Episode 073 - STRR - Using Your Self-Directed IRA to Invest in Your STR BusinessOct 15, 2021
What is a Self-Directed IRA? Where can you get one and how can you use it to invest in your own Short-Term Rental Business? What are the pitfalls and what must you NEVER EVER do with your STR Business if it’s funded by your IRA? This episode is a tiny bit more technical but we make it as easy for you to understand as possible. We believe that everyone should use their IRA to invest as soon as it is physically possible to do so but you have to do it the right way.
Transcript of this Episode:
Hi, this is Michelle, the master of money mindset, and you are listening to BNB dash boss podcast.
And in today's podcast, we are going to be talking about IRAs. It is a Friday repeat day, and I'm actually doing this pretty much almost close to live. So I decided to restart these because. I wanted to make sure I gave everybody like a 1, 2, 3 kind of step thing to do before you do your IRA is before you invest with your IRAs, vesting with your IRAs is a great idea.
Hopefully it's still a great idea in a year or two, because boy, it seems like the administration that's in office right now is really after our retirement funds and they're going hardcore. I think Obama tried eight times to get into our IRAs. This administration now is going to be looking at us and any deposit or withdrawal over $600 is now going to be submitted to the government.
Wait a watch us, huh? Oh yeah. You're going to catch so many people depositing their checks from frickin Walmart. You assholes. Oh my gosh. Government overreach. So these guys are overreaching, their steps right now it's $10,000, right? So anytime you withdraw or deposit more than $10,000, the government wants to know where you got it.
That's pretty good amount of money. That's you know, like if you get a $10,000 check, sure. Go ahead. Honestly, nobody's raised too much fuss over that, but $600. I mean, that's my son's paid check. Why do you care when these people are depositing checks of $600 or with join $600, it's not your damn business, what we do with our money, but okay.
We're going to get off of that subject and go right onto the IRA. Subject IRAs were created. So people would have a way to retire. You know, social security was never meant as a retirement program, it was supposed to subsidize and it wasn't supposed to subsidize. The amount of people that it does now because people lived a lot less long when it first was created in that book, I told you guys to read, and it's probably in the book, I'd tell you to read.
In this episode, it's called the power of zero and in the power of zero, the first beginning, part of that book will go over just the whole social security challenges and what they've done with that. Just why it doesn't work and why you really need to create your own retirement program. Right? So IRAs are your personal retirement program.
It's money that you take that you've earned and you put into a retirement account. So it has to be money that you've earned. It has to be from like a W2. It can't be money from a business and it has to be earned money earned income, and you can put it into several different kinds. I mean, now there's just so many kinds of IRAs, but you can have educational IRAs for your kids or your grandkids set up.
You can have health care IRAs. You can have your traditional IRAs, or you can have a Roth IRA. Now, if you're not making that much money set up a Roth IRA ASAP, you can only contribute to your Roth IRA. When you are making below a certain income. Once you make above that income, you can no longer create a Roth IRA, right?
And then once you make above that income, you can no longer contribute. To that Roth IRA, but Roth IRAs are great. And we'll tell you all about them in this episode, but the whole point is it is time to create your retirement accounts. So the first thing you want to do is if you have a company that you are employed by and you have a 10 99 account or something you want to see, if you can transfer that into your own personal IRA, and you want that IRA to be a self-directed IRA, you want it to be a self-directed IRA, because you want to be able to dictate where your income goes, where your money goes, where your investments are going.
Now we've moved a lot of our IRAs into a checkbook IRA, and a checkbook. IRA is a lot nicer once we've been doing it for a while. We know what is legal and what is not legal and blah, blah, blah. So we can just write out a check. And invest in other businesses or purchase a property or something with our IRAs.
And those are great. When you set up your IRA, you want to do it into a company that specializes in self-directed IRAs. I know that there's companies like chase and all these other companies that now do IRAs. That's great for them, but you want professionals. So you want something like equity trust or vantage, checkbook, IRAs, right?
Some company that specializes in self-directed IRAs. You want them to handle a lot of funds and that way, you know, that they're doing a good job at it, right? So you'll set up that account and then you'll also set up an LLC. The LLC will help protect your IRA as well. So your IRA is just like you or me.
It's just like a regular private entity and an LLC. We'll do the same thing for your IRA that an LLC does for you. It protects it. And, uh, you'll have to set that up with an attorney. So number one, check out and see what retirement programs you have right now. And then see if you can transfer those into a self-directed IRA, then do that.
Number two, set up a self-directed IRA with a big, good company, right? And number three, create an LLC for your self-directed IRAs. So you might need one for you and one for your spouse, right? You might need two of them. Or if you have one Roth IRA and one traditional IRA or one, whatever you want to set it up for each of those individually.
And each of those for the person that it is in the benefit of. So if it could be yours or it could be your spouses or whatever. Okay. So those are going to be your steps that you do. So let's take a listen to this episode and I will probably pop in at the end. I doubt I'm going to want to just pop in, in the middle, but let's take a listen and see what we said.
And maybe anything has changed. The only thing that right now has changed is the new administration is going to try to grab a NAB, anything over. I think they said $2 million. And I know that sounds like it's a lot of money. It's not a lot of money guys for your IRA. $2 million. The deal is that's your savings account.
You've been putting money into it. If something happens to you, they want the money to go to them, to the government because they're so broke, but the money should go to your family. It's your savings account. So we'll go over that at the end of this episode. Take a listen, enjoy this rerun on this lovely Friday afternoon, using your self-directed IRA to invest in your short-term rental revenue business.
This is one of my favorite subjects. First, I'm going to explain a little bit about what IRAs are, how to self-direct them. So if you don't have an IRA yet, don't worry. If you don't have a self-directed IRA yet, don't worry. And if you're young, I just want to quickly touch on why you need to start investing in your retirement right now.
So I pulled up Dave Ramsey has this trusty little example that he uses in his books and in his seminars. And I love Dave Ramsey. The first books I ever read on, um, money were Dave Ramsey books. I I'm trying to remember what it was, but he's, he's had some really great books now. Obviously I don't agree with him completely a hundred percent.
Because I was trained by Robert Kiyosaki, who is a real estate investor. Plus Dave Ramsey lost a lot of money investing in real estate and actually had to file bankruptcy. So he's got a bad taste in his mouth about investing in real estate. And I would too, if I had to file bankruptcy. Yeah. I'd probably be a little bit more hesitant than I am.
But as a woman, I've got to save women. We'd like security. And we, we don't like taking chances. We're not the gamblers that men are. We're not, you know, the Kenny Rogers sitting on a train kind of people. We're the ones, you know, blown on the dice and going, dude, you better win. Because if you lose all our money, I'm going to be so angry with you.
You will not, you will, you will rule the day. Right. But Dave Ramsey has this great little chart that he has. Like I said, he uses it in his books. And I'm going to just read to you a little bit. So in Dave's example, he uses two brothers, Ben and Arthur, and Ben begins investing at age 18 when he starts earning money.
And he puts $2,000 away every single year for eight years. And then he stops. So at age 26, he stops putting $2,000 away. He only does it for eight years. So he invests from the time he's 18 to the time he's 26, putting away in total $16,000. So that's what he saved. Now that 16,000 invested, I believe Dave's example is at like six and a half percent or something by the time little Ben turns 65 years old, that $16,000 investment for him will have turned into 2.28, 8 million.
So that's 2 million, $288,996. That's what his little investment made. And remember he stopped, he stopped putting into his investment at age of 26. Now let's take his brother, his brother, Arthur saw little Ben working his little bottom off and putting $2,000 away. And he was a little bit older than Ben.
And he was like, wait, you know what? That's a good idea. I'm going to start putting money away for my retirement. Right? So Arthur puts $2,000 away, but Arthur has to put $2,000 into his retirement every single year. From the time he is 26, when he started all the way until he's 65. So what is that? It's close to 40 years of, in, of putting $2,000 away.
So he put in way more time, like more than four times. Longer did he put $2,000 away? But because he started later at age 26 and he's, he made the same amount, we're going to say he made the same amount of interest as his brother bended. When he turned 65, he will only have $1.5 million put away. So that's 1 million, 530, $2,166.
That's it. And he put way more into it. But because he started later, the later you start the less money you have, you know, working for itself and incurring interest on itself. Right? So it's magic. The sooner you start, the more money you can make. And it's, it really is the ex-wife. I was saying like, if you're young and you think you shouldn't start, this is when you should start, you should start.
Here's another deal. If you're in your fifties or sixties and you're listening to this and you're going well, shoot, I haven't started yet, dude, better, late than never. Right? Like seriously, don't worry about it. The best time to plant a tree was 20 years ago. The second best time is now. And this is now. So you need to start investing now.
Now I'm going to tell you about IRAs. Now, if you're listening and you know what an IRA is, please just indulge me for a moment while I explain to everybody else now, an IRA, most everybody has heard about it. It's an individual retirement account or individual retirement arrangements. And what those are, you can read IRS publication five 90 and find out all about them.
But there are basically two types of IRAs. There's a bunch of different ones. Okay. But there's basically two different types and that's going to be a traditional IRA and a Roth IRA. And the differences between them are incredible. So you really want to have a Roth IRA. That's going to be your favorite, favorite IRA.
When you set up your IRAs, if you make too much money, you can't get a Roth IRA, a Roth IRA. Right now you have to make lower than $186,000 a year. Wait, I'm already breaking in because I'm going to give you the 20, 21 breakdown of this. So if you make over $140,000 as a single head of household, Or $208,000 as a married filing jointly couple in the year 2021, then you can no longer contribute or open a Roth IRA.
So you have to make under 208,000. If you're a married couple under 140,000, if you're single. So if you're making under that amount, now is the time to open this up. And if you go to Motley fool right now, Motley fool has a really great article on this. I don't know if you've ever read the Motley fool, but they're really good investment advice, but the backdoor Roth IRA today is disappearing before our eyes 2021 may be our last chance to take advantage of this tax loophole.
And honestly, guys, this is, I mean, our IRAs, everything is in danger. This government is really. Just gearing towards they're telling you that they're going after the rich, they're not they're going after the middle-class and anything in between is going to be gone. That's the beginning of what happened in Brazil.
When we went down to Brazil 20 or 30 years ago, we saw that the middle-class had disappeared. I mean, it was just the government had gone after them. And that's what happened when you have socialism. And then after you have socialism and communism moves in rather quickly, that's what's going on right now.
There is an attack on the middle class and the middle class is literally what holds us all together in America. It's what holds our businesses together. The small business owners of America really is the glue of America. And that's what they're going after as our IRA. So I encourage you to write letters, make phone calls.
I mean, I'm not even joking. This is the time to really get active with your representatives in your district, in your state, and let them know that you will not stand for your IRAs being rated. You will not stand for anyone who votes for that. You're not going to vote for them. So make sure that they know that and make sure that you're not on board for this $600 bullshit, stop, excuse my French.
But come on, they have no right to know what you do with your money. It's your money. Once you earn your money, they have no right to know what you do with it. Unless of course you're breaking the law, but they can't monitor everybody so that they can make sure that if you people aren't breaking the law, that's some bullshit laws right there.
You can not give up your rights to keep other people's. That's that's a load of malarkey and that's exactly how they take all your rights away. So right now our rights are under attack and you know, not just your rights, literally your legacy, literally the money that you work for is under attack. They want to take it and pay off the debt that they keep creating and take it away from your family and your children and your grandchildren money that you've worked hard for.
So I encourage you. I encourage you to read about this stuff, go to the Motley fool and look up the backdoor Roth, IRA disappearing. Uh, that's a great article. Now, back to this episode, you're going to have to find out from your accountant or when you form your IRA, you're going to have to look and see what you made last year and make sure it's below that amount.
It actually could be more or less. The IRS will change that. So you really want to check. And remember, I am not going to give you that, that legal warning here. I'm not, I am not a financial advisor, nor am I a CPA, nor am I a tax accountant or anything. These are all my personal opinions. And this is just, like I said, just how I was trained in what I read and the courses I've taken.
And the people I have had throughout my lifetime have given me these opinions. So Dave Ramsey has his opinions and I'm sure actually, I think Dave Ramsey is all into, um, IRAs and Roth IRAs and stuff like that. So, but everybody has their own thing that they like. And so these are just my opinions. You can take it or leave it honestly, but hopefully you'll take and you'll look it up and start investigating it on your own.
If you still make under that amount of money and you haven't gotten one, please get it, get it this year. Because you're going to make more than that really soon. And if you, if you've already missed the boat, don't worry. Use your traditional IRA. It'll be the same thing. The only difference is the main differences are just the tax breaks and the advantages that the Roth IRA gives you.
Your contributions are always non-deductible in a Roth, but get this. The best thing is all your earnings are tax sheltered. So you're earning like nothing. You're not going to have to pay taxes on anything you're earning, but you can take your contributions out of your Roth, not your interest earnings, but your contributions out without the same penalties and fees and all that stuff that you have with a traditional IRA that you're going to have to pay.
So a Roth IRA to me is better on a lot of accounts in case something goes wrong and you can actually play with it like you, you know, when you go to Vegas and you're playing in Vegas, if you go to Vegas and you play craps and you're at the crap. I don't know if you've ever played craps. My sister taught me how to play.
We, we went into Vegas one time, we won a lot of money and I was so ignorant of the rules, but she told me that they had an insurance policy that you, you know, she goes, well, you're going to put down. We only gambled like five bucks at a time or whatever it was. I can't remember, but I would put money down on something.
And then she said, this is your insurance in case they crap out, put money here. And it's basically like the same thing. We started singing this little song to ourselves, going, we put the green in our pocket and we play with a red. So any times we got green chips, we put the green chips in our pocket and we were playing with the red ships.
And whenever, whenever we got the green, we put them in there. And after a while, like our pockets were full of green chips. And one of the, the pit boss guys came and he said to me, he goes, you know, you can't put those chips into your pocket. And I was like, oh my God, I'm really, I'm really sorry. And I started taking him out and he starts laughing and she says, he's kidding.
And I said, well, why did you say that to me? And he said, well, how are we supposed to keep an eye on how much money you're winning? And I was like, oh man, because they were, what we were doing was we were putting the money that we had started with back in my pocket and only playing with the house money.
You can totally do that with a Roth IRA. So let's say you have, you're putting money into your IRA and you're contributing to it. Whatever you put in, you'll be able to take out later on if there's an emergency. So let's say, God forbid, somebody needs, you know, a hospital expense or something comes up and you need that.
Your contribution that you put into it, not the interest that it made, but the money that you put into it, you'll be able to take out if you need to. Now, I wouldn't, I would leave it in there and I would leave it ride, man, because it's for your retirement, you are the house. So it's not like you're, you know, you're playing in Vegas and they're making money on when you're playing, you know, with the house money in Vegas, it means that you're only gambling, the money you made from them anyway.
Right? But in this case, you are the house. So you want to keep the money in the house as long as you can. So, but it's just a nice thing to have. So I like that. Now those rules may change. They may be different. So check it out, always check it out, man. When you have an IRA, you have a trust or a custodial account.
That's what it is. And basically that account is a living, breathing entity to the government is no longer you. It is now something completely different and separate from. So what's really kind of cool. This is where you should always think about it too. When you're, self-directing your IRA, you're going to have certain rules and regulations that you can do that you have to stand by, or you risk losing it all.
Okay. So again, let's pretend we're in Vegas. You don't want anybody coming in and go, you know, you only could use two dyes and you were using three and therefore we get everything that's on the table and everything that's in your pocket. That's basically the IRS. If you do something wrong, if you invest in a certain thing that isn't legal under those IRS guidelines of a self-directed IRA, or if you use that IRA, its accounts or its assets in a way that benefits you personally, you can lose it all.
Doesn't matter. If you only gambled the dollar of it, you can lose everything that you have in there. So you really, really want to be careful. You ha you want. Uh, great custodian. The person watching over your IRA, the rules, regulations, they have them posted and stuff on their websites, and you can read them all, but you never want to go against it.
How most people go against that is in real estate. And let me give you a, for instance, people will use their IRAs to buy property. They do it all the time. They do it here in the U S and they do it in other countries. I've been to Panama and there's, I've seen this like in a bunch of countries. When you go to Costa Rica, when you go to Panama, when you go to Fiji, when you go any place you go that has these awesome, amazing resorts that you can invest in, and you can use your IRA.
They're going to tell you, oh, go ahead. Use your IRA. Invest in here. Then you can stay here once a year and then rent it out the rest of the year. No, you can't. You can not do that. Not with your self-directed IRA. And I don't believe with your regular IRA either because there has to be what they call an arm's length investment.
It can't be benefiting you personally. So you can't invest in something with your IRA, like a house in Hawaii, and then stay there yourself any weeks out of a year, not even a day out of the year, you know, honestly, some people will go, well, if I pay, you know, if I pay myself, dude don't even don't even risk it.
Don't don't even pay for somebody else's Airbnb while you're there. But here's the deal don't ever put your investments at risk walking on that thin line, because you have no idea what has changed and what has not, you just don't want to play with stuff like. The same thing goes true for, um, for instance, when we were buying a, a place up in Flagstaff, when our daughter was going to go to school up there, we started looking at real estate investments up there.
And then we realized that, Hey, if she was staying there, that was illegal too. That was against our IRA. So we did not use our IRA to invest in a property in Flagstaff so that she could go to Northern Arizona. You can't do that because again, it's not arms length. It's not something, it's something that your family is benefiting from.
Definitely your daughter, you know, wouldn't, my daughter would be benefiting from that. So you don't want to do that. There's going to be rules and regulations that you have to be very careful of because if you break these, it doesn't just take the money from that one investment. The IRS will come down on you and they will take all your investments.
That's it. They will take your entire. IRA account. So you do have to be careful, but here's the deal just don't do it. It's just super, super duper easy. Like don't play the game with them. Just play the investment game. You're playing monopoly. You're not playing, you know, so that you could go stay on boardwalk the hell with that.
You can pay to stay on boardwalk later on, but you want to play by the rules. So when you have an IRA, you have the trustees, the custodians and the beneficiaries. You are the trustee, you are the owner of your IRA. And then the custodians are the people who take care of your IRA. That's going to be the bank or the institution or a brokerage firm that handles your account for you.
So if you're doing a self-directed IRA, there are certain companies that specialize in self-directed IRA. And they are, well, my, the account that I use is equity trust and I like equity trust. They, they used to have, they don't still have them now. They have most of those things online, but they used to have this really cool thing that they did called equity university.
And once a year, they would have an entire weekend, usually down in Orlando where we could go. And they would have like people talking about how they invested in their IRA, the money that they made, doing those things, you know, like some people invested in horse ranches and some people invested in real estate, whatever they invested in.
And then they would tell how they made money in it. And then they would have like all these breakout sessions where you could go listen to different people and things that interested you and, and how to invest there. So I love that, but now they do it online. They don't do it. It's more virtual. Now you can still look up anything you want through them.
I'm going to say, I do recommend personally I recommend equity trust, but you'll see a lot of different reviews for different companies on there. And I want you to remember that when people leave reviews, it's often because of the money that they made or the money they lost. So when you have a self-directed IRA, it is just that it means that you're the one who tells your money, that you invested in the IRA, where to go.
Now, most people, the majority of Americans out there right now, their IRAs are directed by whoever they bought the IRA through, or, you know, a different company. And they, and they're totally in charge of it. They have nothing to do with it. So let's say you bought an annuity through MetLife or something.
MetLife is the one who takes that all the money from all the people. And they put it into a big account and then they invest in different things for you. They're in charge of it. So they get like a little bit for running it and blah, blah, blah. But you have no decision making abilities in there. You can't tell them.
Well, I mean, sometimes you can tell them the types of accounts you want to invest in, but for the most part, you can't pick which companies you're investing in or what stocks or whatever they're investing in. If it's a read or something, you can't decide that that decision is made by somebody else self-directed as just that it means you make those decisions and a self-directed IRA.
You can actually invest in a company by yourself. So there's a lot of different things you can do. So let's say, let's say you have a friend. They've got this great grand business idea. And they've had other businesses that have made a lot of money that they've sold for a lot of money. And you want to invest in that company by all means, go ahead.
If it's their first company, I wouldn't do it. But I mean, but if they have a track record of winning, then definitely, yeah, you can do that with a self-directed IRA. You can invest in companies, but it's always good to check with your custodian and you tell them exactly. Like when I call up, I say, Hey, this is what I'm going to do.
I'm buying this property, blah, blah, blah. I'm not going to use it for personal stays. I tell him exactly like, you know, I tell them exactly what I'm going to do. And then they cut me a check and then I invest in it. You just, like I said, you just have to be really careful that whatever you invest in, you do all your due diligence for, because if you invest in something that's like a stock or something, and that stock goes down, you can't blame the brokerage firm or the institution.
Whoever's got your stocks that they went down. If you are the one making the choices of where it goes in a self-directed IRA, you can't blame your custodian for you losing money in an investment. The only person you have to blame is you because you made that choice to make that investment. So when you see ratings for furloughs companies, keep that in mind, these people made their own choices of their own investments.
And if they're bad decisions, what I like to see is I like to look and make sure that you can get your money easily within like equity trust has different levels. And when you pay for one of their top levels, they get there, the checkout to you on the same day. I mean, it's like super fast. And if you don't pay that, it takes a day or two to get your money.
As long as you're doing everything, you know, the right way. If you find a company that has bad reviews and they say that it took me, you know, a week. Or two weeks to get my money. Well, that's not good because 11 times, when you invest in something, you have to make the move quickly, especially with real estate because somebody else is going to make a move on it.
So you want to be able to get your funds as quickly as you possibly can. So do, when you look up a place to have your self-directed IRA and you look up, uh, custodial accounts and, and firms that you look at that I like equity trust. I've used them for a long time, but again, my recommendation. It doesn't have to be yours.
You can use somebody totally different. Maybe you had a brother-in-law who had a really bad experience with them. Basically. That's the only one I've ever used because one of my real estate mentors suggested them and introduced me to a bunch of people with them. And I've never had a problem with them.
Now I've used equity trust and I've used vantage checkbook, IRAs out of Phoenix. And so I like them too. I like being able to write my own check. And so there is an advantage to using vantage sounds funny, but it's the truth. Vantage is spelled with a V and they are out of Phoenix and I really liked them.
I had to, however, go through a lot of steps to open the account and to create the IRA that the checks are going to be drawn from. And every time you invest in something, for instance, we invest. And a couple of businesses and we had to have all the contracts turned into them. So they needed all the contracts, the original contracts, signatures on them.
And I mean, that's fine with me because obviously, you know, you want to dot those I's and cross those. T's the correct. And so I do love using vantage and the advantage of using vantage is being able to write a check and get that money quickly into whatever you're buying. So if you're buying a property, you can close and just pay cash for the property using your IRA, or if you're investing in a business.
You can make that loan quickly. And we get pretty high percentages. We're not getting anything less than 10% return on the money that we're putting out there. And the properties that we're investing in are getting twice that at least. So we're doing pretty good on the IRAs that we're investing with.
When we do it ourselves, you can make a lot of money doing your own research and doing your own investing and investing in other companies, good companies, good properties. There's a lot more money in it than, you know, just leaving everything to some group and having all the expenses drawn out of it and everything else.
There's not going to be all the overhead that you have when you are using a self-directed IRA. So you've got to look for that on your own. Now, remember, there's going to be beneficiaries to your IRAs too. Now, if it's just a regular Roth IRA, most likely it's going to be you, but you can set up all types of.
IRA's IRA's self-directed IRAs are so amazingly fun. You can set up IRAs for educational IRAs for your kids, for your grandkids and beneficiaries. I mean, you can do all kinds of their health IRAs. You can set it up for healthcare. For instance, if it's an educational IRA for your kids or your grandkids, all the money that's inside of it, that's making inside of it.
Those kids can use for any type of education and any kind of educational supplies so they can use it, not just for the tuition and boarding room and board. They can use it for computers that they'll need and transportation and things like that. Anything that has to do with getting them to and from and into their classrooms, their books, you name it, everything.
So there are a lot of different types of IRA accounts out there before you start playing with those, you really need to have your own retirement account and get that going. I would max that baby out every year, whatever you can possibly put into your account legally. Max at baby out, put as much in there as you possibly can.
And then start working with that money. The difference between a Roth IRA and a traditional IRA is huge. And it's basically when you are taxed with a traditional IRA, you get this quote unquote tax break when you put your money into it. So let's say you're putting 6,000 a year or 5,000 a year into there.
So when you pay your taxes, they're going to say, oh, you put money in your traditional IRA. You don't have to pay taxes on the 5,000 that you invested into your IRA, but that will make a difference because the big difference between the two is when you're taxed. So that means, yeah, you're going to pay no taxes on the 5,000, but as you draw it out, once you turn 65 and you draw that money out, every time you draw it out, you're going to pay taxes.
Now a Roth IRA is different because you pay taxes on the Roth IRA money when you put it in. So let's say you're putting 5,000 a year into that. You won't get a quote unquote tax break because you're going to pay taxes on the 5,000. So what pay the taxes on the 5,000, you could be taxed at 30%, and it's not going to matter pay the taxes on the 5,000, because when you turn 65 and you start drawing that money out of the IRA, there's going to be no taxes on it.
So how is that beneficial? Think about the example that we gave you with Dave Ramsey, right? He was talking about the two brothers and the first brother, he put 2000 away for eight years. Let's say he was doing that with a traditional. That means he would have not paid taxes on the 16,000, but when he started drawing out the money at the end, when he turned 65, he'd be paying taxes on 2 million plus dollars.
When do you want to pay the taxes before, after you want to pay taxes on the 16,000 or the 2 million? Right. If he had put it into a Roth IRA, he would have paid taxes on that $2,000 every year for those eight years. So what, because at the end that $2 million would be all tax-free big difference. Big difference.
Also, when you need the money, if you have to take any money out of an IRA, let's say, God forbid, something happens and somebody's sick, or you need that money. If you take any money out of your traditional IRA, you're going to pay penalties on it and all kinds of fees and blah, blah, blah. It's going to be the same thing.
If you do it out of your Roth IRA, however, if you're taking the money that you invested into it. So let's say it was that 5,000 every year, and say you invested 5,000 a year for 10 years now you've got 50,000 of your money in. You could actually pull out $50,000 without paying any penalties, because you can pull out what you put in, what you contributed to your IRA without any penalties, when you have a Roth IRA.
So that's a big benefit as well, but you always want to have an accountant or somebody that you talk to because I can call them for all kinds of advice and say, okay, what about this account? Which one should I use? Should I use this or this? And they won't always say it straight forward. Here's what they'll say.
Something like that. Well, I can tell you what I would do, but I can't give you advice. And they'll always tell you, I can't give you. I know, I know. Send me to the article. That's why I'm like, I know, I know, send me to the article and I'll read it myself and they'll go read this and then I figure it out on my own.
They're very good at directing you to the information that you need to make your decision. Let's just put it that way and that's all you need when it's self-directed you need to choose a really good custodian. So like I said, make sure that that custodian is somebody you trust or somebody that you know, who has a self-directed IRA.
And they trust nave had good rapport with them. Make sure that money is easily accessible as long as you're following all the rules. And it makes sure too that they've got a lot of information online for. So that you can find out, let's say you want to invest in art. That's usually not. That's a no-no let's say it's the first time you had a self-directed IRA and you call and you say, Hey, I want to invest in this art gallery or something and some paintings.
And then they'll tell you, ah, you might want not want to do that because this is on the cusp of being illegal. And here's why. And so you risk your money and they'll tell you exactly that. That's what you want. You want somebody who's going to say, here's why you might not want to do that. You want somebody that you can definitely trust.
Do you want to know what all your contribution rules are? What you can put in as much as you can put, put in, you want to know what you can pull out and what the fiends fees and the fines and the penalties are in association with that. Right. There's a really great book on. Actually it's one of my favorite investing books.
Now, obviously I've read a lot of investing books, but the power of zero by David McKnight is amazing. It's an amazing, amazing book. And basically what he's saying with the power of zero is telling you how you can invest and pay zero taxes on your investment. And that's why you want to use your IRA is because especially your Roth IRA, because like most people go, oh no, we're being taxed at the biggest rate that we ever have, and our taxes are outrageous.
And you're like, dude, no, they're not. In the 1960s, we were paying 20%, 69% and 91% taxes was the highest tax category. And right now we're paying 10 25 and 35% in all three of those. So we are paying less in taxes. And if you think we're paying more than you just don't know your history, read that book and you'll find.
Where do you want your money in a place where they can not be taxed legally? Right? Legally, this is all legal is funny. When you see people on television going, I can't believe he made that much money and didn't pay any taxes on it. It's like, dude, he did it legally. If you can pay zero taxes legally, why wouldn't you w who in the right mind wants to open up their wallet and go, you know, I know uncle Sam only wants 8 cents of every dollar that I've paid here at target today, but I'm willing to pay twice that give them a big 16.
I'm not that person, if you're that person and you are that generous with a government, go for it, man. But these guys, they don't know how to spend money. Now, there are trillions and trillions of dollars in debt. I don't think you should ever give anybody money if they don't know how to spend it already, it's just, let's not go there.
Right. So when you're investing in. Your IRA. You want to make sure that everything that you do is on the up and up, because you're going to protect yourself so that you pay zero taxes at the end, when you turn 65 and you start drawing on that income, you're not going to have any taxes to pay and not Lulu.
Yeah. Oh, I should get like a button where I can just push that because I'll Eluvia, you don't want to pay taxes and you specially don't want to pay them once. You're 65, because God knows. Are you going to be working or are you going to have, you know, what are you going to have coming in? You're not going to have a lot of money coming in.
You'll probably be on some sort of fixed income when you retire. So yeah, you want to pay no taxes and what's really cool about the Roth is you paid taxes most likely beforehand because that you pay taxes before it goes in, not when it comes out now, the government's going to want the opposite. They love traditional IRAs.
What. Because, oh, well, we'll give you, we'll let you put as much money in there and you don't have to pay taxes on the thousands of dollars that you're putting in there, but we'll tax you when it comes out. Dude, what did I just tell you in the beginning of this podcast about those kids investing in their money, right?
So what did little Ben invest? He invested $16,000 and at the end he got $2.2 million. Let's see. Do you want to be texts on the $16,000 going in or the 2.2 million coming out de tax me to death on the 16,000 going in? Hello? It's like, that is a no brainer. You don't want to be taxed on the money coming in.
You want that money to work for you? And that's exactly what it's going to do. That's why they started forcing people to take their earnings out anyway, because people are living longer and longer. And they said, oh, you know what? We're never going to get these taxes. If these people don't start withdrawing from their, their IRAs and from their retirement funds, we won't get the taxes.
So they started forcing people to withdraw so that they could get the tax money. That's why they did it. They want the taxes. So if you have a choice between pain before or pain after, what are you going to do you want to pay before? I don't give a crap on. Anybody tells you they're wrong. Just think of that scenario with little Ben, 16,000 in 2 million out.
Do you want to pay on the 16,000 going in or the 2 million going into. Definitely. See, do you see and understand good. Now when you get your first short-term rental, that's most likely going to be in your private name, you probably didn't create a business entity. And I think I did have that in the one of the first episodes on how to do that.
But when you start investing in your IRA, you definitely want one of those and you need one of those. So create yourself an entity like an LLC that is specifically for your short-term rental business. That is going into your Roth IRA. We're going to use that as the example. Okay. You can name it, whatever the heck you want to name it, whatever you do, name it.
Make sure it's easy to write on a check. I know this is like, this is stupid, but every time the first, uh, the first IRA and the first LLCs I had, I had these like long complicated names and it was. You know, because that's what you're going to have to ride to the benefit of and it goes on and on forever.
Make those names, short people make those names short. You can't use this or you can't use that, but I always make the names as simple as I can because I hate writing out all the checks by hand, like, Ugh, it's just, the names are short. So now it's nice. So keep the name of your LLC. Nice and short. When you start using your IRA to invest into your company, number one, it has to be a company.
So it has to be its own entity. And number two, you don't want to co-mingle personal and IRA ever, ever, ever. You want none of those properties to be the same. You want none of those properties to touch each other. Remember, these are the properties I can not use ever. My friends can't use them. My family can't use them.
No one can use them, but strangers, they belong to that entity. Pretend to yourself that you are running someone else's business. Okay. Because that's literally what you have to do when you think arms length. This is someone else's business. And I am just managing it for them. And as a manager, if I get caught stealing or putting my hand in the cookie jar, not only will I be fired, but they will take everything because the IRS is going to be the one locking down on that.
So you want to make sure that you're not touching any of that stuff with friends, family, or yourself. So those properties are going to be completely separate, know them and don't use them. Okay. It's so, so, so important that you always look at all the rules and regulations that apply to your self directed IRA.
Because like I said, the government wants your tax money. So they created these loopholes, basically. I think the rich create loopholes for themselves, but the IRS loves to find people who are going against them. Don't be one of those people. Don't be silly and stupid. Okay. Be smart. If you're going to do it, do it the right way.
Don't break the law ever. Don't go around it. Don't do it once. Don't say just this one time, nobody will know. They will find out, be honest, always be above the board. If you want to stay at a place, if you find a place in Hawaii, or if you blind a place in Florida and it's super close to universal studios, and this is the area you love and Dr.
Phillips and when to beer and you're like, oh my God, this is the house I want. That house does not get invested in with your IRA. That is a personal investment because if you're going to use it, it's personal. Okay. So let's see. I want to make sure that I covered everything that I wanted to cover here. So I covered the IRS publication five 90 is where you can go look up what an IRA is.
Right. I covered what a custodial account is or a trust. The custodians are going to be the financial institution or the bank or brokerage firm that's taking care of it. Ask around, ask friends and family, anybody who, you know, has a self-directed IRA. Oh, that's another thing people are going to tell you that self-directed IRAs are illegal.
Oh my gosh. No, duh. They're not, if you go on there, you're like, no, they're not. They're totally legal. It's just because people don't know. And what they don't know, they think is always illegal and that's, you can go right there and you can look it up under the IRS. And when you go into equity trust, you'll see, they can be illegal if you're doing them wrong.
If you're investing in something that you should not be investing in, but there's a whole list there. Just follow the rules and the regulations. If you're doing an investment in real estate, completely legal, completely above the board, you can totally do this. Okay. And then there are beneficiaries, beneficiaries.
You can be your own beneficiary to an account, or you can have your children be a beneficiaries. Obviously, if you die, they're going to be the beneficiaries after you, but you can also set up IRAs for your kids, your grandkids. And it's really fun to look into IRA is because, like I said, it's the power of zero.
And again, I do recommend that book. It's not a difficult read. It does get a little complicated. It's not like his loop book, that leart book is really good, but, um, but that's a whole different thing. I probably won't cover that on this podcast because it has nothing to do is short term rentals, but this does your self-directed IRA can definitely be used for it.
And I would highly recommend having maybe, you know, as many personal rentals that you have enough to get your cashflow every month, right? To where you want it to be to where you retire or where it's supplementing your income, what you want. So let's say you want to make 500 a month to a thousand dollars a month extra.
And you've got one property doing that. If that's all you want, personally, that income coming in by all means, keep that one account. If you want 10,000 coming in, let's just say you 10 X, that now you've got 10 businesses, 10 properties that are bringing that money into you. And you're making $10,000.
Personal. Those are yours. If you want to stay at a property ever and use that property for your own personal use or the use of your children or the use of friends and family that needs to be personal, then draw a line in the sand. Boom. Now you start to work on just your IRAs. Okay. It could be several IRAs or just one IRA, but you're going to have lots of companies inside your IRA.
Your IRA is going to own a bunch of LLCs and those LLCs will own properties that you never go into that you never allow any of your friends or family to go into. These are completely different properties, but this is working on your retirement. Okay. So your personal stuff is working on your income and cash flow.
And, you know, keeping the lights on in your house right now. And when you drew the line in the sand, all these other properties, all these other LLCs are going to be owned and run by your IRAs, and they will never ever mix with your personal stuff. And you will never ever use them for personal use or any friends or family or anything like that.
Okay. That's when you're working on your retirement, the time to start working on your retirement start funding, even if you're not playing with it is now. So that means that every month, I literally suggest you get to a point where you're putting at least 500 a month into your IRAs and that's per person.
So start little start at, you know, $20 if you only have $20 or $50 or whatever, a hundred dollars a month until you can max that. You can keep those IRAs going and just invest in little things, maybe companies or even nothing. I mean, it doesn't matter as long as it's that money is in there. And then wait until you get a big old chunk and you really are ready to start investing in them where you're buying property is or running BnBs.
Make sure that you do have that line in the sand and you never let the companies meet. And remember, again, not a tax professional, find somebody who you can trust. And this is just my personal advice. And you want to set all this stuff up because a lot of times too, what you can set up now might be totally illegal.
How many years from now you want to be grandfathered in to any of those things. If you earn that money and you invest correctly and you make that. Why the government would think that they could deserve that money or could take that money. They definitely could if they made a law, but you'll be grandfather, dang, get this stuff taken care of.
Now you want to protect yourself. You want to protect your children, your beneficiaries, whoever you leave your money to, you know, it could even be an organization or something. You want to protect them from things like that. And you want to be grandfathered in before any of these laws can take it back.
Now, some of the times they make those laws where they aren't grandfathered in. But as soon as you hear tell of things like that happening, that's when you split those things, you're like I'm going to pull out my investment, whatever I invested in and go into something else and let that interest, that money ride.
So you need to always watch what's going on with your accounts. Always watch what's going on with politics and the things around you. Make sure that you are aware, oh, when you have an account, like an account with equity trust, they have newsletters and stuff that they send you out. Anything that is going to affect.
In any way you want to be aware, you want to be aware, you want to know what's going on. It's the same thing with your short-term rentals. You've got to know if the city that you have your short-term rental and makes it illegal to have short-term rentals. If that happens to you, you're in trouble. Right?
So especially if you own the property, then you're going to have to turn it into a long-term rental or, you know, sell it whatever behooves you to do. But, um, if you're renting, you'll have to get out of that lease as soon as you possibly can. Some people hint, hint, even put it in their lease, that if they make it illegal in a town that they can give them a 30 day notice to get out.
Hmm. I wonder who's smart enough to have that in their contracts. Me. Yeah, because dude, if they change that stuff, it makes a huge difference. I know I'm going to be renting a property in the keys. If I can't make money on that property legally. You got to make sure that you always have these ways out, check yourself before you wreck yourself.
Right? Isn't that what the kids always say? Make sure that you're following these rules, make sure that you're staying ahead of the game, make sure that once you start doing these things that you're in different groups, you know, I, there's only a couple of different places where I have to check stuff because I know the best ones and I should start putting links up to some of the newsletters and some of the agencies where I get my information, but a lot of stuff I get from equity trust and from Stansberry, those are my two favorite places because they're on it, man.
They're on the changes and they know what you invest in. And if you are an investor, what you invest in is very important and who you invest with. So they take care of you. They make sure that you're ahead of the game. You want to know if any of these rules change, right? And you want to protect your. So it's very, very important.
It's important to me too, that you're not just making cashflow because cashflow is cool. Don't get me wrong. I love cashflow. I love the money coming in every month. That's a lot of fun, but what I really love is knowing that as a woman, knowing that a cut money coming in, when I get older or when I retire, God forbid, if anything ever happened to my husband or something that I've got money coming in, and then I'm not going to be bunkered down with a bunch of taxes on it.
Right. Because you know, I look at my mother-in-law and it's really sad. He or she is living on this small retirement that she got a small pension from my father-in-law's account, a little bit of social security, which who knows probably won't be there. Right. I mean, we all know the story of social security and what's going on with that.
And you know, she's living on this tight, fixed income. She's not having the retirement that she dreamed of. It's tight for her. And I feel sorry for her. I mean, she's got, she's got us and she's got, you know, my husband's other brother to take care of her too. I mean, everybody loves her and we're not going to let anything happen to her, but she doesn't want to be a burden on anybody.
Do you want to be a burden on anybody? No, we don't want to be a burden on our family. You know, we want our kids sitting by her bed waiting for us to drop. You know, when we're saying going, who's going to get the money, I'm going to keep my kids guessing for like ever. I'm never going to tell them who I left this stuff to because, because I want them to treat me nice.
Just. You better be tripping me eyes. You don't even know right now. You don't even know. No, my kids I'm sure. I always tease that. My daughter, my oldest daughter, if I sneezed, she would put me in a home because she was like, oh, you can't take care of yourself. You got a cold again. You know, I go, we're not leaving her.
Like, she will never be in charged by we're going to have like a custodian who's in charge of my health going. Yes, she is still in her. Right mind. Nicole will be arguing going. She's got a cold. She went outside again and just her socks. I always go outside in my socks. I don't know why. Cause I don't like wearing shoes, but I do like wearing socks.
So, but anyways, you want to make sure that you're not a burden on your family, right? He loved them. You want to take care of them. You don't want them to take care of you. And that's why you need a self-directed IRA. So I hope I didn't babble too long, but I hope he took a little bit of. And I hope you go and check out equity trust, hope you start putting money away.
If you haven't yet keep those things separate. That is actually the most important thing. Never, ever, ever, always arms length. Remember, that's not your, your IRA and the business that it will invest in. Neither of those are any longer yours. Once you start doing business within them, okay, those are now a business company that you work for, and they're not going to want you to take any of their money.
And they're not going to want you to let your friends or family or yourself stay for free in their company, you know, whatever. So don't do it. Just keep your arms length on those things. That's pretty much the most important thing that you can remember is just follow the rules that are there and any, any custodian that you find there, their website, their custodians, their people, their employees are going to they'll direct you to all the things that you need to do.
All the publications from the IRS and everything, so that you're following the letter of law. That's what you want to do. That's going to protect you. It's going to protect your family and it's going to protect your investment.
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