Learn to Become a More Profitable Investor! Real Estate & IRAs Don t Miss Out

Transcription

1 Learn to Become a More Profitable Investor! Real Estate & IRAs Don t Miss Out By Rich & Jeff Desich Most real estate investors aren t aware that they can use retirement savings, such as IRAs, 401(K) and other qualified plans, to invest in real estate. More importantly, they don t fully understand the incredible wealth- building powers these plans hold. Any IRA invested in low interest CDs or government bonds will grow exponentially due to the tax-deferred or tax-free status that IRAs possess. But what makes this tool so much more powerful to real estate investors, is the fact that they are able to achieve substantially greater returns than most stocks or mutual funds through their current real estate investing strategies. When you combine the powers of an IRA with the knowledge and incredible returns of a real estate entrepreneur, you create a situation capable of tremendous growth. By creating, transferring, or rolling over a 401(K), to a self-directed IRA, you will have complete control on how these funds are going to be invested. In fact you can use your current investing style to invest your retirement savings. Imagine being able to complete real estate transactions almost exactly as you are currently doing them, but gaining the added advantages IRAs and their tax-deferred/free status offer. As I mentioned, an IRA is one of the most powerful wealth-building tools available to real estate investors. But why is this? What can an IRA offer that your present investing strategies cannot? Throughout this article we will cover these points step by step. As you will soon see, an IRA can offer real estate investors much more than just a way to save for your retirement. 1. The Power of Tax-Deferred Compounding Interest One of the greatest features of the IRA is that it allows investors to enjoy the true power of tax-deferred compounding interest. What is compound interest? Compound interest is basically interest on interest. For example, when you make an investment and receive a return, you are able to enjoy interest on both the investment principle and the earnings you have accumulated. The additional interest you made on your profits is compound interest. Compounding can occur with any investment you make, but the true power of compounding is obtained when you make an investment in a tax-deferred environment. By taking advantage of an IRAs tax-deferred status, you do not have to pay tax immediately on the earnings. Thus you are able to enjoy the power of compounding

2 on all of your profit and not just that which is left after tax. Let s look at an example which will illustrate the power of a tax-deferred environment. The Most Powerful Force on Earth is Compounding Interest -Albert Einstein In this example we have a man who is 35 years old and contributes $2,000 annually to his traditional IRA, until the age of 65. These thirty contributions total $60,000. Assuming a 10% annual rate of return, the individual s IRA at 65 will be worth approximately $400,275. Now, let s look at the same investment made without the IRA s tax deferred environment. We will use the same assumptions as above, except the individual s investments would be subject to a 28%annual tax rate. The total value of the account would be just $227,220. A loss of over $170,000! $400, $350, $300, $250, $200, $150, $100, $50, $ Tax Deferred Taxable With the Roth You Will Never Pay Income Tax Remember, this example was based on a traditional IRA. A traditional IRA is funded with before-tax dollars which, in most cases, is tax deductible. To increase this power one step further, an individual could invest using a Roth IRA. With the Roth, contributions are made with after-tax dollars so you don t receive a deduction, BUT your earning will not be taxed when you make a qualified distribution. Imagine making the same deals you are currently making, but receiving your profits tax-deferred or tax-free! All by just using your IRA to invest.

3 2. Reduce your Taxable Income In addition to letting investors experience the true power of compound interest, many IRAs can reduce your taxable income. As we have mentioned before, in most cases contributions to a Traditional IRA may be tax deductible. If you are interested in receiving greater deductions, as well as contributing more than $2,000 to an IRA, a SIMPLE or SEP IRA might be right for you. With these plans real estate investors can contribute up to $25,500 annually to their IRAs. Let s look at an example of how a family could considerably lower its taxable income utilizing IRAs. For more information on these accounts, or any topic in this article, please visit The Smiths are a family of four living in the Midwest. John Smith has a business, which rehabs houses and then resells them. He employs his wife and their two children. Between the four of them the family has a $70,000 annual income. In order to maximize their contributions to an IRA and lower their taxable income, they have chosen to have both a traditional IRA and a SIMPLE. Smith Family $70,000 Combined Annual Income John Son Annual Income $25, Annual Income $10, SIMPLE $(6,000.00) SIMPLE $(6,000.00) Traditional $(2,000.00) Traditional $(2,000.00) Taxable Income $17, Taxable Income $2, Wife Daughter Annual Income $25, Annual Income $10, SIMPLE $(6,000.00) SIMPLE $(6,000.00) Traditional $(2,000.00) Traditional $(2,000.00) Taxable Income $17, Taxable Income $2, Total Family Taxable Income $38, Total Amount Contributed To IRAs $32, By utilizing multiple IRAs, the Smith family has been effectively able to lower its taxable income by 54%. More importantly, the family has an IRA contribution of $32,000. Now that they have these funds available, in the tax-deferred environment of an IRA, the Smiths can optimize their real estate investing strategies.

4 3. Gives You Asset Protection Unlike qualified plans, IRA regulations pertaining to asset protection are created at the state level. In most states IRAs have considerable protection against most creditors (excluding the IRS and your Spouse). For more information on this subject, it would be advisable to research the regulations which apply to you in your own state. 4. Provides a Great Estate Planning Tool Most investors are attracted to the immediate advantages an IRA offers such as tax-deferred/free compounding and the ability to reduce their taxable income. What they don t realize is that IRAs are excellent tools for planning the future. Whether it be you have a newborn in the family and would like to give them a head start or you are enjoying your retirement and you would like to plan your estate, IRAs offer extreme advantages. In order to illustrate these benefits we have two examples. Who Wants To Be a Millionaire? In this example, we will show you how you can make your child or grandchild a millionaire with just $2,000. The numbers don t lie; if you contribute just $2,000 at age one to his/her Roth IRA and achieve an annual rate of return of 10%, the account at age 65 will be worth $1,078,000 Income Tax Free! $1,200, $1,000, % Return Value $800, $600, $400, $200, $- 10% Return Years

5 What Type of Returns do you Make in Real Estate? 10%, 20%, 30%? In our second example we will show you how structuring your IRA correctly can leave your loved ones with a considerable amount of money. In this example a grandfather has left his 12-year-old granddaughter with a Roth IRA valued at $300,000. By achieving an 8% annual return and taking just the minimum annual distributions, this IRA will be worth almost $12,00,000 over her lifetime. Because the granddaughter was the beneficiary of the Roth IRA, she is required to take the money out over her life expectancy. The chart below illustrates what the minimum required distributions would be over her lifetime. Remember, if she wanted to, she could withdraw all of the funds at anytime. 12 Years Old - Life Expectancy = Years First Year Min. Required Distribution $4, Age Min. Req. Dist. Age Min. Req. Dist. 12 $4, $77, $7, $161, $17, $421, $36, $1,164, Total Distributions = $11,975,293 Why haven t I heard of this before? The reason most real estate investors don t know this opportunity exists is because most IRA custodians do not offer truly self-directed IRAs. Often times if you ask your current custodian/trustee, Can I invest my retirement funds in real estate? they will say, You can t do that, that is not allowed. They mean you can t do that at their financial institution. These Custodians/Trustees will only allow you to invest your funds only in their approved list of investments such as CDs, Stocks, and Mutual Funds. Equity Trust Company allows its clients to invest in all forms of real estate as well as any other investments not prohibited by the Internal Revenue Service.

6 With a Equuity Trust Company Self-Directed IRA you can invest in: Single family homes Apartments Commercial property Mobile homes Raw land Mortgages Real estate notes Tax liens And more With Equity Trust Company - You are in the Driver s Seat: Your Deals, Your Profits The most important point to take from this article is the fact that with a Equity Trust Company Self- Directed IRA you will be able to execute the exact same deals you are currently making but with your IRA. ETC s staff understands the type of investments you are making and is there to help you along the way. We specialize in real estate, and we have helped thousands of investors just like you. As you will see, investing in real estate with your IRA can be a simple process. It will allow you to combine your understanding and expertise of real estate investing with: The power of compound interest The ability to reduce your taxable income Asset protection Estate planning advantages Take control of your future and let Equity Trust Company help you begin to take advantage of the many benefits a self-directed IRA has to offer. For more information on any topic we have discussed in this article or information about IRAs in general, please visit our web site at About the Authors Richard and Jeffery Desich are both registered principals with Equity Trust Company and are actively involved in real estate and the financial service industry. Equity Trust Company is an IRA custodian which allows clients to self direct their retirement funds into investments such as real estate, notes, limited partnerships, private placements and other non publicly traded assets. An IRS approved custodian, Equity Trust Company services thousands of individual IRAs and small business retirement plans in all 50 states. For more information please visit Equity Trust Company web site at