IRA Investing For Growth – Episode 260

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[00:04] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, best-selling author, Kim D.H. Butler. Welcome to the Prosperity Podcast. Today we’re going to be talking about IRA money versus cash money and we’re going to understand the differences between the two and we’re going to understand maybe what you should be doing. So Kim, are you there with me? I am, Spencer. Happy day to you. Happy day as well. So I’m actually really excited for this because every single time I’m gathering these topics because it’s something that I want to dig into deeper and learn more myself. That’s great. Well, you know, it’s interesting when people start conversing with us, one of the most

[00:58] interesting topics to them seems to be this arena of the self-directed IRA and we’ve done a variety of podcasts on them. What I wanted to drill in on today is the type of investment that suits IRA type money. It could be 401k, rollover, 403b, self-directed, Roth, any of those types of dollars versus the type of investment that suits cash money better. So is the question clear? What type of investment are we talking about? That’s the question. Is that clear? I think it is, yeah. What’s interesting about IRAs, as many people know, is they were set up by the federal government and they have the most ridiculous list of rules as to what you can and can’t invest in. How much you can put in when you have to take it out, when you can put it in,

[01:50] how much you have to take out, etc., etc., etc. And because of all those rules, I have found over my career a very clean and simple break between the type of investment that IRA money is more suited for and the type of investment that just regular cash, like after-tax cash, is more suited for. And it comes down to one particular rule in the IRA world that’s called unrelated business taxable income, unrelated business taxable income. Sometimes it’s abbreviated as UBI, just unrelated business income, or even the UBTI, obviously unrelated business taxable income. So UBI is what we’ll call it for our podcast because that’s a mouthful to get out. And I’m not going to pretend to be a CPA in this arena as well, but what I will

[02:48] say is that my good friend Tom Willwright heartily agrees with me about the type of investment that an IRA style of dollars is more suited for. And again, for purposes today, I’m just going to use the term IRA, but it could be 401K, it could be 403B rollover, it could be self-directed Roth, etc., etc. And I’m not really addressing self-directed versus just a regular IRA, but for the most part, the types of investments that we’re talking about do tend to be more commonly found in self-directed IRAs. And maybe, Spencer, in the show notes, you could just reference the podcast that goes in a little more deeply to the self-directed IRA arena in case people are curious about that. We can do that. No problem.

[03:35] Fabulous. So here’s the bottom line. IRAs do not do well when they have UBI, unrelated business taxable income. And so when you think about the types of investments that would have income in them, think cash flow, you’re going to get into bridge loans and real estate. And so there are many, many people out there that are talking about putting real estate inside IRA money and doing bridge loans inside IRAs. But I strongly disagree with this strategy. And as I indicated, my CPA friend, Tom, disagrees with this as well. And it’s not that there aren’t exceptions and in fact, if you’re 70 and a half, there’s a huge exception. We’ll talk about that in a minute. But if you’re younger than that and you’re just letting your IRA grow, then your IRA

[04:35] should not be creating income. In fact, if you cause it to create too much income, you’re going to get hit with this unrelated business income issue and that could cause you problems. And just think about it logically. If you have an IRA, we all know that those dollars are locked up until we’re 59 and a half and that IRA is kicking off monthly income, i.e. cash that’s no longer invested. It’s going to go back into the IRA account and it ends up just sitting there waiting for the next investment because if you’re under 59 and a half, you don’t really want to take it out and be taxed plus penalties. You’re going to be taxed regardless, but there’s no point in paying penalties. So I have really gotten clear over time that the types of investments that are appropriate

[05:26] for IRA dollars are more of the growth oriented types. So think maybe life settlements or some type of real estate deal maybe that would be a buy and a hold. But even that one I’m not a fan of because you’d be better doing a buy and hold real estate deal with after-tax money so that you could get capital gain treatment. So often we inadvertently cause ourselves more problems by trying to quote defer tax because IRAs are not avoiding tax, they’re deferring and we end up sometimes putting deals in our IRAs that really would be more efficient if held outside our IRAs. So again, pretty much anything related to real estate. And again, I acknowledge there are people out there talking about real estate in your

[06:18] IRAs. It’s not that you can’t do it, it just in my mind is not the most efficient, the most effective type of investment. IRAs are designed to grow. Find investments that grow and ideally find investments that don’t lose principle, find investments that have growth orientation to them, meaning maybe there’s movement of the money, cash flowing from the money every five, six, seven years. Clearly not every year and certainly not every month. Questions so far on that? You know, that makes me think, OK, so real estate might not be the best thing out there. So what we’ve talked about are bridge loans. What other types of things do you think it fits best for? I will readily admit I’m very biased to absolutely what works.

[07:07] And to me, that’s life settlements, which works for the accredited investor. And then some growth oriented strategies that fall into the peer to peer lending arena in a loose category. So listeners to our podcast have certainly heard us talk about peer to peer lending again in the past. And again, I’m kind of loosely defining this category, but we have a particular one that’s a merchant oriented peer to peer lending, but it’s growth oriented. So some peer to peer lending, you’re going to have payments every month, which we’ve identified are not the most effective thing with IRA money. So this is more of a nine to 12 month environment where, again, the money is set to grow. The money is not set to create income or cash flow.

[07:59] Those work for the non-accredited investors. And there are certainly a lot of other things out there that could work. People even put annuities in IRAs. I disagree with that for the most part because you’re putting a tax shelter over a tax shelter. And you could have a big debate about this that’s certainly not worth getting into today. I also see occasional other things that would fit that growth category. Of course, some people would argue that stocks or even bonds fit that. Those are not favorites of mine because the impetus there is the potential to lose principle. And my risk tolerance is such that I’m not interested in losing principle. I would rather have slow growth and actually have my principle than have

[08:40] supposedly opportunities for higher growth and the risk of losing my principle. That makes a whole lot of sense. And, you know, I think one of the reasons why a lot of people do focus on real estate with their IRAs is because real estate is one of the easier transactions to do. Most people know about it and they’re comfortable with it. But once you step outside of that scope and you can actually see different opportunities, it becomes a lot more attractive and actually more simple to handle. Absolutely. And within the self-directed arena, you’ll find that there are two very specific things that we’ve talked about today that you literally can set it and forget it. And that’s kind of a nice thing with an IRA since it’s such a long term.

[09:22] Now, I do want to address what happens when you’re 70 and a half. At that point, so at 59 and a half, as most people are aware, you can take your IRA. You really shouldn’t be, though. In many, many cases, you should be deferring that as long as you can. Not always. You know, there’s always just situations where it makes more sense to go ahead and take it at 59 and a half. But assuming that you’re still working, deferring to 70 and a half, and then at that point, you have to start to take it. Well, at that point, you frankly want it to be the first asset that you reduce to zero. So you want to be taking the income off of it very, very heavily. And at that point, it makes sense to completely switch gears and go to an

[10:05] investment that is cash flowing. So at that point, you want to sell your life settlements and your merchant accounts and other things and get your IRA to create income and even potentially something called a pay down or a spend down where we’re purposely reducing that IRA down to zero over the next 15 to 20 years because the IRA is the worst asset to die with. You want to make sure that you get that asset used up before you die. You know, it’s kind of strange that you phrase it in that way. It’s the worst asset to die with. And I remember a past episode that we had, many people, they have the strategy of kind of pulling away from several different assets at a time. Whereas what you’re saying is focus on that one, you drain it all the

[10:53] way to zero and then go to the next. Is that correct? Absolutely. And that’s not the typical financial planning way. Maybe on another day, we’ll do a larger podcast on this subject because the typical financial planning way is to take a little bit from each asset and that certainly appears safer, but it’s way less effective. And if you can at 70 and a half really drain that IRA, you do so because you have other assets in play and you have a death benefit from your life insurance policy that gives you the permission slip to go ahead and spend that money, you know, the old bumper sticker that used to say, I’m spending my kid’s inheritance or something like that. What we like it to say is I’m spending my kid’s inheritance and

[11:45] I’m leaving it to them too. And so with the life insurance death benefit as a permission slip, that’s what you get to do is you can spend that IRA down, possibly even pay down other accounts and leave the life insurance behind as your legacy money, your inheritance money, which is a much, much more effective thing to leave behind because the IRA, of course, is completely taxable and the life insurance is income tax free. Now, I know there’s lots of strategies out there that talk about stretch IRAs and abilities to basically never pay the tax. Well, if you never pay the tax on your IRA, you also never get to use the money. There is no such thing as not paying the government. Exactly. To me, that’s a hundred percent tax.

[12:35] That makes no sense at all. That’s true. And the thing is this, if you believe that you can not pay the government, well, if you have any assets on your death, forget about those assets transferring to your loved ones. That’s right. Yeah. The government is going to step in. So just as we’re clear that IRA money needs to be growth oriented until you’re going to completely switch gears and make it very income oriented. In other words, nothing in between. In my mind, cash money should be the opposite. To me, all of our liquid money, other than that, that that is stored for our emergency opportunity money. So we’re talking investments here today. We’re not talking savings accounts. All cash money. So like bonuses, lump sums,

[13:27] revenue from the sale of something. All of those types of dollars should be invested to create income, to be cash flow oriented. And the fourth principle of prosperity of our seven that exist is flow. And it’s designed to remind us to be focused on cash flow. Now, for a lot of people, the typical financial planning voice says, you don’t need your money to cash flow until you’re ready to, quote, retire. But that’s crazy. How can you live 30, 40 years, not creating any cash flow with your dollars, and then all of a sudden overnight be able to create cash flow with your dollars? And that doesn’t seem very wise to me. I really like our clients to practice, to literally get some of the investments that they have today to

[14:17] create cash flow on a monthly basis so that when it does come time to maybe override a big decision with cash flow versus growth, that they’re completely ready to do it. Maybe they have a 401k to roll over or they sold a business and they have a large lump sum to invest or the myriad of other things that occur typically later in life where they’re going to want that cash flow to start being very consistent and accurate and active on a monthly basis. They want to have been investments prior to that time that are cash flowing on a monthly basis. So I get all of our clients pretty much no matter the age to, even if it’s in a really small degree, to quote, practice with some cash flowing investments so that they are

[15:09] ready for that larger decision and that bigger step down the road. So to me, all after tax money, again, that’s investable, not our liquidity money, but all of our after tax money, our opportunity money, if you will, whether it’s borrowed against our life insurance policies or a bonus money or something that we have lump sum from a sale or what have you, that should be creating cash flow. And to me, there is a very clear distinction between investments at cash flow and investments that are for growth. And of course there’s again, exceptions. There are definitely some investments that do both, but I find that people that are used to investing in the stock bond mutual fund world don’t really know how to create cash flow.

[15:52] There’s just not very many things these days because the bond market is so out of whack and our interest rates are so low that create cash flow very well. And I’m not a big fan of annuities because they go against principle number five, which is control. And when you do an annuity, you’re completely giving up that control. That’s a deferred annuity that I’m talking about. Now if you’re 70 and a half and you want to have an immediate annuity that would start to create cash flow, that’s a different discussion. But for our after tax money, you’re not typically going to go buy an immediate annuity if you’re 40, 50, 60 years old. So again, cash should create cash flow. Cash should create income. If it’s not there for liquidity,

[16:33] IRAs should be invested for growth. That to me is the very clear and distinct division between those two types of investments for those two types of dollars. Very good way to explain this. I think for our listeners, they may need to hit the replay button and listen to this one again, because there’s there’s a lot of information. But a couple of things to point out is that you need to be looking at the things that are unrelated business taxable income, and then be focusing on and understanding either your growth and your cash flow. Now, because some of this may be overwhelming and there’s a lot of information and you have to think about timetables of 59 and a half or 70 and a half, I would say the best thing to do would be to reach out to Kim at Hello at

[17:19] Partners for Prosperity and ask your questions. Would you say that’s the best thing to do? Absolutely. I’m delighted to engage in answering. And of course I may have some questions back so that my answer is very specific and accurate to your situation. Cause as I’ve indicated, there are definitely exceptions to this, but hopefully this is helpful info and I agree it was a lot. So thanks for the nod to hit the replay button. That’s the beauty of podcasts. It’s there for you. And I welcome questions at Hello at Partners, number four, Prosperity.com. All right. Thanks listeners for tuning in with us again today. Thank you for listening to the Prosperity podcast. To take control of your money and have it work for you,

[18:03] visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.