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.
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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.