution. Everyone should have one. Maybe you don’t have all that cash laying around. If you have an emergency fund, you can start your Roth with it. When an emergency pops up, you can borrow from it with no taxes and no penalties.

Can money from a single-member LLC be put into a Roth? Quick reminder that this isn’t tax or legal advice. If it’s earned income, yes it can. It doesn’t matter where the money itself comes from. You just have to have earned income to do this.

Can you buy real estate in a foreign country? Yes. You can buy real estate anywhere you want.

If you have a traditional IRA, can you roll it into a Roth? Yes. You can do a conversion. The government knew that since Roths were only created in 1998 and traditional IRAs were created in 1974, people might want to go from one to another. Since you took a deduction at the time that you contributed to your IRA, you need to pay taxes on the money going into the Roth. There are conversion strategies that make this more feasible.

Show outline:

  • Now, we’re moving on to protecting your wealth. There are two choices. We can pay ourselves or we can pay taxes.
  • There are three ways you make money. The first is a taxable environment. With an IRA, you have two other options either get a deduction now and pay taxes on your distributions or pay taxes now and not pay them on your distributions.
  • Take a look at Publication 590 and what the IRS says about distributions from a Roth IRA.
  • How to access money early: you can borrow money from the IRA and pay your IRA the interest, not the bank.
  • How to create wealth for your children using this strategy. All a person needs to open an IRA is earned income. So, take some of their income and put it into a Roth IRA.
  • When you die, the assets of the Roth IRA roll over to your spouse. When your spouse dies, it goes to your heirs. Since they inherited it, the money remains tax-free, but the minimum age for distribution goes away.
  • Now for some questions: What are the fees? Can Edwin’s company set up a solo 401k? What about required distributions? Can you take money out and put it back within 30 days with no penalty? Can you self-direct an IRA to buy a property you already own? What are minimum costs to set up a self-directed IRA? Can money from a single-member LLC be put into a Roth? Can you buy real estate in a foreign country? If you have a traditional IRA, can you roll it into a Roth?

LINKS MENTIONED IN THIS EPISODE:

Real Estate Power Hour Episode 43

HERE’S THE WEBINAR VIDEO IN ITS ENTIRETY

IRS Publication 590

TWEETS YOU CAN USE TO SPREAD THIS GREAT CONTENT:

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