Different Kinds of Tax Advantage Accounts

Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Larry: Hey, this is Larry Goins, today’s trainer at REI Classroom. Really excited today because today I’m going to share with you all of the different types of self-directed retirement accounts that you can use, okay?
Mike: This REI Classroom real estate lesson is sponsored by theinvestormachine.com, FlipNerd’s private investor coaching program and your blueprint to investing success.
Larry: Now, basically, there are several different types of retirement accounts. There’s individual retirement accounts, there’s employer sponsored retirement accounts, and there’s retirement plans for self-employed borrowers, okay? Now, I want to go over the five different types of IRA’s first.
You have a traditional IRA. The good thing about a traditional IRA is you can take a tax deduction when you put the money in, okay, a tax deduction when you put the money in. However, you’re also going to pay taxes when you pull it out at retirement and there is what’s called an RMD, required minimum distribution, which means when you turn 70 and a half, you have to start taking it out and you have to start paying taxes on it, okay?
The next is a Roth IRA, okay? Roth IRA. This is the absolute best kind of IRA there is because you don’t get a deduction when you put it in but also when you grow it up to millions of dollars, you can take it out tax free, okay. The Roth IRA is the absolute best kind of IRA other than an inherited IRA, that’s the best kind.
So the next one is a spousal IRA, okay? You can set up an IRA under a nonworking spouse’s name, okay? And it could be funded by either spouse, all right. There’s also what’s called a myRA, M-Y-R-A, that’s myra.gov, and this is an account that the government sponsors. It’s an IRA but where the government, they actually invest the money for you, okay. But nobody ever does it that has any sense or knows what they’re doing because the government is only paying 2.375% return as of this month, okay.
So the next kind of IRA is a rollover IRA or a conduit IRA and this is where you might, maybe you had a 401(k) at your employer and you wanted to basically roll that over into an IRA, maybe you left your employer, okay, and you want to roll it over to an IRA so that’s what a conduit is called or a roll over, all right?
Now, let’s talk about the five different types of employer-sponsored retirement accounts, all right? There is a 401(k). You can also have a 401(k) with a Roth component, okay. There’s a 403(b). That’s also known as a TSA or tax-sheltered annuity account. There’s also a 457(b). State and local governments typically sponsor this.
There’s also what’s called a defined benefit plan. This is basically public or private companies, self-employed and high income individuals use this. And then there’s a TSP that is a Thrift Savings Plan. Now, some of you who work at other companies, big companies that have some of these accounts, you’re typically not going to be able to self-direct them. However, what you can do, if you have a 401(k) and you’re still working with the organization, you can borrow against it, buy and sell real estate and then put the money back because you’re really just borrowing from yourself anyway. So it’s one way to take advantage of a company-sponsored 401(k).
Now, let’s talk about the five different types of retirement plans for self-employed people and small business owners. The first you have is the SEP IRA for self-employed people, okay. That’s for companies with one or more employees.
Then you have what’s called a solo 401(k). Now, this is what a lot of people talk about and will typically have you invest in if you are a one or two-person show. Maybe it’s just you with your company or you and a spouse. You don’t have employees, okay? So that’s when you would use a solo 401(k). And the good news is there’s also a solo Roth 401(k), all right?
And the great thing about the 401(k)s versus IRAs is whenever you go and borrow money, you have to pay UDFI, Unrelated Debt Finance Income, when you’re borrowing money in an IRA which basically means even it’s in an IRA, you’re paying taxes. However, with the 401(k), there is no UDFI, Unrelated Debt Finance Income, okay? Also, if you happen to do a prohibitive transaction in an IRA, there’s a 100% penalty and the IRA is done. However, if you have a 401(k), there’s a 15% penalty if you do a prohibitive transaction and it’s only a penalty on the amount affected.
Let’s say you have $100,000 in there and you bought a property for $20,000 from your daughter, that’s a prohibited transaction. You’re going to pay 15% tax on the $20,000 and you get to keep the 401(k).
The next type of retirement account for small business owners is a SIMPLE IRA. SIMPLE stands for Savings Incentive Match Plan for Employees. That’s what we used to have. I like it because we have about 15 employees in our real estate and our education business and if they don’t contribute, I don’t have to match. That’s the reason I like that, okay. Now, there’s also a payroll deduction IRA. It’s for self-employed people and employers with one or more employees, okay. And then there’s profit sharing plans as well for small businesses.
Now, there’s two other types of plans I want to talk about. They’re not retirement plans but they’re very, very important. The first is an HSA, Health Savings Account. You can have one individually or for your family. You can put like mine, I’m over 50, so with my family, I can put in $7,750 per year. I can grow it and pay for all qualified medical expenses but I also have to have what’s called an HDHP, High Deductible Health Plan. See your insurance person about that.
The next type of plan is an ESA, Education Savings Account. This is where some people call it a CESA, Coverdale Education Savings Account. The great about thing this is you can use it for everything from kindergarten all the way until your child is 30 years old, and if you have two children or if you have a child and a grandchild, once your child is done with it, you can roll it down into the next child or even give it to a grandchild as well and keep the money growing and working.
So I’m Larry Goins, thanks a lot for listening today. If you want a free copy of my latest book, “HUD Homes Half Off,” just go to freehudbook.com. Thanks a lot. I’ll see you next time.
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