This part of real estate investing is absolutely amazing. In recent years I have been involved in some very heated “discussions” with so called experts about what you can and can’t do with a self directed IRA.

    TIP: What kind of title does a veterinarian have? What kind of title does a brain surgeon have? They both call themselves doctors. The same applies in many professions, from attorneys to financial advisors. I prefer to use the veterinarian for their specialty and use the brain surgeon for the precious high valued life threatening brain surgeries. They are worth it. So be careful whom you take advice from, including me. I am not an expert on everything, only what I do well, and I am still learning. I focus on the ROTH IRA and don’t know much about all of the other SEP, self directed pensions, etc.

    I like the ROTH IRA because it is TAX FREE investing, not tax deferred, like the traditional IRA. I’ve had traditional IRAs since they were started and jumped on the bandwagon of the Roth IRA the year it was created and have been working it ever since. At that time, I had to pay regular income tax on funds transferred to the ROTH because I was taking “pre-tax” dollars and converted it to a TAX FREE program where contributions were made with After Tax Dollars. With the ROTH, all of the profit and gain from my investments would be Tax Free, not tax deferred.

    When I retired from the police department, I had a “deferred compensation program” allowing me to use dump pre-income tax wages into my choice of 6 or 7 mutual funds. This whole program tried to groom me mentally for retirement. They assumed I would become poor and have less income during retirement. Once retired, I was told I would make less money, and I could start receiving monthly disbursements from this program and treat it as “earned income” paying federal, state and local income tax. Ouch. This deferred compensation program had no way to move into any kind of an IRA. My choices were wait till I got old, or cash it out now as earned income. I chose the latter.

    In addition to this program, I had the good 20 years and out pension offered by the state. The only problem I had involved retiring early meaning I could start receiving payments at age 55 or cash it out now and pay taxes now. I did not like either choice. So I learned about choice number 3.

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    This was a two step process. I could rollover my pension to a traditional IRA and then “convert” it to a ROTH IRA and pay income taxes now. Remember, the pension and traditional IRA uses “pre-income tax” tax dollars to reduce your income NOW. If you have enough depreciation, odds are, your income tax is reduced significantly now. You need to plan and prepare properly for down the road when you run out of depreciation and jump into the high income tax bracket. All of the profit, if done properly, is TAX FREE in your ROTH IRA.

    Forget the word “Contribution” and focus on “Profit”. Many people and financial advisors are stuck on CONTRIBUTION. You must qualify initially to get  your ROTH IRA open. There is a minimum and a maximum income limit. You will find those limits in the enclosed Q&A. Your challenge is to Get It Open Now! If you make to much money and feel you can’t qualify to get it open, give me a call. You just need to qualify in one year to get one open with an initial contribution. The magic starts when you get your Roth IRA open.

    Once opened, you can begin to make your ROTH IRA part of your investment program! Do not be concerned about annual contributions and limits. Include working your IRA in your annual investing goals. My objective here is I can use my knowledge of real estate and drive my own IRA investments using real estate and get phenomenal returns.

    Here is my simple version of using a Self Directed ROTH IRA. Remember the movie Austin Powers and Mini-Me?

Your self directed ROTH IRA is your Mini-Me!

    There are basic simple rules to follow. You can not do business with Mini Me. Imagine your Mini-Me is running loose out there in the world. You are in a cage or up on a balcony giving instructions to Mini-Me. Mini-Me is not real bright and does not know how to read or write. This is where the 3^rd party helps out Mini-Me.

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    Your custodian for Mini-Me holds his hand and signs his paper work. This is the simple version and this is where we will start. You can’t do deals with Mini-Me. For example, if you own a property and you want to make it an IRA deal and sell it to Mini-Me, too late, you can’t do it. Mini-Me can’t do deals with your spouse, your children, or your parents etc. (You can do deals side by side with a percentage of ownership, you can’t transfer anything from you to Mini-Me.)

    It really helps to keep the mindset about giving instructions to Mini-Me’s custodian to make investments involving buying things and selling things. You use your knowledge of real estate to guide Mini-Me and let Mini-Me reap all of the profits TAX FREE.

    Before getting started, you must understand some of the risk involved. Nothing is guaranteed. Although you use your knowledge and give instructions to Mini-Me, you could lose money.

    Another risk involved in the real estate arena is the risk of ownership. If Mini-Me owns real estate occupied by tenants, Mini-Me is exposed to the risk of ownership and should have real good insurance in place. Do not confuse with some information learned from veterinarians who say IRA and pensions are protected from judgments. This is only true in the normal everyday world… stocks, bonds, etc. In this situation, Mini-Me becomes the Owner of the real estate and the tenant would sue the Owner, your IRA. Therefore, the risk of ownership goes with owning real estate.

    The other benefit lost is depreciation. Since the ROTH IRA does not have to file a tax return in most cases (UBTI, Unrelated Business Taxable Income is the exception) Mini-Me loses the benefit of the phantom expense of depreciation.

    The safest way in my opinion to grow your ROTH IRA is by allowing Mini-Me to be the LENDER in real estate deals; however, most folks start off with next to zero in their Roth IRA. Keep in mind, as you grow your Mini-Me account aggressively and quickly and it becomes large, you should avoid the risk of ownership and let Mini-Me be the lender. How often does a tenant slip and fall and sue the lender? Nope, they sue the owner.

    Be sure to join Cranking It 24-7. Members get the monthly mini-seminar designed specifically for real estate investors. You'll get valuable resources, tips, and strategies.\

The other courses are designed to get full time results with part time effort.

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The Roth IRA should be one of your most powerful investment tools. Used properly, you can grow your investments TAX FREE. It should be a major part of your investment plan.

A few months ago, a financial advisor invited me to lunch to discuss his unique investment opportunities. This was with a well known national company. He did a great job convincing me I could learn more about investing and get a free lunch.

To my surprise, the financial advisor brought an attorney from a local so-called investment practice. (My fuse was lit a little bit, but I was eating on their lunch dollar). These two proceeded to bombard me with their wonderful tax-deferred versions of 401ks, mutual funds, annuities and a limited assortment of in-house products, services, insurance, etc. making money for their company from fees charged to me.

After about 30 painful minutes of listening and biting my lip, I began to fire back. I listened to their pitch and disagreed with their program; but, I extended the courtesy to listen. After introducing them to the Self Directed ROTH IRA and the benefits, the stubborn attorney idiot flat told me it was illegal and you can not do these types of transactions. The financial advisor was listening and wanted to learn. The attorney was stubborn and refused to learn.

My point is to be careful about experts. Many people including financial advisors, attorneys and more, refuse to learn. They will make comments like “you can’t do that”, or “it is not allowed” or better yet, they may try to impress you with a 3 or 4 syllable words and say something like “it is a prohibitive transaction”. BOLONEY!! The company they work for allows them to only sell in house company products. They want to be labeled “experts” and give you a choice of 9 products to choose creating a WIN-WIN situation for the bank or institution they represent. You are left out.

Set up a ROTH IRA for yourself, your spouse, and your children. Promise yourself to put a deal into each ROTH IRA every year. With time, they will grow and probably perform better than most mutual funds.

Your ROTH IRA can purchase real estate, loan money on mortgages at great rates (15%-20%), purchase discounted notes and mortgages, buy and sell real estate. This is real. Take your killer deal of the year and make it a ROTH IRA deal. Now that is a home run! 

Roth Individual Retirement Account

Created in the summer of 1997, the Roth IRA is named after its creator, Senator Roth of Delaware. Like the Traditional Individual Retirement Account, the Roth IRA is a personal savings plan that offers tax advantages to set aside money for retirement.

Investments compound tax-deferred, but what makes it truly unique is that once an individual has reached 59 1/2 and his/her account is more than 5 years old, all withdrawals are TAX FREE.

What is meant by a self-directed IRA?

A self directed IRA is one that allows complete diversification which includes traditional investments such as stocks, bonds, and mutual funds, as well as real estate in your IRA, mortgages/deeds of trust IRAs, private placements, tax liens, and mobile homes.

A truly self-directed IRA allows Americans to use their knowledge and expertise to prepare not only for their future, but also their family's future. While some custodians claim to allow self direction, most only allow the proprietary investments such as CDs or an approved list of stocks, bonds and mutual funds. Truly passive custodians will allow clients to make their own investment decisions within a wide range of acceptable investments.

What are the advantages of a self directed IRA?

A self directed IRA allows you to use your knowledge and expertise to better plan for you and your family's future.

Who can establish an IRA?

     Every American is eligible for a Self Directed IRA. The only two requirements being that you have a social security number and that you have earned income.
     While every American is eligible, those with higher income may not contribute to certain Self Directed IRAs such as the Roth and they may not qualify for deductions that accompany contributions to certain Self Directed IRAs.

What is the difference between tax deferred and tax free?

A tax deferred account is one that is funded with pre-tax dollars, which means, in most cases, that you get a deduction for your contributions. When distributions are taken from the account those funds are taxed. Traditional, SEP, and SIMPLE IRAs are referred to as tax deferred accounts.

By contrast, a tax-free account is one that is funded with after tax dollars, which means that you do not receive a deduction for contributions. When distributions are taken, there are no taxes incurred in a tax-free account.

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Who is eligible for a Roth IRA?

Anyone who has earned income and falls within the MAGI (Modified Adjusted Gross Income) limits can establish a Roth IRA. Unlike the Traditional IRA, the Roth IRA has no age limit for contributions, so individuals can continue to contribute as long as they like. (Note: In a Traditional IRA, individuals can only contribute until age 70 1/2.)

How is earned income defined?

Earned income is defined as the salary or wages you receive as an employee. If you are self-employed, earned income is your net income for personal services performed. Passive income such as interest, dividends, and most rental income is not considered compensation for the purpose of funding an IRA.

What are the Modified Adjusted Gross Income (MAGI) limits for a Roth IRA?

* If you are single your MAGI must be less than $110,000.
* If you are married your MAGI must be less than $160,000.

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Can I make contributions for my non-working spouse?

Yes. This is referred to as a Spousal IRA. The spousal IRA allows a married person to make an IRA contribution for his/her spouse. A married couple can contribute up to 100% of their combined earned income or $6,000, whichever is less.

Can I convert my Traditional IRA to a Roth IRA?

Yes. But when you convert, taxes must be paid on the portion which is being converted.

Can rollover funds from 401k, 403b, SEP, SIMPLE and other retirement plans be placed into a Roth IRA?

Funds from other retirement plans can be placed into a Roth IRA. The funds must be first transferred to a Traditional IRA and then converted to a Roth IRA. When the conversion is made, taxes must be paid on the portion being converted. (Note: Each retirement plan is unique, so please consult with your plan administrator for fund withdrawal options.)

Do I pay taxes on earnings in my Roth IRA?

No. All earnings in a Roth IRA are Tax Free, because contributions are made with after-tax dollars.  The only requirements necessary to receive these benefits are that the IRA owner must have reached the age 59 1/2 and had their account established for at least 5 years.

When can I withdraw funds from my Roth IRA?

* Annual contributions can be taken out at any time with no tax.
* All other funds (i.e., earnings, conversion funds) can be taken out penalty-free if the account has been established for 5 years and the individual is over the age of 59 1/2. Non-contribution funds taken out without meeting these requirements are taxable and are subject to a 10% penalty.

Are there exceptions for premature distributions?

Yes. Some exceptions include:
* Medical expenses
* Disability
* Education
* First time home purchase
For a complete list of exemptions to the 59 1/2 premature distribution rule, please see IRS Publication 590

Am I required to take distributions from my Roth IRA?

No. Unlike the Traditional IRA, where distributions are required at the age of 70 1/2 , there are no mandatory distribution requirements for the Roth IRA.

What happens to my Roth IRA in the event of my death?

Your named beneficiary(ies) will receive the entire proceeds of the IRA. The manner in which your beneficiary(ies) will receive the funds is determined by the election made by your beneficiary within the guidelines of the law.

When is the contribution deadline for funding a Roth IRA?

Roth IRAs for the taxable year can be opened and/or funded anytime between January 1 and the date your tax return is due for the year, excluding extensions. The due date is always April 15 (plus extensions) of the following year.

Real Estate in Your IRA:

Utilize Your Knowledge and Expertise to Prepare for Your Future

Historically real estate has provided many Americans with a stable investment vehicle that provides both income and appreciation. One of the greatest tools available to real estate investors are government sponsored retirement plans.

Very few Americans realize that they have the option to self direct their IRAs and other retirement plans into real estate. Most investors believe that there only IRA investment options are bank CDs or the stock market.

If you currently are a successful real estate investor or just looking to diversify your retirement portfolio the combination of real estate and your IRA can be very powerful.

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“Invest with knowledge, expertise and comfort”

The specific advantage real estate IRAs hold for real estate investors is the fact that they can take investments where they are successful (and comfortable) with and apply that knowledge to their IRAs and other retirement plans.

Here is a partial list of real estate investments that can make within your IRA.

• Raw land
• Single family homes
• Apartments
• Mobile Homes
• Commercial Property
• Real Estate Notes
• Mortgages
• Tax Liens

Your Rates of Return Are Based on Your Knowledge and Expertise
When you combine the advantages of an IRA with your knowledge of real estate you have the ability compound investments tax deferred/free.

The rates of return on your investments are based on your knowledge and expertise in real estate, not the ups and downs of the stock market.

What kind of wealth can be created for you and your family?

Why haven’t I heard of this before?

Because most custodians do not offer truly self directed IRAs. They will only allow you to invest in their approved list of investment options. If you have an IRA at a bank, you will probably be limited to CDs and if at a brokerage firm, stocks, bonds and mutual funds.
 

Are there any downsides?

There are not any downsides per se other than the fact that there certain types of transactions that you can not enact through an IRA. For the most part these prohibited transactions have to do with what is called “self dealing”. Basically these rules prohibit your IRA from making an investment into a property where you or your relatives have prior ownership.

Additionally no investment (outside of FDIC insured deposits) is guaranteed. And real estate investing is not for everyone. However most successful real estate investors feel that investment risk associated with real estate is much less than that of investing solely in the stock market.

You are in Complete Control

The most important thing to remember is that when you use a truly self- directed IRA the type of investments you make will be the exact same kind you are making presently. The only difference is that you will be making them in a tax deferred/free environment.

A truly self directed IRA program puts you in the drivers seat.

How can I learn more?

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How do I get Started?

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I plan on purchasing a property with my IRA that will generate rental income.
Does the rental income have to go back to my IRA?

Yes, all income generated by a property owned by your IRA must return to your IRA, in order to retain the tax deferred or tax free status of the investment.

How does the rental income actually get back into my account?

Rental payments are remitted to the custodian Trust for the benefit of your IRA. The checks or money orders are made payable to "Custodian. FBO Your Name IRA #xxxxx. Once received, the checks or money orders are deposited into your account. All checks must be remitted with a payment coupon.

Checks may be mailed directly to your custodian, or they can be mailed to the property manager for record-keeping purposes before being forwarded to your custodian. If several checks are to be remitted per month, mailing them in one envelope will save time and postage but they must include a separate payment coupon for each check.

Please note: As the investment is owned by the IRA all rental checks must be made out to the IRA with proper titling “ Company Custodian FBO Your Name IRA.

Don't worry about contributions!
Be concerned with getting it open and Start Cranking It!

                        Mike Butler

JUMP START  Your IRA in 14 Days!
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