Creating Wealth “Ivestment Strategies: Building a Nest Egg”

             Thank you for joining me for this month’s edition of Creating Wealth. Last month I spoke about Self Directed IRAs as a strategy for investing in real estate so that all of your gains are either tax deferred or tax free. In order to fund these transactions however, the IRA needs to have enough money to not only pay for property in cash but also to fund the necessary refurbishment and applicable management costs. Wow! Depending on the cost of the property, that could equate to a lot of $$$. What about those of us who want to take advantage of this opportunity and don’t have a sizable nest egg? Not to worry. I am going to answer this question and provide you with additional ideas that you can use to build your investment capital using your Self Directed IRA.

A moment of truth…

            I discovered Self Directed IRAs earlier this year while on one of my monthly reading binges. Then in July my fiancée and I went to an investment conference in Las Vegas where we learned more about how powerful they can be as investment vehicles – especially when investing in real estate. We walked out of that weekend inspired to supercharge our wealth and take advantage of all of the new information that we had acquired.  In taking the first step towards our “financially free” free future, we had to look at our current reality. Needless to say, it was a little disheartening. In gathering my financials, I found that I only had about $1,800 in a Roth IRA, $1,600 in a mutual fund,$27,000 in a 401k from another life, and $800 in a 401k from a more recent past employer. When I considered my desire to start acquiring real estate through my Self Directed IRA, I can honestly say I had no idea how to make it happen at that time. 

Bridging the Gap…

            The truth of the matter is that many of you are like me. More importantly, many of your customers are like me. The concept behind the Self Directed IRAs creates a strong argument for true self managed wealth where each man (or woman) is the captain of his own financial destiny. The problem is that if you are just starting, or started late in your retirement planning, you don’t have the robust retirement dollars to invest in a Self Directed IRA. Or do you?

            There are two ways that you can self direct with your IRA 1.) through a Traditional IRA and 2.) through a Roth IRA. The difference between the two types of IRAs is based on retirement growth that is tax deferred vs. tax free. A Traditional IRA is tax deferred, which means that pre tax dollars go into this account to grow your retirement dollars tax free until you start making withdrawals. The money is then taxed as ordinary income when you take it out. A Roth IRA is funded with post tax dollars, which means this money grows tax free since it has already been taxed before you put it in the IRA. If you remember my retirement inventory, I only had $1,800 in my Roth IRA. I knew from past experience that with a 401k rollover you can combine like accounts. So I combined my mutual fund and Roth IRA for a total of $3,200, because they were both funded by post tax dollars. I then combined both 401ks for a total of $27,800 because they were both funded with pre-tax dollars. I then had a choice; I could roll my 401k dollars over to a Traditional IRA or convert it to a Roth. I opted to convert it to a Roth because it is not a large sum of money to begin with, so I paid tax on that money to convert it to after tax dollars. I now had money to play with and it is all going to grow tax free!

Creating Wealth…

            I was able to fund my Self Directed IRA by taking an inventory of idle retirement money tied up in my stranded 401ks and mutual funds. I then converted my pre-tax accounts into post tax dollars so that I have more money in my Self Directed Roth IRA account. Then I started looking into prohibited and non-prohibitive transactions in regard to loans made through your IRA. As it turns out, since my fiancée and I are not married yet, I can loan her money from my IRA at a reasonable interest rate and she can combine it with her Self Directed IRA for more buying power. (More to come on prohibited and non-prohibitive transactions!)

 

Here are a few more suggestions for those of you with limited investment capital like us:

 

Tax Liens: Are a good way for you to build your IRA investment dollars for two reasons: 1.) Tax liens require less money to buy than real estate because you can buy liens anywhere from a couple hundred bucks and up. 2.) Tax liens are safe because they are secured against real property, so if the owner never pays, you have the right to foreclose.

Tenants in Common: So you found a property that promises enormous wealth, but do not have the cash to fund it solely with your IRA? You might consider getting your friends together to create a tenants in common agreement. A tenants in common agreement allows two or more partners to own undivided portions of the same real estate without the right to survivorship. This means that if the person dies his/her ownership interest in the property goes to his/her heirs, not the other partners.

Non recourse loans: Allow a potential investor to partner with his/her IRA. The IRA puts forth the capital for the down payment and owns the property. A bank or a private party carries the note for the remaining balance. There are very few banks that will do these loans and their terms might not be as favorable as terms that can be negotiated with a private party. (More to come.)

These are just a few of the many strategies that can be employed by a potential investor to build investment capital. Look for up coming issues of Creating Wealth for more information or drop me a line:  303-877-6323 or brodriguez@ccmc-net.com.