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The IRS allows us to use our IRA's and 401K's to invest
in Real Estate and if set up in the right manner with
the correct safeguards and controls in place Investments
Clubs could hold a lot of advantages to the small
investor. Investment Clubs allows you to take part in
deals that would otherwise be out of reach. Over the
last few years a great many very successful clubs have
been formed all over the U.S.
Many of these clubs were formed with five or less
people, normally family or friends. Most with less than
two thousand dollars but with all the members agreeing
to deposit a set amount every month to build up the
funds.
A lot of Americans have two or more 401K plans from
companies they have left over the years, the plans are
normally small, less than $2000 but put together in one
joint Investment Club can become a great starting block
for the club.
"In America there are two tax systems, one for
the informed and one for the uninformed. Both systems
are legal."
One of America's most famous jurists, Justice Learned
Hand made this statement over forty years ago. When used
today one would certainly have to include the world of
Individual Retirement Accounts (IRA). The point I am
making here is, we all need to keep ourselves informed
about what IRA alternatives are available to us, being
uniformed about these IRA alternatives almost certainly
means we are not taking full advantage of the
opportunity to get much safer and higher returns than
you could ever hope to get through stocks, shares or
mutual funds.
Your Broker Doesn't Want You to Know This!
There are a great many incredible wealth-building
opportunities offered by your IRA and 401K's this
includes their ability to buy real estate Tax Lien
Certificates, Tax Deeds and Mortgage Notes. The vast
majority of Americans since 1974 unfortunately have sat
back opting instead to take the easy more passive
position. They have allowed their IRAs and 401K s to be
directed by someone else, the friendly Broker and their
Wall Street affiliates. This easy going very passive
approach "let someone else do it for me" attitude may
well have continued forever had it not been for the Wall
Street crash of early 2000 With more than a trillion
dollars lost in IRA and 401K equity alone, it challenged
the way we viewed Wall Street. Millions of Americans
lost even more trillions in non IRA, 401K accounts.
The vast majority of Americans since 1974
unfortunately have sat back opting instead to take a
more passive position. They have allowed their IRAs to
be directed by someone else, namely their Broker, Wall
Street and its affiliates.
This very passive "let someone else do it for me"
attitude may well have continued forever had it not been
for the Wall Street debacle of early 2000 that
challenged this laissez-faire posture. An estimated
trillion dollars plus were lost in IRA equity alone,
millions of Americans lost even more trillions in non
IRA accounts.
If you had used your IRA to purchase Real Estate
Tax Lien Certificates, Tax Deeds or Mortgage Notes
For most Americans the difference with current anemic
IRAs would be truly alarming. The clear fact is if
Americans had known back in 1974 that their IRAs could
be used to purchase real estate Tax Lien Certificates,
Tax Deeds and Notes, millions of baby boomers would
today be retiring with vast sums of cash and assets
inside of their IRAs and 401Ks.
The clear fact is if Americans had known back in 1974
that their IRAs could be used to purchase real estate
Tax Lien Certificates and Tax Deeds, millions of baby
boomers would today be retiring with vast sums of cash
and assets inside of their IRAs.
Let's do a few very simple comparisons...
NASDAQ reported on March 10, 2005 that it had risen
to 59% of what it was five years earlier! $100,000.00
invested in NASDAQ in 1999 would now be worth something
like $59,000.00. That's very sad but it's where
most Americans are today.
If you had put $5000 into a CD with a local bank in
1975 and secured a 6.02% interest rate and left it there
for 30 years you would now be collecting $29,541 a
little better but still not great.
If you had purchased Tax Liens Certificates at the
following Rates for 30 years this is what you would have
collected:
In AZ $5000 @ 16% for 30 years $429.249
In FL $5000 @ 18% for 30 years $716,853
In IA $5000 @ 24% for 30 years $5,120,000
How many banks are still paying 6% on CD's NONE,
the rate today is around 4%, $5,120,000 from Tax Lien
Certificates or $29,541 from a CD or a lost of $41,000
on NASDAQ which one would you choose?
Your Self-Directed IRA Can Set You Free
$5,120,000 from Tax Lien Certificates or $29,541 from
a CD or a lost of $41,000 on NASDAQ which one would you
choose?
Magazine, newspaper and television advertising
campaigns have created the illusion to millions of
Americans that those Wall Street products were the only
financial products you could buy. This is not the fact
and as outlined above Wall Street has not preformed well
over the last 30 years.
Real Estate has always been a safe investment for the
"informed" and with Tax Lien Certificates, Tax Deeds and
Notes your retirement dollars are secured by Real
Estate. Real Estate has out preformed everything over
the last 30 years by a very long way.
IRAs in general have over ninety percent of their
funds in financial products. This may well lead you to
ask "Why". Are the Wall Street financial products
superior to real estate?" No, here are some quotes from
the financial media.
"... since the major housing organizations began
keeping records in the 1960s, there has never been a
year in which the average existing U.S. residence lost
value. Not a one."
FORTUNE Magazine, August 12,2002
"Twenty-eight states haven't had a down year for
real estate since 1990. 11 haven't since 1985. What's
more, from 1985 through the first quarter of 2002, five
states in the Rustbelt-Illinois, Indiana, Michigan,
Ohio, Wisconsin-have never even had a single down
quarter. Name a Mutual Fund that has produced 69
straight positive quarterly returns."
FORTUNE Magazine, August 12,2002
"It is striking that after the longest, strongest
bull market in history, the average American built more
wealth owning a home than investing in the stock
market."
Denver Post, March 14,2002
After reading these quotes, it really is hard to
understand why IRAs are not 90% real estate versus 10%
Wall Street products. Their very effective marketing has
really made all the difference, Wall Street has
out-marketed and out spent the real estate markets and
as such has succeeded in capturing the trillions of IRA
and 401K dollars available. It really is as simple as
that.
The History of IRA's
Employee Retirement Income Security Act (ERISA)
was enacted by Congress in 1974. President Ford
signed it into law later that same year.
ERISA: The main aim of the act was to correct
the abuse of mismanaged private pension plans. Some
would say that the mismanagement still prevails today.
ERISA: Designed to move the responsibility of
retirement savings and investing for an individual's
retirement plan from the employer to the employee.
ERISA: The main purpose of the act had a
very simple objective: to encourage the average
working American to invest money during their working
lifetime by moving pre-tax dollars into an IRA. The
IRS calculated that a taxpayer's IRA would be entirely
depleted by the time he or she expired. This also
meant that the IRS would have taxed all of the
distributions that were put into the IRA tax free.
When Congress passed ERISA it unfortunately
neglected to provide any guidelines to protect an
extremely naive public regarding these investments.
What Is An IRA?
To keep it simple an IRA is a personal savings plan
that allows you to receive individual tax incentives to
set aside earnings for your retirement. Your IRA is a
trust or custodial account which must be established in
the United States for the exclusive benefit of you or
your beneficiaries. The IRA account is created by a
written document that must meet the following
requirements: (See IRC 408,408a and 530).
The IRA account is created by a written document that
must meet the following requirements: (See IRC 408,408a
and 530).
- The trustee or custodian must be a bank, a
federally insured credit union, a savings and loan
association or an entity approved by the IRS to act as
a trustee or custodian.
- The trustee or custodian generally cannot accept
contributions of more than the statutory limits
established by the IRS.
- Contributions, except for rollover contributions,
must be made in cash.
- Money in your IRA account cannot be used to buy a
life insurance policy.
- Assets in your IRA account cannot be combined with
other property, except in a common trust fund or
common investment fund.
- You must begin to receive distributions by April 1
of the year following the year you reach the age of
70.
There are five basic individual retirement plans plus
one additional plan that covers Education.
- Traditional
- ROTH
- SEP (Simplified Employee Pension)
- SIMPLE (Savings Incentive Match Plan for
Employees)
- Spousal
- ESA (Coverdell Education Savings Accounts)
- A Traditional IRA
The Traditional IRA is an IRA that is not one of the
following: a ROTH IRA, SIMPLE IRA or Coverdell IRA. An
individual who has earned income and then desires to
defer or eliminate taxes on income from funds set
aside for their retirement is allowed to open a
Traditional IRA. You cannot make contributions to a
Traditional IRA after the age 70.
Distributions may be taken without any penalties from
a Traditional IRA beginning at age 59.
- The Roth IRA
Unlike the Traditional IRA the Roth IRA is an
after-tax retirement plan and as such is not
tax-deductible. The earnings accumulate tax-free it
should also be remembered that all subsequent
distributions are tax free from the age of 59.
Qualified withdrawals can be made tax-free without any
annual limits and there are no minimum distributions
required when you reach the age 70.
Many CPAs will tell you the Traditional IRA may be
better for those taxpayers who expect their tax rate
to be lower when withdrawals are due to be taken.
An IRA opened for a non-working spouse (Spousal IRA)
may also be opened as a Roth IRA provided the
qualifications for the ROTH IRA are met.
- The SEP IRA
A Simplified Employee Pension (SEP) is the plan that
allows an employer to make contributions toward their
employees retirement plans without becoming involved
in the more complex arrangements. Their contributions
are made to the Traditional IRA of each participant in
the plan.
This plan saves the employer from having to set up a
profit sharing or money purchase plan with a trust.
They can adopt a SEP Agreement and make the
contributions directly to a Traditional IRA for each
eligible employee. The participants under a SEP may
establish their own IRA at the institutions of their
choice. Due to the fact that the underlying account is
an IRA account covered employees may choose to have a
Self-Directed IRA as their SEP IRA. This can be in
addition to any other IRA the employee may have.
- The Simple IRA
Millions of Americans employed by large corporations
already benefit from the small business pension plan
(SIMPLE). Savings Incentive Match Plan for Employees
is the full name of the plan. As an employee you can
make tax-deductible contributions of up to $8,000.00
per tax year. The employers match the contributions
and the money is not taxed until it is withdrawn.
Under the "SIMPLE" plan the term "employee" also
includes a self-employed individual who received
earned income. There are two types of SIMPLE plans,
the SIMPLE IRA and the SIMPLE 401(k) Plan.
You are allowed to have a Traditional IRA in addition
to any other qualified plan or SIMPLE IRA in effect.
An IRA opened for a non-working spouse (Spousal IRA)
may also be opened as a Traditional IRA.
- The Spousal IRA
Designed for married couples filing a joint tax
return, they can contribute $4,000.00 ($4,500.00 if
age 50+), to their IRAs (excluding a SIMPLE IRA) on
behalf of each spouse even if one spouse has little or
no earned income.
- The Coverdell Educational Savings Account (ESA)
The Coverdell Educational Savings Account also known
as the "Coverdell ESA", is a trust or custodial
account. The account is created or organized within
the United States exclusively for the sole purpose of
paying for qualified higher educational expenses of
the designated beneficiary of the ESA Account. This
account must be designated as a Coverdell (ESA) when
it is established in order for the account to be
treated as a Coverdell (ESA) for tax purposes.
Are All IRAs Created Equally?
The answer to that question is "NO". The type of IRA
that is right for you is something you should discuss
with your CPA or accountant. In the end choosing the
right type of IRA for your need is your responsibility.
The main difference between a typical IRA and a
Self-Directed IRA can easily be summed up in one word,
CONTROL. What do we mean by "control" we mean you
control what goes into your IRA, when it goes in, how
long it stays there and when it comes out. Normally only
one of two people would have control of your IRA, the
IRA custodian/trustee or you. With over 40,000,000 IRAs
in America today the vast majority of control lies with
an IRA custodian/trustee.
Ensuring that you choose the right custodian is very
important it can make a big difference to how well your
IRA performs. The IRA custodian cannot go on a buying or
selling binge without the permission of the IRA holder,
however, it does mean that the custodian or trustee can
severely limit the products or category of investment
products that it offers to the IRA holder.
Call your IRA custodian and ask them if your IRA is a
"Self-Directed IRA". When they ask "why" tell them that
you wish to purchase real estate Tax Lien Certificates
with your IRA funds. If your IRA custodian/trustee is
one of the many stock brokerage houses, banks, mutual
fund or insurance companies it is very likely that they
will tell you "You can't do that with your IRA". They
like to create the illusion that you cannot buy real
estate Tax Lien Certificates, Tax Deeds and Notes with
your IRA because they are not equipped to facilitate or
service such a purchase. The only reason for this answer
is they (the broker) don't make any money from
non-financial market products. Their only concern is the
fees they (the broker) earn from you, not your wealth.
Big Benefits to Setting Up a Self-Directed IRA or
SEP With Check Book Control
You will need the assistance of an experienced
Self-Directed IRA facilitator to help you set up a
single-entity LLC (you will be the single entity as
opposed to multiple parties). The formation of the LLC
is the most important part of this process and it must
be done in compliance with IRS Regulations. Establishing
the correct LLC is not an area for the novice, including
attorneys who have never established one before. If not
formed properly the IRS could well interpret any IRA
funds deposited into the newly created LLC a prohibited
transaction and impose a hefty penalty.
After the LLC (you) has been formed, the LLC then
elects a manager to run the fund, this of course would
be "You". As the manger of the LLC you now instruct the
Self-Directed IRA to place all, or part, of its funds
into the new LLC. As the LLC manager you would have
already opened a bank checking account for the LLC. You
now have direct and immediate access to the funds that
reside in the LLC checking account. You are now ready to
start enjoying the benefits of a Self-Directed IRA with
check book control.
Your Check Book Control Self-Directed IRA empowers
you (as the manager of the LLC) to decide what to
purchase and that includes but is not limited to:
- Purchase Real Estate Tax Lien Certificates
- Act as a partner in real estate
- Lend money on real estate
- Purchase real estate options
- Purchase a real estate lease
- Consummate a short sale
- Purchase a pre-foreclosure
- Purchase a foreclosure (HUD included)
If you would like more information on how to take
control of your investments and maximize your retirement
savings plan please call us direct and request an
updated list of our FREE workshops and telephone
conference training dates.
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