Real Estate Investing Basics

Why You Need to Start Your IRA NOW…and Any Other Tax-Free or Tax-Deferred Vehicle You Can

Expertise: Business Management, Mortgages & Creative Financing, Landlording & Rental Properties, Real Estate Investing Basics, Personal Finance, Real Estate Deal Analysis & Advice, Commercial Real Estate, Personal Development, Real Estate News & Commentary
228 Articles Written
Start Your IRA

Many people struggle with the concept that they actually determine their financial future with how they handle each dollar that comes through their hands. Most folks also struggle with concepts like paying yourself first or having reserves set aside. Saving for retirement, for many people, gets put on the back burner. And, the concept of working their retirement account themselves seems foreign and out of reach.

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There could be many reasons for this. Maybe they truly don’t have access to the right information. Or, maybe their financial planner is hesitant with recommendations, since most of his/her clients are not financially savvy when it comes to investing in general and/or retirement planning. Regardless of the reason, if you haven’t started an account, it’s never too late. I don’t believe, either, that you can start too early. If you haven’t heard of Self-directed IRAs or other similar accounts (SIMPLE, SEP, HSA, 401k, Traditional, Roth, etc.) you’re in the right place—Bigger Pockets is a great place for someone to become better informed.

Regrets

One of the biggest regrets that I have these days, now that I’m in my early 50’s and fast approaching my retirement years, is that I didn’t start early enough, large enough, and focused enough, especially with my self-directed IRA, and other similar types of accounts.  I just didn’t take things as seriously as I should have.

So, why did I (and most other people too, especially real estate investors) think that my IRA accounts weren’t that important?

For me, it was lots of excuses:

  • “I’m too old to get started on that now.”
  • “I’m too young to worry about that.”
  • “I don’t have enough money.”
  • “I have too much money.”
  • “My money would be tied up for too long.”
  • “I won’t be able to touch the money if I do that.”
  • “I don’t want to pay myself a salary because I’m self-employed, and I’d rather not pay Social Security Tax.”

This unfortunate list of myths and/or excuses goes on and on.  Dick Desich, of Equity Trust Company, explains in his special report, “Proven Wealth Building Secrets for You and Your Children” (8th Edition), how the self employed, for example, avoid paying themselves salaries so as to not pay the 11% in Social Security tax (this is the approximate rate after applying all credits).

The Missed Potential

They’re really missing out on a huge future gain just to save a few dollars now.  If they paid themselves, or their spouse and children, a salary of say $12,000, approximately $1320 would be paid in Social Security taxes, but they’d have a tax deductible amount of $10,680 invested in a SIMPLE IRA combined with either a Traditional or Roth IRA.  If that same $10,680, one-time contribution, earned a 15% return over 30 years, tax-deferred, that account would be worth $707,142 at the end of 30 years!  Dick says, “Don’t you believe it’s worth $1320 in taxes now, to have $707,142 in the future?”

Knowing what I know now, I didn’t fully appreciate the benefits of tax-free, tax-deferred investments, as well as the true power of compound interest inside a tax favored environment.  I was like the typical real estate investors just scraping together all my money to throw at my next real estate deal.  If I knew then what I know now, I would’ve never done that.

People say they can’t get access to their money.  But they can, indirectly.  Just lend to those who will lend money to you.  Then you can just use OPM (Other People’s Money) for all your real estate deals, and this would enable you to keep more of your own money for other tax-advantaged investment vehicles (pay yourself first).  If you lend out IRA money and utilize your IRA properly, you won’t need your own money for deals and you’ll have access to more capital than you could ever put to use.

IRA Investing Strategies

Over the last 10 years, I’ve been pretty active with my IRA accounts have done numerous types of investments.  I have even belonged to an IRA group (no, not the Irish Republican Army), where several investors, many with 80-100 properties or more, had formed an IRA Mastermind to brainstorm many creative investing strategies.  Here’s a short list of some of my favorites:

  • flipping houses in my IRA;
  • doing options with each other;
  • holding notes for fellow rehabbers;
  • investing in shares of LLCs, commercial real estate deals, note pools;
  • and buying notes with my HAS (Health Savings Account).

There’s probably too many to mention here, but you’re probably starting to get the idea.  One of my favorites was doing a once a year rollover to quickly fund a deal, flip it, and put the money back into an IRA within 60 days. And, yes—I always have my own money to back myself up in case the project isn’t done on time.

Another idea was how to fund my grandson’s college.  Of course I can use some of my own Roth IRA money, but I could also pay him a salary for being in my marketing (his photo is used in one of my slides). Now if I pay him $5000, and because he’s a minor under 18 years old, he can avoid taxes. And now because he has earned income, he can have a Roth IRA.  Bingo!  This is much better than a Coverdale or 529 plan, even though having a Coverdale as well is not a bad idea. College tuition isn’t getting any cheaper these days.  But with a Roth, you can use the money for so many other things besides just education.

Another strategy is to pay my 80-year-old mother a salary, especially since she’s in a lower tax bracket, and now she has earned income to put in her IRA.  Now I can have her make my grandson the beneficiary of her IRA.  This is a very unique way to get the IRA money to my grandson.

Another cool strategy is using my HSA to buy notes.  Not only do you get a tax break going in, it builds tax-deferred, and is tax-free when you take it out.  Now, you’re not limited to what type of medical care you can get either.  We’re all going to have some type of nursing care (even if it’s in-home), especially since we’re all living longer, and you can use HSA money to pay long-term health care premiums as well.  But my favorite is to contribute to maximum and to pay all my medical bills out of pocket, and keep the receipts, in case I want to retain them later for cash, if I need to withdraw the money in the future.

Maybe, you can share some of your favorite IRA investing strategies, and if you haven’t started an IRA account yet, don’t be like me, get ‘er done.
Photo Credit: daystar297

Since 2007, Dave Van Horn has served as president and CEO of PPR The Note Co., a holding company that manages several funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, a real estate investor, and a fundraiser. As the latter, Dave has raised over $100 million in both notes and commercial real estate. In addition to his investments and role as CEO, Dave’s biggest passion is to teach others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of the real estate business.

    Jason R
    Replied about 6 years ago
    I never thought of HSA’s as an investment vehicle before…very interesting. Thanks for the article, Dave.
    Jim Fisher
    Replied about 6 years ago
    tell us more about using the HSA to buy notes…:-)
    Dave Van Horn
    Replied about 6 years ago
    Hi Jason, Thanks for your feedback! In my opinion, HSAs are the best investment vehicles available. It also can be perceived as better than a Roth IRA, because it’s tax-free going in. Best, Dave
    Jim Fisher
    Replied about 6 years ago
    tell us more about using the HSA to buy notes…:-)
    Dave Van Horn
    Replied about 6 years ago
    Hi Jim, I hope this thread and the one below it have been useful. Let me know if you have any specific questions. Dave Reply Report comment
    Dave Van Horn
    Replied about 6 years ago
    Hi Jim, I hope this thread and the one below it have been useful. Let me know if you have any specific questions. Dave
    Chad Ballard
    Replied about 6 years ago
    Dave, how do you buy a note with an HSA? It isn’t an approved expense and you can’t borrow against it. You have peaked my interest as well.
    Dave Van Horn
    Replied about 6 years ago
    Hi Chad, Thank you for your interest! If you go to any self-directed IRA company, they’re all custodians for HSA plans, as well as ESAs. With this type of HSA (self-directed), you can invest in everything that you can with a Self-Directed IRA, such as precious metals, real estate, tax liens, etc. Best, Dave
    Greg Jessup
    Replied about 6 years ago
    Dave, I’m with you on the HSA. It’s a home run, and not enough people use it (including myself, until recently). Do you self-direct your HSA? If so, who do you use as a custodian?
    Dave Van Horn
    Replied about 6 years ago
    Hi Greg, Yes, I do self-direct my HSAs. And, also, as a company, we work with over a dozen custodians throughout the U.S. If you want to know who I use personally, feel free to PM me. I actually have two different custodians for my HSAs. Best, Dave
    Tom Waddell
    Replied about 6 years ago
    Dave, was my question about recommendations for custodians for self-directed HSAs an inappropriate one? As I said earlier, I would be happy to send a private message, but I see no way on this site to do so. Regardless, thanks for a great article.
    Dave Van Horn
    Replied about 6 years ago
    Hi Tom, I sent you a colleague request. Once you accept, we can message each other directly. This should show up in your inbox on the main biggerpockets.com website. Talk to you soon! Dave
    Tom Waddell
    Replied about 6 years ago
    Hi Dave. Thanks for a great article. I’m trying to PM you to get the recommendations for custodians for self-directed HSAs and I can’t seem to figure out how to PM someone on this site!
    Greg Jessup
    Replied about 6 years ago
    Dave, I’m with you on the HSA. It’s a home run, and not enough people use it (including myself, until recently). Do you self-direct your HSA? If so, who do you use as a custodian?
    Tony Tran
    Replied about 6 years ago
    Dave, This is a great article. In the article, you stated that a good strategy is to pay your mother a salary. Is she is a “W2” employee to your company (owned by the self-directed IRA), “K1” partner, or just “1099” recipient? If she is a “W2” employee, the earned income would be subjected to social security and other taxations. Isn’t that correct? Thank you for your time, Tony
    Dave Van Horn
    Replied about 6 years ago
    Hi Tony, Yes, that is correct. Although I’m not a CPA, according to Albert Aiello, Children under 18 working for an unincorporated parent are exempt from Social Security and Medicare taxes up to a certain amount, but parents working for a child are not exempt from any payroll taxes. For more information, see IRS publications: 15, 334, and 929. Best, Dave
    Tony Tran
    Replied about 6 years ago
    I now wonder how this applies to 1099 individuals.
    Dave Van Horn
    Replied about 6 years ago
    Check with your accountant, but if the family member you’re paying is in a lower tax bracket than you (like it is in my case), it may still be a good business decision.
    Tony Tran
    Replied about 6 years ago
    I plan to. Thanks for the quick reply!
    catrina brooks
    Replied about 6 years ago
    Dave, This is an ingenious article! Can you direct me to someplace that I could expand on the concept of how I can lend to others in order to have access to my own funds? Thanks Catrina
    Dave Van Horn
    Replied about 6 years ago
    Hi Catrina, Thanks for your positive feedback! What I’ve come to realize is that by giving others access to your funds, others will be more willing to give you access to their funds. It’s based on relationships and networking with people, who have similar goals. A great place to network would be National REIA type groups. If you’re looking for other resources, I think Alan Cowgill wrote a book on the subject. Best, Dave
    catrina brooks
    Replied about 6 years ago
    Dave, This is an ingenious article! Can you direct me to someplace that I could expand on the concept of how I can lend to others in order to have access to my own funds? Thanks Catrina Reply Report comment
    Jeff Brown
    Replied about 6 years ago
    Gotta think anyone doin’ business with you is pretty smart, Dave. The note strategy inside the HSA is brilliant. What are the contribution limits?
    Jeff Brown
    Replied about 6 years ago
    Gotta think anyone doin’ business with you is pretty smart, Dave. The note strategy inside the HSA is brilliant. What are the contribution limits?
    Dave Van Horn
    Replied about 6 years ago
    Hi Jeff, Here’s the 2013 limits. Keep in mind your HSA money can partner with Roth money or regular money to make an investment. (e.g.note) HSA Maximum Limit Self-Only Coverage $3,250 Maximun Limit Family Coverage $6,450 Age 55 Catch-Up Limit** $1,000 HDHP Minimum Annual Deductible Self-Only Coverage $1,250 HDHP Minimum Annual Deductible Family Coverage $2,500 HDHP Maximum Out of Pocket Self-Only Coverage $6,250 HDHP Maximum Out of Pocket Family Coverage $12,100 Best, Dave Van Horn
    Jeremiah
    Replied about 6 years ago
    For some fine print, don’t HSA’s need to be cashed out on a qualifying medical expense?
    Dave Van Horn
    Replied about 6 years ago
    Hi Jeremiah, Yes, you are correct. But, they also work on a reimbursement basis. If you pay out of pocket on medical expenses, you can retain these receipts and be reimbursed from your HSA at any time. According to CamaPlan, “Expenses can span several years. It is not a ‘use or lose.’” While the money sits in your HSA, if it’s self-directed, you can invest in everything that you can with a self-directed IRA (precious metals, real estate, tax liens, etc.), the money can build tax-deferred, and when you do take a reimbursement, it’s tax-free. Best, Dave
    Mark Ferguson
    Replied about 6 years ago
    At 34 I still don’t want to lock my money away that long. If I had a self directed Ira or hsa, could I acces that money before 50 without penalty? By acces, I don’t mean invest in more houses, I mean blow it on fun stuff like cars. 🙂
    Dave Van Horn
    Replied about 6 years ago
    Hi Mark, With the HSA, if you pay any medical expenses out of pocket and save the receipts, you can redeem these receipts and be reimbursed at any time. And yes, you can then use this reimbursement to fund a car. The great thing is that not only do you get a tax break going in, but the money builds tax-deferred, and is tax-free when you take it out. With a Roth IRA, you can withdraw your contributions, tax-free, at any point. You can also access any funds converted over to a Roth from a Traditional IRA (after five years). The only time you would pay a tax penalty is for withdrawing non-qualified distributions. According to CamaPlan, “You generally do not include as gross income in your tax return qualified distributions from your Roth IRA(s) or distributions that are a return of your regular contributions.” For more information on qualifying distributions, check out IRS publication 590 ch. 2. I hope some of this helps! Dave Van Horn
    Shari Posey
    Replied about 6 years ago
    Here’s a strategy I am trying for 2013… I’m starting a solo IRA rather than my usual SEP. I have the money to fully fund it with 20% of my income, $17,500 deferred income and $5,500 catch up for being over 50. Putting away all that money is good for my future retirement and it reduces my modified adjusted gross income (line 37 on the 1040 form). So not only do I save a lot in taxes but I will be able to get a substantial subsidy for Obamacare which lowers my current private health insurance as well. I’m not 100% sure this will all work out the way I’m expecting but it could save me few thousand dollars in taxes and about $3000 for the year off health insurance. (I have a rental property currently held jointly by my SEP and Roth IRA)
    Dave Van Horn
    Replied about 6 years ago
    Hi Shari, This sounds like a pretty interesting strategy, although I’m not very versed in Obama Care. But, this sounds pretty cool. Good luck! Dave Reply Report comment
    Dave Van Horn
    Replied about 6 years ago
    Hi Shari, This sounds like a pretty interesting strategy, although I’m not very versed in Obama Care. But, this sounds pretty cool. Good luck! Dave Reply Report comment
    Dave Van Horn
    Replied about 6 years ago
    Hi Shari, This sounds like a pretty interesting strategy, although I’m not very versed in Obama Care. But, this sounds pretty cool. Good luck! Dave
    Douglas Dowell
    Replied about 6 years ago
    Thanks for the great article Dave, This is a great vehicle people have MUCH more power over what we do with the funds. Not say Wall Street would hate this idea or anything 🙂 Over 5 Trillion in IRA funds are out there to partner with us instead. Great opportunity to educate consumers and generate great partners.
    Dave Van Horn
    Replied about 6 years ago
    Hi Douglas, Thanks for the positive feedback! You’re right. Self-directed just isn’t main stream yet. Maybe the book David Bach is working on will help spread some awareness on it. Dave
    Levar
    Replied about 6 years ago
    I am 36-years old and my wife is 35-years old. I am currently employed full time as a DoD contractor but looking to do real estate full time by the end of 2014. Anything that discusses health care in the aftermath of what Obama Care intends to do, has my attention. I have heard of HSAs before but I have never done research on them. As a future full-time real estates (my wife and I), how can HSAs benefit us? We have three kids (ages 16, 14, and 7). When you mention lending money to those that will lend to us, are you referring to P2P (peer to peer) lending networks? Are IRS Publications 15, 334, and 929 the references in order for me to research what is covered under the stipulation of lending within my IRA? Given the versatility of HSAs, would it be wise to redirect the money going into my IRA to the HSA? I do like the concept of setting up IRAs for aging parents with grandchildren as the beneficiaries. I never thought of that. Lastly, I would greatly appreciate it if you sent me the contact information of who you have personally dealt with concerning your HSAs. Thank you for such an enlightening article, sir.
    Dave Van Horn
    Replied about 6 years ago
    Hi Levar, Thanks for the positive feedback on the article! As for your questions, I’ll try to answer them the best that I can. The HSA has many benefits, such as the ability to pay lower health care premiums, control your own account, and have more freedom in terms of health care expenses that are allowed. It saves people money because they get a tax break going in, it builds tax-deferred, and it’s tax-free when you take it out. It can also be used for long term health care down the road. For more information on HSAs, check out http://camaplan.com/choose-your-camaplan/hsas/. When I mentioned lending money to those who will lend to you, I didn’t mean P2P lending networks, but rather your own network of like-minded real estate investors, who, if you lend them capital from your IRA to fund deals, will do the same for you. IRS Publications 15, 334, and 929 are more on payroll tax requirements regarding a child working for a parent vs. a parent working for a child. As far as what’s covered under the stipulation of lending within an IRA, this compiled list of official documents on IRS rules regarding self-directed IRAs might be helpful: http://www.trustetc.com/new/rules-and-regulations/self-directed-ira-rules/. Although I can’t give you professional financial advice, from a tax perspective, nothing beats an HSA. I hope some of this helps! Best, Dave Van Horn
    Levar
    Replied about 6 years ago
    OK. I appreciate the feedback, sir. I have more information to read based on the first link you posted. I read through the CamaPlan homepage just a tad and I like that it discusses Self-Directed IRAs as I have been doing research on those all of this week as I am considering that my investment vehicle of choice. I see that the HSA route might be a more favorable route. I am currently employed and my employer offers us heath, dental, and vision care. I did the math, I am presently paying roughly $665/month before taxes for medical, dental, and vision for my family of five (including myself) and my employer covers down on the rest. I wonder how I can use the HSA in my favor in regards to this situation.
    Dave Van Horn
    Replied about 6 years ago
    Hi Levar, The HSA will work great when you venture into doing real estate full time—I think you said the end of 2014 is your goal? This is unless you can convince your employer to support HSAs and a high deductible plan, in which case you could utilize it sooner. Although, from a tax standpoint, I do see HSA’s as the best investment vehicle, the self-directed IRA is a high second. If it’s possible, it’s not a bad idea to use both. Let me know if you have any additional questions. Best, Dave
    Levar
    Replied about 6 years ago
    OK. I appreciate the feedback, sir. I have more information to read based on the first link you posted. I read through the CamaPlan homepage just a tad and I like that it discusses Self-Directed IRAs as I have been doing research on those all of this week as I am considering that my investment vehicle of choice. I see that the HSA route might be a more favorable route. I am currently employed and my employer offers us heath, dental, and vision care. I did the math, I am presently paying roughly $665/month before taxes for medical, dental, and vision for my family of five (including myself) and my employer covers down on the rest. I wonder how I can use the HSA in my favor in regards to this situation. Reply Report comment
    Levar
    Replied about 6 years ago
    HSA as well as a Self-directed IRA, huh? Would this be mainly to further reduce my taxable income? As for my company adopting HSAs, I doubt it. I would stand a better chance winning a gold unicorn on eBay.
    Dave Van Horn
    Replied about 6 years ago
    Hi Levar, A traditional IRA would reduce your taxable income, but you would be paying taxes on the crop instead of the seed. With a Roth it’s the opposite, you don’t get a tax-break going in, but the money is tax-free when you take it out—all qualified distributions are tax-free (i.e. paying less in taxes overall). Other exceptions to taxable distributions include: to buy/build/rebuild your first home, to reimburse a certain amount of medical expenses, to pay medical insurance premiums during a period of unemployment, to pay higher education expenses, etc. To see a full list of the qualified distributions and exceptions, IRS publication 590 may be a good resource: http://www.irs.gov/publications/p590/ch02.html#en_US_2012_publink1000231061. Of course this is just my opinion, but a self-directed Roth IRA, although it doesn’t have all of the same tax advantages of the HSA, might be a good alternative (unless you win that gold unicorn on eBay). Best, Dave
    Levar
    Replied about 6 years ago
    OK. I have reduced my medical coverage with my current provider and starting January 1st, I will save roughly $300/month. That being said, I have read through the CamaPlan information and since I am currently enrolled in a company-provided medical plan, I do not qualify to start an HSA. This is a bummer for me as the HSA seems more lucrative than the Self-directed IRA.
    Dmitriy Fomichenko Solo 401k Expert from Anaheim Hills, CA
    Replied over 4 years ago
    Great article Dave, I should check with my clients to find out who is using this strategy.