“America is a place where you can be born into a low-income household but still lift yourself up.” – Alphonso Jackson
Imagine that you didn’t have one red cent in a traditional savings or checking account – but you could still simply “write a check” to:
- purchase real estate
- lendmoney on real estate
- purchase an option on real estate
- purchasea real estate lease
- consummate a short sale
- purchase a foreclosure
- makea personal property loan
With a Check Book Control Self-Directed IRA – a little-known but extremely powerful investing tool – you can do all that. And more. Yet, for three decades, 99% of the American public has been shying away from Self-Directed IRAs – even though experts recommend it.
Because they don’t understand how a Self-Directed IRA works. And they don’t realize that it can help you retire years, even decades, earlier.
When did this widespread ignorance begin?
ERISA (Employee Retirement Income Security Act) was enacted in 1974. ERISA’s goal was to fix problems associated with mismanaged pension plans. To eliminate the potential for abuse, it shifted the responsibility of retirement investing from employers to employees.
ERISA required taxpayers to take IRA distributions at age 70 1/2. The idea was to encourage the employee to save money during his working life and then use it up during his retirement years. That would leave the account drained dry by the time he passed away.
But nothing was said about how individuals were to invest their money.
Stock brokerage firms, mutual fund companies, and financial planners quickly recognized the void (i.e. opportunity). They stepped in to “teach” the public how to invest their retirement money.
As Robert Kiyosaki, author of “Rich Dad Poor Dad”, points out, this was tantamount to “letting the fox guard the henhouse.”
There are 42 million IRAs in America, with $10 trillion in investments. There’s a lot of money at stake here … and Wall Street intends to keep it all. So they spend millions each year to perpetuate the myth that the financial markets are the only place IRA dollars should be put. As a result, only 1% of those 42 million IRAs hold real estate.
The Organization of Certified Financial Planners stated in a recent Wall Street Journal article that Americans should have no more than 5% of real estate in their entire investment portfolio. Guess where the remaining 95% of your dollars should go? Stocks. And that’s just where most people do put their IRA money. A big problem. Not only are these people missing out on the huge wealth-building potential of real estate … they’ve created a ticking time bomb of sorts. Here’s why …
The seemingly harmless requirement that distributions from traditional IRAs (the kind most people have) must begin at age 70 1/2 will some day create a dilemma of dramatic proportions.
From 2016 to 2026, an estimated 2.5 million baby boomers will reach age 70 1/2 each year. This translates to over 25 million baby boomers. If the current trend of investing IRAs in financial products remains constant, there will be an unprecedented forced sell-off of stocks, mutual funds, etc. beginning in 2016.
Imagine 2.5 million baby boomers calling their stockbrokers and saying, “Sell!”
Some time after 2016, sellers of stocks, mutual funds, etc. will outnumber buyers. And the problem will keep getting worse. Robert Kiyosaki calls this inevitable situation “The Perfect Financial Storm” – and he predicts it will create the biggest stock market crash in history.
Sound farfetched or crazy? I don’t think so.
If I had all of my IRA holdings in the stock market, I would begin to liquidate and convert my portfolio into non-financial market products like real estate. But to do that, you need a Self-Directed IRA – something your financial “advisor” is not likely to recommend.
With most IRAs, your choice is restricted to financial products that your stockbroker, mutual fund salesperson, or financial planner sells (and earns a commission on). This is how they make a living. So for them to suggest that you set up a Self-Directed IRA so you can buy real estate is counter-productive for them.
What kind of IRAs can be Self-Directed?
- Traditional IRAs (where contributions are deducted from income)
- Roth IRAs (where contributions are made with after-tax dollars but withdrawals are tax-free)
- SEP and SIMPLE IRAs (generally used by the self-employed and small businesses … and allowing much larger tax-favored annual contributions than Traditional IRAs or Roths)
Most Americans have an IRA that grants control over the IRA funds to a “custodian” or “trustee.” Usually, we’re talking about a stock brokerage firm, mutual fund, financial planner, insurance company, or other entity that has been approved by the IRS.
The people employed by these IRA custodians may understand the financial markets, but they don’t understand real estate. What’s more, they’re usually not even willing to make a real estate purchase for your IRA, because they wouldn’t make a commission by doing so.
So if you want your IRA to buy real estate, you will probably have to change your IRA custodian.
And what kind of impact can that have on your portfolio? Here are a few examples of people who have turned anemic IRAs into powerhouse real estate wealth-building tools:
- Dena H. of Colorado bought a small, rural Post Office building in Wyoming for $65,000 that had 11 years remaining on the lease and a net monthly rental income of $575 (after paying all expenses). Dena’s $65,000 had been in a money market account earning a dismal 3%. Now, her IRA earns over 10.5%.
- Patrick H. of Pennsylvania converted his Roth IRA into a Self-Directed Roth IRA. Within one year, he increased his IRA funds from $30,000 to over $100,000 by purchasing, fixing up, and then flipping distressed homes. And with a Roth IRA, all of his profits are tax-free (as will be the distributions).
- Ron T. from Cleveland, Ohio also uses his Self-Directed IRA to buy inexpensive homes and duplexes (many under $75,000), fix them up, and then resell them.
Even if you have a small amount of money in your retirement account, switching to a Self-Directed IRA so you can invest in some sort of real estate is worth considering. Gilles G. of California, for example, recently used his Self-Directed IRA to buy an older trailer for $22,000 that rents for $650. After all expenses (including lot fees), his IRA nets $350 per month. Prior to making this purchase, Gilles’ $22,000 was earning a scant 2% in a money market account. He is now enjoying a yield of 19.09%.