IRA and Real Estate – Episode 271

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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, bestselling author, Kim D.H. Butler. Welcome to another episode of the Prosperity Podcast. Today we’re going to be taking a listener question and we’re going to break down some of those answers and give you some insight. But first, what we want to say is this, if you have questions, make sure that you’re sending them to us at hello at partnersforprosperity.com. And yes, we’ll keep some confidentiality. We’re not going to share your name and all of your circumstances because we want to look out for your best interest. But again, send those to hello at partnersforprosperity.com.

[00:53] Now, Kim, are you there? I am, Spencer. Thank you. Wonderful. So this is going to be a fun one because we got to see Kim answer these questions and then we can go into more detail. So here’s the first question. What was your reasoning when you said that an IRA is the worst thing you should die with? So my reasoning is that if you die with an IRA, it’s going to be fully taxable to your beneficiaries and that’s taxed as income. Now, of course, they can defer it and then it will just be 100 percent tax, basically. So that is definitely not the typical financial planning mantra. People talk about deferring, deferring, deferring, how valuable it is. But if you just continue to defer your money, then that was 100 percent tax to

[01:45] you. And then if your children continue to defer it, that was 100 percent tax to them. That makes no sense. Furthermore, depending on the size of your estate and in today’s world, we’re over five point six million or so. But an IRA can get wrapped up into a state tax. And so then you’ve got the state tax and possibly even gift tax and then income tax on it. It’s just a wicked environment with which to subject money to. So as a general rule of thumb, as soon as people hit 70 and a half when required minimum distributions are necessary, I encourage them to take the next 10 or 15, maybe 20 years and do what’s called a spend down or a pay down on that IRA. Now, of course, I’m just speaking generically here.

[02:29] I don’t know enough about the listener’s situation to get super specific, but a pay down or a spend down will take the balance plus whatever interest is being earned and it will pay it down to zero over a dedicated time frame. So, again, 10, 15, 20 years. And that’s going to depend on all the other things that you have in your finances at that time. But that should be what happens with an IRA so that you do not die with it. Oh, that makes sense. So let’s dive into IRAs because there were actually several many questions that there were follow ups about this. And one is the relationship with IRA and then putting real estate inside of IRAs. Can you shed some light on that? Yeah, absolutely. So this is something that a lot of real estate people will recommend.

[03:15] And it is not my favorite strategy at all. It’s also not something that Tom Wheelwright recommends. The CPA that is so well known for his tax advice from a real estate standpoint. And it’s because real estate has really good, efficient tax law. It has depreciation. It has capital gains taxes. Neither of those things you are going to benefit from if you use your IRA to do real estate deals. Now, let’s separate out real estate deals from, for example, bridge loans, because it’s totally fine to just lend money on real estate and get the interest income that a bridge loan provides, because that’s actually not owning the real estate. But in most cases, it’s crazy to actually own real estate in an IRA because you’re going to miss the depreciation flow through,

[04:08] which is a tax benefit. And you’re going to miss the capital gains tax because you’re going to get taxes income instead. And that’s a higher rate. So you’re essentially taking good tax law, real estate and putting it in a bad tax law, an IRA. And it doesn’t make any sense in most cases. Well, that’s so true. OK, so now that we understand a little bit clearer and we’re we’re understanding that maybe there’s some misconceptions that investors are thinking they’re going to completely optimize with their IRAs, but there’s the tax side. So help us understand how to prepare for those taxes. And what’s the proper strategy so that they can get the best with their money? Well, for IRA taxation, it is a big surprise to some people.

[04:57] I just had a client the other day. They’ve put a ton of money in qualified plans. So 401Ks, 403Bs over their lifetime. Now that money’s rolled into an IRA and they’re having to take everything out of it is completely taxable. Well, that’s IRA tax law. And they were saying to me, gosh, I wish somebody had told me this earlier. I wouldn’t have been so heavily focused on contributing to the qualified plan arena, which, of course, has its carrot as the tax deduction today. But if you’re going to get a tax deduction today, that means you’re going to be fully taxed tomorrow. And not that it’s bad that you want so much so that you want to do none of that, but please, let’s not be doing all of that.

[05:42] In other words, don’t fund your 401K, 403B, IRA profit sharing environments to the max. M-A-X, consider only funding them to the match M-A-T-C-H, thereby enabling those other dollars to go do other investments that would be after tax. Yeah, it means paying a little bit more tax now. But if you think about it, in theory, the money that we put in today is supposed to be small. The money that we take out tomorrow is supposed to be large, right? Isn’t that what we normally hope for with investing? Absolutely. So my question is, where do you want the tax benefit? Do you want the tax benefit on the small dollars, which some people refer to that as the seed? Or do you want it on the large dollars, which you could call the harvest?

[06:26] And the answer is, if you just look at that simple fact, of course, most people would prefer to pay tax on the seed. So I get it. You know, tax deduction today is intriguing. So go ahead and take a little of that. Just don’t overdo it so that you’re stuck with all of your dollars in a completely taxable environment with a lot of money down the road. Yes, totally true. Now, you know, there are two things that we cannot avoid. One is death. The second is the IRS. So come on, right? So we can’t avoid that. So it would make the most sense to pay on the seed. Yes, it does. And so there are a variety of ways to do that. Sometimes it’s just literally paying the tax on the money that you earn and then going and doing a real estate deal.

[07:15] Another way to do that is more on the savings side, which is the life insurance. Another way to do that is to find investments that do get you a tax deduction, but are not stuck in qualified plan land, which typically are businesses and oil and gas deals where you’re getting the benefits of actually investing in the oil well. So I’m not talking about like oil stocks, but the actual oil well. And some of these things are for accredited investors. And clearly not all of our clients are going to want to do businesses. But truly, those are environments where you’re sometimes dealing with after tax dollars. Now, of course, in a business environment, you can still get some before tax dollars to benefit you

[07:58] because of the way that the businesses are structured. But again, be very, very careful with the qualified plan arena. I had a client the other day say, you know, I’m matching myself. And it’s pretty rare that clients pick up on that. Like they’ll own a business. They’ll create a 401k plan. They’ll put their own money in and then they’re, quote, matching themselves. Well, yeah, you’re literally using your own money to match your own dollars. It’s not this special thing that the IRS gives you. So business owners in particular need to be very aware of that. That is so true. Now, one of the follow up pieces that you mentioned in this question in this dialogue to the listener, again, we’ll say if you have listener questions, send those to hello at partners

[08:43] for prosperity dot com that you were talking the difference of the real estate transactions and real estate with the IRAs and then using the bridge loans and how that is going to affect income. Can you talk a little bit about that and maybe go into some more detail? Sure. So a bridge loan is typically where you or your IRA have lent money to somebody that owns and is going to keep owning real estate. And they are paying you for the use of your money. And that’s a perfectly acceptable transaction to have inside an IRA. It’s just interest income. And typically, we wouldn’t want that in an IRA until you are older, like well over fifty nine and a half, closer even to seventy and a half. Because income inside an IRA, if you’re not going to take it out,

[09:34] can get problematic. There’s something called unrelated business income, which can cause a ding on your taxes and cause you to pay more taxes than necessary. But if you’re older, it’s totally fine to have a bridge loan in your IRA. And then you’re going to use that interest income from the bridge loan, pay taxes on it and take it out of the IRA. That’s a very legitimate strategy. Now, if you own real estate, so that’s the distinction, then that’s a different ballgame. You don’t want to do that in the IRA because you don’t get the depreciation flow through, nor do you get capital gains treatment on the growth of that real estate. Wonderful. These are these are great concepts that I wish I would have learned

[10:18] back in my 20s. And, you know, I’m scratching my head and I think, why do not more people ask these questions to Kim? And granted, we get them all the time, but these are good questions. And where else are people going to go and get this? They’re going to get it from a blog that might give misguiding advice or they’re going to get it from a financial planner, not an advisor. This is this is good stuff for me, at least. Well, good. Yes, it is interesting how much information is out there that just follows the typical advice that financial planners give that our society implements. And nobody stops to actually think about it. And so that’s a role that we play in the world. Our first principle prosperity is to think about your finances.

[11:05] And yes, you need to think from a prosperity mindset, but you need to think. And so stop following the crowd. If you do, of course, you’re going to get the results that the crowd gets and instead develop your own thought process, your own methods, your own way of getting results in a way that works for you. Very well said. So I think the call to action we’re going to put on this podcast is for people to send us more questions, because one, I love learning about this because I get to I get to ask Kim the questions and then we get to go deeper and I can see the email interactions. And that’s wonderful place to ask those questions as hello at partners for prosperity dot com. So that’s where you should ask your questions.

[11:48] Kim, do you have any specific questions that you would like to answer for people or maybe questions you have for the audience? Well, my question for the audience always is the first. Where do you store your cash? Because that’s a legitimate question and most people don’t have a good answer for it. And then my second one is what’s your favorite investment? And so if if people have awesome places to store cash, I would love to hear about it. And if they have a favorite investment, I would love to hear about that. I find in most cases, they don’t have a good answer for either one. Well, help prove Kim wrong or shed some light so that she has some new places to store cash and some new questions to answer.

[12:32] That’d be wonderful. So thank you, listeners, for spending time with us today. Submit those questions at hello at partners for prosperity. Thank you for listening to the Prosperity podcast. To take control of your money and have it work for you. Visit us at partners for prosperity dot com. If you liked this episode, make sure you subscribe and leave a review.