- October 29, 2019
- Posted by: august19
- Category: Podcast
Everyone hustles while they’re young in preparation for retirement, to ensure that they spend the latter years in comfort. One option we have is the IRA, but not everyone understands what it is or what it can do. Gail Anthony Greenberg and Chris Seveney shed some light on what the IRA is. They give an overview of the different types and defines their differences in a way that we can easily understand and remember, all the while providing real-life examples of its applications. In this episode, they cover the different ways you can invest your IRA in the note business to establish your future as early as possible. They also discuss the technicalities you need to watch out for when dealing with IRAs to make sure you don’t end up with the short end of the stick.
Listen to the podcast here:
IRA: What It Is And Why You Should Get One
How are you, Chris?
I am wonderful, Gail. What is our topic for our wonderful audience?
We should talk about IRAs because our first episode had quite a bit about IRAs in it. I find that not everybody has read and internalized the lessons. We have someone in our fund who is a young guy. He makes a great living and he called me twice to talk about IRAs because he definitely has the feeling that everybody in our fund is using their IRA and they’re using it like a ninja. It’s like they’re advanced in their understanding and their mastery of IRAs. He feels like he’s missed the boat on this. Even though he’s young, he’s like kicking himself because he didn’t start a Roth IRA several years ago when he was twelve or whatever. There are lots of things that people ask about IRAs. If you don’t mind me tossing out the first topic, one of the biggest things that people wonder is Roth versus non-Roth. What difference does it make? Do you have thoughts about that because I certainly do?
I’m not an expert in the whole IRA realms. I understand them probably enough to get myself in trouble. I don’t have an IRA. I have a solo 401(k). We can talk about that later because of some of the profits that I’m making this year and making sure how can I put some of those into the 401(k) and understanding it. I digress like usual, but Gail, why don’t you educate us all on the difference between a Roth and a conventional IRA.
Since you were good about giving the proper disclaimers, I will do the same. I too am not an expert on IRAs. I do pretend to be one in my life. That’s why we’re here talking about it. What I know is what I have been educated about by my own IRA custodians and the attorney who set up my Roth IRA. As you know, I have two checkbook IRAs, checkbook control, they are sometimes called. What that boils down to is that instead of having an account at a custodian like Avant, Quest, CamaPlan, those people holding onto my money, that’s the big difference between having checkbook control and a classic custodian account. It’s like who’s got the money and who gets to do things without consulting someone.
When you have a custodian account, they’ve got your money and any deal you want to do. You have to submit the paperwork, get them to sign off on it and disperse the funds to you so that you can do it or disperse the funds directly to a vendor. I have total control. I have a custodian who keeps track of the reporting requirements for the IRS, but they don’t have anything to do with my deals. They don’t know what I’m doing. I’ve digressed because the question was Roth versus non-Roth. A Roth IRA, when they first were introduced, it was like, “Everybody, here’s an IRA where you can pay the taxes when you put the money in.” We all went like “What?” The whole advantage of an IRA since the very beginning was you put the money in and you don’t pay any taxes.
Presumably, you pay the taxes when you’re a little old person taking out the money and you aren’t earning an income anymore. Your tax bracket is much lower. Even though the money that comes out of it as a distribution to you is treated as income. In theory, you don’t have a lot of income at that point. It’s not a big deal to pay the taxes on it. A Roth on the other hand flips it around. With a Roth, you pay the taxes when you’re putting the money in. You don’t pay the money when you take the taxes. You don’t pay taxes when you take the money out. Why is this a good idea? If you are someone who is only going to do very modest things with your IRA, and your IRA is only going to grow a little bit over time, it may not make sense for you to do a Roth and to pay all the taxes upfront.
If you are someone who knows how to take a small amount of money in an IRA and grow it very large, you absolutely want to have a Roth IRA. I’ll give you an example of something that happens to me. My Roth initially had about $50,000 in it, when I first got it going. The very first contract for the deed I bought was the one in Flint, Michigan. I bought it for $15,000. After owning it for nine weeks, the house burned down and I got a total payoff of $42,000. Within a very short period of time, I got a $27,000 profit on a deal in my Roth. That $27,000, which is the $42,000 minus my $15,000 investment, that windfall is never going to be taxed ever. I’ve turned around and done other things with that money.If you’re someone planning to grow your IRA in a large scale, you’d absolutely want to have a Roth IRA. Click To Tweet
The thing is it’s not the advantage for you to be able to be retired. Take money out of your retirement account the way you always dreamed of to support yourself. You will never pay taxes. You don’t even worry about what the tax code is going to be or the tax rate is going to be when you’re old. The other incredible beauty about it that I don’t think any of us thought about is that when your kids or whoever is inheriting from you inherits a Roth IRA from you, they don’t have to pay any taxes either on the money that comes out of it. This becomes a powerful tool to build tax-free generational wealth. For them, they can pass it down to their kids too.
It certainly during their lifetime, their kids can get the benefit of it. You can even put their kids on as beneficiaries. It’s pretty amazing. You and I have a friend, that sounds a little sad and gloomy, but if he’s aware of someone who is nearing the end of their life, say an elderly person or it might not be an elderly person. He will see if they’re interested in setting up a Roth IRA and funding it. They’re letting him put a bunch of people on as beneficiaries so that they can inherit it when the person passes. In return for doing that, he compensates the dying person.
That’s often a very meaningful and helpful thing to get a bunch of cash at a later stage. The reason that’s powerful is you can sign up your child to be a beneficiary on someone’s Roth IRA. When you inherit it, you have all this ability to do all these transactions in it, build it up and have all that tax-free capacity where you don’t have to pay taxes. You have to know how to take a small amount of money and grow it in the IRA. I figure anyone who tunes into our show either already knows how to do that or is definitely going to learn how to do that.
One of the questions that people still do ask is, how to grow it? I still got that question that’s asked a lot. I’ve got an IRA. What type of investments should I be investing in? Should I do a JV? Should I buy a note of my own? Should I invest in a fund? Should I buy a partial? I hear that a lot from people still. I’m curious about what your advice would be for somebody.
I am about to go down to see Walter Wilford in Jackson, Mississippi who does a seminar on this very topic. I’m going at the beginning of December 2019. If it’s too late for you to sign up and you’re interested, he repeats them often. The classic way to do it is to buy an option on something for a small amount of money. Let’s say you find a motivated seller who wants to sell his house and you buy an option on it to buy the house for $50,000. You pay $100 for the option to buy it for $50,000. You go find somebody who is willing to buy for $60,000. You can, in theory, do a double close where your IRA is buying that property for $50,000 and reselling it for $60,000 at the same closing table. All that’s going to happen is that your buyer with the $60,000 is going to give the title company their $60,000 and you don’t even have to come up with the $50,000. You paid whatever you paid for the option. There has been a discussion on our Facebook group about whether these types of transactions are legal in an IRA.
I hear that a lot. I’m curious how many people are doing that, getting a property under an option and turned around and trying to sell it to somebody. It’s one of those things that it’s similar to when you hear people say, “I found a bank to hypothecate my note. I found a bank that’s selling notes.” You always hear people talk about it, but when I ask people, “Show me one example where somebody has physically done it,” I cannot find anyone. If somebody’s reading who has physically done it, please reach out to me.
Show us many pages of evidence that you did it. Let’s bring it back to note world. There was an occasion where a tape came out and you happen to be out of commission for some reason. It’s because you were at the bedside of your beloved mother when she was having surgery. I mentioned this detail because it was a rare occasion where I got the first crack at something. You weren’t available and it was truly awesome. It was a contract for deed tape, all performing. I didn’t know at the time. I did what I usually do. I identified once I was interested in. I immediately made offers and I made low ball offers because this particular seller will always counter unless you’re ridiculous. I always go low because I don’t know what they want.
Amazingly they accepted some of them and they countered not very high on some others. It was like, “Holy smokes.” This was a situation where they were performers. They’ve been performing solidly for a while and I was getting them at an incredible price. Rather than keep them, I thought I can resell them at a 15% yield and make a very nice bump. In this case, what I could have done was find buyers for them, it was not difficult at all to find buyers for them. Collect those people’s money and use their money to purchase them from the seller. I didn’t do that because I did have enough cash to buy them in my IRA so I did. Particularly, if you’ve done what we’ve done, which is to take the time to build relationships with people where they interacting with you, trading with you and dealing with you. There’s no question in my mind. I could have called a couple of people if I hadn’t had the cash and I could have said, “I can sell these to you. I need your money like now.”
That’s still a double close though.
It’s almost like flipping a note, but it wasn’t. It would have been if I had used their money.
Would you give different advice to somebody who has $10,000 versus $50,000 and want to be passive? Because I would, in the sense, if somebody had $10,000 to invest, I would say don’t do a JV deal with somebody, get into a part where you can buy a partial, get that growing for a period of time and continue to contribute. When it gets to a point, maybe either go to a JV deal or to a fund, if you’ve got $50,000, that does give you more flexibility where you could JV with somebody or put in a fund. One of the things I’ll ask the question to you is, because this comes up a lot and there’s another debate of, can you manage your own assets in an IRA?
I don’t want to abandon the topic of what to do with a few hundred dollars though. Let’s circle back to that. Every time that I have flipped a note or done something like that, it didn’t start out that way. I didn’t go looking for it, but when the opportunity presented itself, I recognized it. That’s a big thing because a lot of us go into all of these transactions. When I was looking at that tape, I wasn’t thinking, is there anything on here I can get cheap enough that it’s flippable for me. My thought was I would buy them and do a partial or I’d buy them and keep them or whatever.
When they accepted my low prices that was when it went like a little bell went off in my head. This is an opportunity to do something quick and bump up my IRA. I had the cash and I did it. I had $80,000 that I bought those for. Let’s talk about what if you have $300. There was another case when I was very new in this business. I was looking for a note. I saw a very low-price note on FCIs portal. It was only a $7,000 note. It was in New Orleans, which I had a fantasy, “Let me buy this note and feel like I own something in New Orleans.” The seller wanted some ridiculous prices. It was a $7,000 UPB.
It was a note. You would have to foreclose to get the property. With such a low UPB, there’s no way you would get the property. You would have a big legal bill and you probably wouldn’t even break even. He wanted $5,000 to $6,000 for this thing, but that’s FCI. They’re old, exchange. It used to have lots of people like that on it, unrealistic sellers. The guy didn’t sell it to me. I was annoyed about it. I did a skip trace on the borrower. I looked her up. It made me wonder, why is someone delinquent on a note with such a low balance? I thought, “Let me find this lady and see what’s going on with her.”
I did find her. In fact, the property was under contract to be sold to someone. It was an abandoned house that had been damaged in Katrina, but it was in a hot neighborhood. It was in Treme, which as you know from the series is a big deal. This guy had it on a contract and he couldn’t close. She reached the end of the rope. I did not put that under. I did not buy an option on that. I should have because the guy who I flipped the deal to a friend who was a realtor and he ended up making $60,000 selling the property to a developer who turned it into two building lots. My friend turned it into two building lots.
She wanted $100,000. It was worth easily well more than that, but I didn’t know the area well enough to know. I should have researched it, figured out generally what a building lot in that area would be worth. I could have put it under it. I could have bought an option on it and flipped it to the same guy I did flip it to. Only instead of him making all the money, I would have made it. It would probably only cost me $100. To me, it’s not that these deals don’t exist. Are we all going to stop what we’re doing and go look for this deal? Probably not.Take the time to build relationships with people until they interact, trade, and deal with you. Click To Tweet
If I had $100 in IRA, I want to turn it into something. I would carve out time to be looking for deals where I could do an option. There are people who buy pretty houses. If you can learn a few tricks of the trade to sell a house retail, if you buy an option on it, a lot of people don’t know this. You are allowed, even though houses can only be sold by realtors or the owners. If you buy an option on it, you have an equitable interest and you are an owner at that point so you can sell that house. If you are someone who for example knows how to put up a listing on the MLS, which you can do now, you don’t have to be a realtor to do that and you sell a house for somebody.
I’ve done this several times for friends. Where I’ve gotten an option on their house and sold it. I don’t charge them. The option is a legality so that I can help them sell their own house. There are myriad of people who can’t sell their own house because they don’t know what they’re doing. Mostly, they don’t know they can put it up on the MLS and that’s where all the action is in selling house retail. If somebody doesn’t know that and you come along and you’re like, “Give me an option at your house and I will sell it for you,” you can do that.
I’m the skeptic on some of that. The other thing too is a lot of times the people who have like $100 also know nothing about notes and they like, “I’m going to go find a note.”
We’re not talking about those people. We’re talking to our audience who for the most part are pretty serious about learning this business and being ninjas themselves. They are not going to be flaky about it. They’re going to be like, “Let me learn a few techniques that if I run across an opportunity, I’m going to know what I’m looking at. I’m going to know how to do it. I can take a little bit of money and turn it into a bunch of money. You have to be willing to learn something to be able to turn a little bit of money into a lot of money.
The only thing I always make sure that people also understand is you don’t want to buy ten assets with only $3,000 in your name, hoping that you can turn around. You don’t want to get them under agreement and be like, “Now I got to go hunt the money” and not find the money to have somebody on the other end and go back to the seller and be like, “I can’t buy it.”
If you have a small dollar IRA you can also partner with someone, but in theory, you can’t put in $200 and they put in $50,000 and you split it 50/50. That’s not legal.
It’s got to be the percentage of who put what in.
We should probably table it until I go to that seminar and I’ll come back with a few more better ideas. Let’s talk about IRAs in general. I hope everyone understands this is why you have a Roth.
One of the things I want to mention about IRAs because I’ve run into this is if you are investing in a deal with an IRA, let the sponsor know upfront. There’s paperwork you’re going to have to fill out. The other thing, with the fund we put together, people filled out the paperwork, putting their name and all their information down only to get it funded with their IRA. I’m now chasing down on some of that information to make sure it’s correct. When somebody fills out a subscription agreement in your name and I hand that to the accountant, when it gets audited and so forth or my bookkeeper, when they issue your 1099, guess what it’s going off of? They have no clue where your money came from. That’s what the form you filled out. If you fill up a form that said, “I’m John Doe, Quest Trust IRA for benefit of John Doe,” you’re going to be in for a rude awakening.
Can you change that after the fact? You are trying to change it now. How long you have to change it?
It’s making sure the paperwork is proper and in order. When I spoke to an attorney and stuff, something like that, it’s not an issue. If you close the fund and start taking more people to put in a fund, that’s a whole different issue. If it’s something that the person funded it from Bank Account A versus Bank Account B, I’ve been advised that’s not a concern.
Here’s another thing about Roth IRAs versus traditional. With a Roth IRA, it’s not completely like you don’t have to pay any fees. You have to have a Roth IRA open for five years and be at least 59.5 to be able to take distributions out, tax-free. You can at any time take back the amount you put in. Let’s say you put $50,000 into a Roth IRA and pay the taxes on it, which I have to say, you can’t out of your earnings put $50,000 in. You can only rollover from a traditional IRA $50,000. There are normal contribution rules for a Roth IRA is that are the same as traditional IRAs. You can only put in whatever it is, $5,500, $6,500. It’s $5,500 if you’re younger than 59.5 and it’s $6,500 a year if you’re over 59.5.
This is a real moment to say I’m not an expert because I don’t know these numbers. Last time I checked it was something like that. If you are rolling or if you’re converting money from a traditional IRA to a Roth, you can convert any amount you want. You have to count that money as income in that year and pay the taxes on it. Once that money is in the Roth, you have converted $50,000 and put it in there. If for some reason you have to take it out, you can take it out without penalty if you’re at least 59.5 or the Roth has been open for five years. You can take out your initial contribution as long as you’re 59.5 without it having to be open for five years. If you’re taking back some portion of that $50,000 or up to that $50,000, but if it’s made money and now it’s worth $75,000 instead of $50,000, you can’t take out like that first dollar over $50,000. You would have to pay a penalty on if your Roth is less than five years old. I made that confusing, but you can take back what you put in, but you can’t take as new money that it earned.
Who are the companies that you’ve worked with from an IRA? Because if some of our audience is still searching for an IRA fund, who are some that you have worked with from dealings with a funding source that you’ve had decent luck with?
Initially, with the checkbook IRA, you still have a custodian because they do the accounting and they do the reporting to the IRS for you. They report any rollovers, contributions, distributions and the value once a year of your IRA. I started out with IRA Services Inc. out in California. I was not particularly impressed with them. I switched to Kingdom Trust and I never appreciated IRA Services more than when I was using Kingdom Trust. I heard good things about them. Not only did I move my money there, but I encouraged my husband to start a Roth IRA there. It was a nightmare without end. I am now moving everything to CamaPlan, which is in Ambler, Pennsylvania so that twenty minutes from my house. I don’t know that there will be better. My recommendation is to pick someone as close as possible because you’re going to want to go over there and strangle them at some point and you need it to be conveniently close. I remembered the one other thing that I wanted to say about inherited like the Roth and a traditional when you inherit.
When you inherit a traditional IRA, if the person you’re inheriting it from was taking distributions, you will have to keep taking distributions too, which is sad because you can deplete it. It’s based on your age and the size of the IRA. If you inherit a Roth IRA, you never have to take distributions if you don’t want to, just keep the money in there growing, rocking and rolling. It’s like a cash machine. Go Roth IRAs. I hope at least I feel like we covered a lot and not in a way that was very easy to follow in this. This is the takeaway. Get a Roth IRA and I would love for you to talk on the next one about a solo 401(k) because that’s something I don’t know anything about. I have wondered if I should have one.
We can absolutely talk about that on the next one. Any final thoughts, Gail?
Thanks, everyone, for being with us. Please keep in touch. Keep those great reviews coming. Let us know what topics you would like us to cover. Go out and do some good deeds.
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