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

by | BiggerPockets.com

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.

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.

How to Invest in Real Estate While Working a Full-Time Job

Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.

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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

About Author

Dave Van Horn

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.


    • Dave Van Horn

      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.


    • Dave Van Horn

      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.


      • 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!

      • 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.

        • 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!

  1. 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,


  2. catrina brooks on

    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?


    • Dave Van Horn

      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.


    • 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)
      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

      Dave Van Horn

    • Dave Van Horn

      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.


  3. 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

      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

  4. 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)

  5. Douglas Dowell on

    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.

  6. 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.

    • 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!

      Dave Van Horn

  7. 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.

    • 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.


  8. 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.

    • 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).


  9. 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.

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