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What to Know about Self-Directed IRA Investing with Terry White
This week's guest is Terry White, the president and CEO of Sunwest Trust, Inc. Sunwest Trust, Inc. is a financial services firm that offers real-world solutions to clients who need help with their self-directed IRA and escrow management needs.
Terry started First Financial Escrow, Inc. Over the next few years, he also started other businesses like First Financial Equities, Inc., Asset Ventures, Inc., and First Financial Marketing, Inc.
Aside from acting as CEO of Sunwest Trust, he was also appointed to serve on the Board of the New Mexico Finance Authority.
- Terry's background and what his company does
- How he started Sunwest and how they are helping their clients
- Why he started the trust company
- On doing your due diligence and understanding what you are investing in
- A lot of money on the sidelines just waiting for a good investment
- On diversification
- Buying and selling owner financing
- Thoughts about investing on debts or buying notes
- On self-directed accounts
- The key is knowing what you're doing
- Different ways you can invest in real estate using a self-directed retirement account
- On making offers
- What some of the prohibited transactions are
- What a checkbook IRA is
- Difference between a 401K and an IRA
- Terry's favourite type of account
- Risk versus reward
- “You need to do your due diligence and understand what you are investing in.”
- "I think it's super important for people to take their time to educate themselves so that they don't take their retirement account to an investment that they may not be the best one for them."
- "The higher the reward you get, the higher the risk."
RESOURCES AND LINKS FROM THIS SHOW:
- Sunwest Escrow
- Sunwest Trust Inc
- Sunwest Trust Youtube Channel
- Retirement Industry Trust Association
- When All You Have Is a Hammer... by Terry L. White
Larry: Welcome to the Brain-Pick-A-Pro show live from Lake Wylie, South Carolina. I’m Larry Goins. Thank you guys so much for watching and I really appreciate it. We try to bring you on the show the best of the rest. The movers, the shakers, the people who are doing investing, working with investors and doing deals, having fun making money. Today is no exception. I am really excited. We have the president and CEO of Sunwest Trust, Mr. Terry White. What’s going on, buddy? How are you doing?
Terry: I am doing great, Larry. How are you doing?
Larry: Man, I am doing awesome, doing awesome. Why don’t you start out and tell our viewers and listeners a little bit about yourself.
Terry: Well, like you said, I am the President and CEO and Sunwest Trust. We have a few little companies. Sunwest is our major company and we do self directed IRAs which what that means is we allow people to invest their individual retirement accounts and what you might consider nontraditional assets.
Terry: We have people who invest in real estate, precious metals, private companies, tax deeds, I mean, the sky's the limit. The interesting thing is the IRS doesn’t tell you what you can invest in. they tell you what you cannot invest in and so they say you cannot invest on your retirement account, life insurance, or collectibles, so that leaves it open to everything else. That’s what we do in that company. Just some personal information, actually tomorrow, I will have been married 39 years.
Terry: I have been celebrating that with my wife and I have three sons who work with me here at Sunwest Trust and various other businesses that we have going on, and two amazingly handsome grandsons.
Larry: That’s a lot.
Terry: So that’s a little bit about me.
Larry: That’s really cool. That is really cool. So tell us a little bit about Sunwest and what are you guys doing and how you help your clients?
Terry: Well, I started Sunwest or I started the company that became Sunwest in 1987, so we’ve been in business for almost 32 years. In October, it will be 32 years.
Terry: We started out as an escrow company. I don’t know if you’re familiar with escrow where you’re from; but here in New Mexico, an escrow company basically is a mortgage servicing company but for owner financing. So, if an individual wants to sell property and instead of getting cash for the property, they accept monthly payments, so they kind of act as the bank. We service those loans and that’s what the Sunwest escrow does. And then in 2004, I started Sunwest Trust with the main and only purpose of being a self directed IRA custodian. So we’ve been doing that for what now, 15 years?
Larry: Oh, okay.
Terry: We have a little over 10,000 clients all over the country. We don’t do any investing for or consulting or anything. We don’t tell people what to invest in, we just facilitate their ability to invest their IRA in whatever they choose to invest in.
Larry: That’s good. That is good. So, you still have Sunwest escrow and I am on the website now. Really cool site. I like that. Now, do you service loans and just a few states or nationwide?
Terry: Well, our escrow business is pretty much regional so we service loans in all throughout New Mexico and some in Texas, some in Southern Colorado. So that is really the reason I started the trust company is because we were limited in the amount of growth we could experience in the escrow company because it was a regional business.
Terry: The cool thing about the trust company was that we could be nationwide and so we’ve been very fortunate over the past 14-15 years to get some really good clients in every state in the country. We’ve got a client in every state. We’ve got a few in Alaska, Hawaii and stuff. We’ve been really fortunate there. We’re custodian for about a billion and a half dollars in assets.
Larry: That’s sweet. That is sweet. So yes, a lot of people who are watching this podcast, they know all about the escrow companies, about seller financing, so you know, maybe they can reach out to you. Terry’s website is Sunwestescrow.com so if you’re in New Mexico or maybe Texas, reach out to him because they can service your seller finance notes. Terry, you and I both know there’s probably more seller finance transactions in Texas than any of the other states put together, so there’s a ton of them out there.
Terry: Yes. probably so. We see a lot of seller financing on real property, you know, property they can’t get for one reason or another, you can’t go to the conventional loan, but it’s also a good idea. It’s not a bad idea for someone that owns a house free and clear or something. Especially now, interest rates are reasonably low and you can get a decent rate by carrying the financing yourself. So if you own a house or you own a piece of property that you own free and clear or maybe even if you have a mortgage that gets a little more complicated but you can charge 6% to 7% interest which is not a bad rate and that’s way better than you can get in the bank and it provides a monthly income. So, it’s not a bad idea.
Larry: That’s true. It even works the other way too. Just yesterday, I negotiated three properties for 75,000 dollars. No money down, 5 % interest for 20 years, right?
Terry: Absolutely. In fact, I do that quite often myself. In fact, I am looking at a few properties right now that I am hoping to negotiate contracts on. The nice thing about that, Larry, you know, apparently you do some of this, but you know, there is no qualifying. There is no credit check necessarily. You know, you don’t have to jump through all the hoops that you have to jump through when you’re dealing with a bank or a mortgage company, so you might pay a little bit higher interest rate but a lot of times, it’s worth it to avoid that hassle.
Larry: Exactly, exactly. You know, Terry, there’s a lot of people probably watching this and they’re all like, man, he’s got over a billion dollars in assets. I’d like to get my hands on some of that money for private money to partner with people and stuff like that. Now, you’re regulated. You can’t just say, hey call this guy. He’s got 200,000 in his account. But I would like to talk a little bit about, I’m sure, and you don’t have to give me specific statistics, but I’m sure you know, out of your billion dollars in assets, there’s probably a pretty high percentage that are uninvested, just sitting in an account waiting for a deal.
Terry: Well, I tell you what, Larry. It’s funny that you ask that because I get that call at least twice a week and to be honest with you, I don’t do any of the work around here at Sunwest Trust so I don’t know, you know, whose accounts have cash in it or now, but even if I did, we’re very careful not to make any referrals or anything because I simply don’t have the time.
Larry: Well, you can’t.
Terry: Yes, I can’t. Number one as a regulated company, but the other thing is I don’t have the time to do my own due diligence on each of the people that are wanting to borrow money and so that brings up, what I would think is a great thing for your investors to understand or you know, the people that are listening to understand is, they need to do their due diligence and they need to make sure they understand what they’re investing in, how the person is going to pay them back, what’s the probability of that happening if it doesn’t happen, you know, worst case scenario, if it doesn’t happen, you know, what do they do? So I think at Sunwest Trust and just to point out real quick, I meant to tell you, we have two websites. So we have SunwestEscrow.com which is my escrow company and we have SunwestTrust.com which is the trust company, that’s the self directed IRA, so be sure whichever one they’re interested in to go to the specific website. But on the Sunwest Trust side, we have a Youtube Channel called Sunwest IRA where I have over 230 videos that talk about how to do due diligence, what a self directed IRA is, so I think it’s super important for people to take the time to educate themselves so that they don’t take their retirement account which is something, you know, kind of sacred. I mean that’s what you’re depending on living on when you decide to retire, so that they don’t take it and put it in an investment that may not be the best one for them or may not be a good investment, so it’s very, very important for people to do their own due diligence.
Larry: Exactly. I think that’s very important. I think the main point I was trying to get across is people who own or have a self directed retirement account, they’re a great source for private money or to partner with deals on or to sell turnkey properties to or whatever, but the main thing I wanted to get out was there’s a lot of money sitting on the sidelines just waiting for good investment. You know, not everybody who has an account at Sunwest Trust or with any SD IRA has the money fully invested. There’s a lot of money sitting on the sidelines just waiting for investment opportunities. Would you agree?
Terry: Oh, that’s a great point and I think to add to that is the fact that there’s a ton of money, I think there’s 9 trillion dollars I want to say in self directed IRAs, 401Ks in this country right now. So there are a lot of those people that don’t even realize that they could do a private loan deal with their IRA or invest in real estate or something. So, you know, that’s one of the reasons I love doing these podcasts and talk to your listeners. It’s an education process just people understanding that they can do something different with their retirement account. Me personally, I don’t think they should ever take all of their money out of the market necessarily but man, it’s a great way to diversify. You know, you’re always told by your financial advisers and everything, diversify, diversify, diversify, and they look at that diversification as put your money in a mutual fund and spread across several stocks. I don’t do a lot of investment. I don’t understand stocks and stuff that well but it seems to me when the market goes down, they all go down. So why wouldn’t you consider putting it in something completely out of the stock market? A piece of real estate. A private investment. I’ve done deals with my IRA where I loaned good friends money to start businesses and stuff and they’ve done well and they’ve paid off. They don’t all do well and they don’t all pay off but the majority of them have and I have been pretty blessed with some of those kinds of deals that I’ve done.
The other thing that you and I have talked about is this owner financing. A lot of people don’t realize, there’s a whole market out there buying and selling owner financing. I mean, I don’t know if you’ve done that before I have spent my entire career buying debt, other people’s debt, and getting monthly payments and it has worked out very well for me.
Larry: That’s great. You know, a lot of people talk about, you know, it’s better to invest in debt or buy notes or create notes than it is to actually own the real estate in an IRA. what are your thoughts about that?
Terry: Well, you know, the nice thing about owning the debt is you’re still participating in real estate, if you like real estate, but you don’t have the headaches of a tenant and that kind of thing so you don’t have to, when the sink is leaking at 2 o’clock in the morning, you don’t get that phone call. When the toilet doesn’t work, you don’t get to that phone call but you’re still participating in it. There is always a chance that if you buy notes from people, there’s always a chance that you’ll get the real estate back and you know, in most cases, you end up getting it back at a much lower price than if I had bought it on the market. Over the years, I bought my first real estate contract in 1985 and so I have done that probably over a thousand times in the last few years. I can’t say that every time I took a property back, I did well, but I think the majority of the times that I have had to foreclose which is not that many. I mean, that’s one thing people to understand that the foreclosure rate on real estate contracts at least here in New Mexico is probably lower than the mortgage foreclosure rate. But when you do take that property back, there’s an opportunity there also.
Larry: That’s really good. I love that. I love that. Really, there is a very, very small percentage of IRA. you mentioned something about nine trillion or whatever, but you know, there’s a very small percentage that it’s actually in a self directed account, isn’t there?
Terry: Yes, exactly. You know, it’s hard to know exactly but I’m in a group called RITA which is the Retirement Industry Trust Association. It’s an association of companies in my business and they have estimated or we have estimated from that of the nine trillion, only 3% to 5% of it is self directed at this point in time. So, there’s a huge amount of opportunity there. Let’s say you have someone out there that’s trying to raise money for something. What they need to do is just start asking people that normally lend them money or they know and that appreciate what they’re doing. Hey, do you have an IRA. did you realize you can lend me money out of your IRA? You know, I can secure that by real estate or whatever they decide to do. So, just them knowing there’s an entire pool of money something that someone doesn’t even know how they can use it necessarily and giving them that opportunity or that idea. You know, they may not. I firmly believe that probably, you know, 90% of the people out there have no business doing a self directed IRA because they don’t understand investing, but for those that do, it’s a great opportunity. You know, it’s nice to be able to go and physically see something that you have in your IRA. I can physically drive down the street here in Albuquerque and point to a house and say, my IRA owns that house. So that’s a nice feeling. You know, I also own some stock in my IRA and I have got nothing to point to there. I have no control over what that investment does.
Larry: That’s true. That’s a really good point. I said years and years ago and I used to be a stock broker. Right? Back in the 80s and I said, after I lost money in stocks, I said, I’ll never buy another investment that I can’t personally control, right? So I don’t do stocks, bonds, mutual funds, options or any of that stuff, right? All my stuff is real estate related, hard assets, or notes.
Terry: I’m not quite at that point as you are. I do have, my company has a 401K and so that’s in mutual funds. I mean, I personally think in my mind, it’s important to have a little bit in both but there’s nothing wrong if you understand investing in real estate. I mean, I’ve done very well in real estate and I’ve been very pleased with it. The key is knowing what you’re doing, I think. I think you would agree is it’s like doing your research and making sure you don’t just jump into something because somebody tells you it’s a great deal. We have so many of these fix and flip shows on TV and stuff, the kinds of stint that makes everybody think they can do that. I’ll tell you, it’s not as easy as they make it seem on the TV show.
Larry: No. If it was easy, everybody would be doing it, right?
Terry: Exactly. Exactly. It will be a lot more competition for guys like us.
Larry: There you go. Hey, can you share some different ways that you can invest in real estate using a self directed retirement account?
Terry: Sure, you know, obviously as long as it’s not life insurance and collectibles, you can do anything. Some of the things that I have seen over the years, maybe the first thing and the most obvious is for your individual retirement account to buy a house and rent that and so you have to understand if you do that, your IRA has to have enough money to actually purchase the property. So say if you had 100,000 dollars in your IRA, it probably wouldn’t be a good idea to buy 100,000 dollar piece of property because you want to keep a little extra cash for unforeseen expenses and stuff like that.
Terry: So that’s one way you can buy a property.
Another way is you can actually have debt in your IRA. a lot of people don’t know that and the debt has to be structured in a special way. It has to be a non recourse debt but there are lenders out there that will lend money to IRAs, non recourse loans to IRAs, you just google, you know, IRA loans and you’ll find four or five banks that are on the country that will do that. So that’s a second way.
The third thing you could do is what we talked about is maybe you don’t own the real estate but you lend money on real estate so you’re still invested in real estate but you have fixed return with the potentially, obviously I was going to say opportunity but it may be an opportunity or potential of getting the real estate back so you have to keep that in mind that you might have some of the expenses and foreclosing and that kind of thing. Another thing you can do and some people do this, is they buy land. Buy vacant land in your IRA and so if you are a young person and you have the opportunity to buy land that you think is in the path of progress, you know, that might be something good to invest in your IRA because you have a lot of time. You know, if I was 30 years old, you can’t start taking the money out of your IRA until you’re 59 and a half. So if you’re 30 years old, you’ve got 29 and a half years to let the value of that land go up. Here in New Mexico, here in Albuquerque, we have the westside of town where a lot of people bought property years and years ago and it became very valuable.
So that’s something you could do. We have clients who invest in tax deeds if you’re familiar with that. New Mexico does not deal with unpaid taxes that way but a lot of, I know Colorado does, and there are other states that will. When someone owes property taxes and they don’t pay them, they will sell that property or sell a deed to that property and there are certain rules and stuff that you have to deal with but that’s another way that you can invest in real estate so there are several ways and I am sure there are other ways. You can partner with other people, individuals, to other IRAs as long as they’re not disqualified parties and purchase real estate in that way. You know, you can even look it up. I know I’ve talked on some podcasts where they promote syndications and stuff like that, so that’s another opportunity.
Really, Larry, it’s kind of endless whatever somebody can think of and again, going back, as long as it’s not life insurance and collectibles, you can have that investment in your IRA.
Larry: That’s great. I love it. I love it. That’s really good info. I even know some guys that are like maybe they’re in the medical field and they buy and sell medical equipment for their business, but over here in their retirement account, they find a good deal on a piece of imaging equipment or something, they put an option on it and turn around and sell it but they’ll do that through their IRA. you can do that, right?
Terry: Exactly. Absolutely. That’s something I didn’t even mention is not ever actually buying the property or assets like you referred to, buying an option or tying that up knowing that it’s in the path of progress in the next six or eight months or something.
Terry: So tying it up with an option or first write a refused deal or something, and then turn around and sell that so you can absolutely do that in your IRA and that’s a great way potentially to build your IRA from a relatively small amount of money. You know, we talked about buying a house. Well if you’re going to buy a house, you have to have a pretty good size IRA account but if you’re going to buy options, you can probably do that with 10 or 15 thousand dollars in your IRA. It’s a little more risk obviously, but the potential is there.
Larry: You know the other thing that I do, Terry, in my ESA and HSA is when we get somebody that calls us from our marketing and they have a lot, just a building lot, right? I tell them right upfront, hey I can’t give you much money for it. I’ve got no way to improve it. It takes two or three years to sell a lot. You know, I can give you 500 bucks for it. Right? So just in the last 30 days, I bought four lots in my son’s ESA and for 500 dollars a piece, and we’re selling them for 999 rent to own, owner financing. Right? We’re actually closing tomorrow on one of them where the lady said, I’ve got 4,000 dollars cash to put down. I said, look for 4,000 dollars I will just give you the lot and you won’t have to make any payments, right? Because I only had 500 dollars in. right?
Terry: Yes, yes. Well you’re exactly right. I think what might be important to point out is that some people listening. I am not sure exactly who your audience is but they might think that that’s taking advantage of somebody but it’s not because they don’t know 500, maybe they inherited and they have no idea their dad has owned it or their parents have owned it for 50 years or so. You know, you’ve got to be careful and not be afraid to make those kind of offers I think. I actually did a deal a year ago, maybe about a year ago, on a big piece of land, close to a place called Mountainair here in New Mexico and the person had it listed for 450,000 dollars. I don’t remember, it’s like 60 acres. We offered him 45,000 dollars for it and we got it. They were happy to get rid of it because you’re exactly right. Vacant property like that out in the middle of somewhere, sometimes, there’s a special buyer for that and it takes a long time to find that buyer.
Terry: When you come in and you offer them. They’re thinking, I’m never going to get anything out of this and then you come in and offer them something. A lot of times, they’ll take it. You know, sometimes you can’t be embarrassed by making those little offers I don’t think.
Larry: That’s a really good point. I’ve always said. If you’re not embarrassed by your offer, it’s too high.
Terry: So you’re saying do be embarrassed by that. That’s a good point.
Larry: Exactly. You absolutely should be. Let’s talk a little bit about prohibited transactions because having a self directed investment account, whether it be an IRA, ESA, HSA, whatever, it comes with a little bit of responsibility. Can you touch on that?
Terry: Exactly. Great point. So the first thing again, and I’ve said it several times, the life insurance and collectibles, you can’t invest in that. The next rule is you cannot invest with a disqualified party and those are defined as your family, you are number one disqualified party, so your IRA can’t buy something from you. You can’t buy something out of your IRA. the next disqualified parties are your family and it’s interesting to me, the IRS defines family basically as ascendents and descendents so your parents, grandparents, kids, grandkids. You can’t do business with them. The third group is people that provide services to your IRA. so if you have, Larry, if you had an IRA here at Sunwest Trust, I own Sunwest Trust, so your IRA could not buy something from me because my company provides services to your IRA.
Terry: So those are basically, and they seem pretty straight forward but you would be surprised how often people look for ways to try to cross that line. You know, in my opinion, there are plenty of good deals out there without doing business with a disqualified party. So, just real quick, once your IRA does business with a disqualified party, that is what’s called a prohibited transaction. Once your IRA does a prohibited transaction, the entire IRA could be disallowed which means the IRS will make you dissolve that IRA, add that value to your tax return for the year that that happened and pay taxes on all of it, and if you’re under 59 and a half, you’ll pay an additional 10% penalty and there are also some other penalties that could be assessed there, so you do not want to commit a prohibited transaction.
Larry: That’s a great explanation and I really appreciate you sharing that. It is very, very, very important, guys, that you pay attention to this and don’t do. If you have a question about it, ask a professional, right? Ask somebody like Terry. So I mean, he doesn’t give advice, he doesn’t give counseling, he doesn’t make investment recommendations. He can’t do that. But he could let you know what’s prohibited and what’s not. What about siblings? Is a sibling a disqualified party?
Terry: No. again, they are not ascendent or descendent, so you could actually do business with a sibling. You know, I have one client that I like to talk about because she does really well in her IRA and she lends her nephew money to flip houses. Her nephew is a house flipper. Her and her sister which is another aunt of this particular kid, lends him money to flip houses and they do really well, so that works out really well for them.
One of the quick examples I want to point out, Larry, that’s kind of on that subject is because we just saw this happen. IRAs are typically protected in bankruptcy and protected from creditors, but what I’ve heard happened and we just actually saw it in our company in the last couple of weeks. If you file bankruptcy and you have an IRA, sometimes, the bankruptcy trustee attorney or some attorney of a creditor that you have will look at your IRA to try to find a prohibited transaction and even though the IRS didn’t find it and maybe you’ve not been audited, if the lawyer can find a prohibited transaction that happened prior to you filing bankruptcy, they will say that because you did this prohibited transaction, your IRA would be disallowed therefore it’s not really an IRA and it needs to be included in the bankruptcy. So just something to caution your listeners. You know, those prohibited transactions aren’t only dangerous with the IRS but they could be dangerous if you have creditors or if you file bankruptcy or something. So that’s just something to keep in mind because a fairly new thing that’s happening. Some of these lawyers have realized that there is a pool of money there that they haven’t been able to get to and they’re trying to figure out how to get to it. Again, we just had one last week. It’s the first time I’d ever seen it. I’ve heard about this for a couple of years but it’s the first time I’ve ever seen it in our company. They were able to identify a prohibited transaction and then use it to pay a judgement in a lawsuit.
Larry: Wow, so it’s very, very, very important and the good news is, there’s not a whole lot of attorneys that know to even look for a prohibited transactions because they don’t understand self directed anyway. But the more it is mainstream the more it will go to look for them, right?
Okay, so let’s talk a little bit about entities. You know, everybody talks about, you know, I want a checkbook IRA, checkbook IRA. you don’t know if you guys do that or not or allow that. But, you know, I guess they can be okay but there’s also a lot of responsibility that comes with those. Can you touch on that?
Terry: Yes, so you hear about it and we allow checkbook IRAs. we make people sign a management agreement saying that they will have someone review their LLC, you know, annually, at least to make sure that they’re not doing any prohibited transactions, but basically what a checkbook IRA is, is you create an LLC and you have the IRA purchase all the membership units of the LLC and you have the IRA as the member, the only member of the LLC name you or anyone, but typically it’s the individual person who owns the IRA as the manager. So you’re the manager of the LLC but you’re not an owner in any way. You’re just managing it on behalf of the IRA and that’s a perfectly legitimate strategy. The problem with it is, if you go out to the internet and you find people that will set those LLCs up for you, sometimes they will tell you that by having the LLC structure, you can avoid the rules on the IRA. I will tell you that that is absolutely incorrect. Every rule that applies to your IRA, the fact that you can’t do business with disqualified parties and prohibited transactions that results from that, apply to the LLC. so, again, where you’re saying it’s dangerous is, you know, as a custodian, we don’t look at your transactions close enough to necessarily determine if they’re prohibited transactions or not. But a lot of times something will come across our desks that we can see obviously that it is a prohibited transaction, and we won’t let you do that. Although it’s not our responsibility to police your account, we look at it and we know and we’re here if you want to call us and ask us if something is prohibited and we can guide you in that.
When you got this checkbook control LLC, you know, you could very easily be out there and do something that you’re not supposed to and not even realize it. A perfect example that happens with LLCs is people take their distributions so they turn 59 and a half, they’re old enough where they can take money out of their IRA without any penalties so instead of giving them money back to us as the custodian and asking for the distribution so that we can report it properly, they just write themselves a cheque out of the LLC and think that’s a distribution and that could happen several times before we ever find out about it as a custodian and it’s very difficult to fix that problem. Many times it will result in the IRA just being disallowed. If they were to get audited or something, then the IRA, that would blow up their entire IRA. I think it’s important to point out, if I do a prohibited transaction for let’s say 5,000 dollars. It’s a little 5,000 dollar transaction I lend my son money, let’s say, out of my IRA. let’s say my IRA is worth a half a million dollars. If that gets audited and it gets caught, they are not going to just make me take the 5,000 dollars. You know, the 5,000 dollars is not going to just go into my income that year. They’re going to disallow the entire IRA so half a million dollar IRA gets distributed in one year over a little transaction that was only 5,000 bucks so you got to be very, very careful with those prohibited transactions.
Larry: That’s why. That’s so true. It’s perfect. That’s why also a 401K is a really good way to set up a retirement account when it comes to prohibited transactions because in a 401K, 401Ks are protected by ERISA laws so if that 5,000 dollar transaction was a prohibited transaction, only that amount of money in a 401K would be affected, not the whole 500,000, right?
Terry: Okay. I probably knew that at one time, Larry, but I’m old and I forget those things.
Larry: I hear you.
Terry: But you know, there are some other really great advantages. If you’re listeners are self employed with no employees other than a spouse, solo 401K or individual 401K is a great retirement plan and I would encourage people to look into that because it not only does have the advantage that you just talked about but it has got the advantage of larger contributions on an annual basis and it also has the advantage of you being able to borrow money out of it which you can’t do out of an IRA. so it’s great. I’m kind of surprised that the continue to let people have those. Then if you can have a Roth portion of it which is even better.
Larry: Exactly. You can have a solo or an individual 401K and it could be a Roth, right? It doesn’t have to be a traditional, right? So you don’t take the deduction but you don’t pay taxes when you pull it out. You know, do you want to pay taxes on the seed or on the crop? Right? You want to pay it on the seed when then amounts are small, right?
Terry: Yes. That’s a great analogy because that one little seed produces a whole lot of fruit sometimes.
Larry: Exactly. Exactly. You know, the other cool thing that is an advantage over a 401K versus an IRA is talking about UDFI. unrelated debt financed income. If you borrow money on an IRA, on a deal in your IRA, when you’re going to pay taxes on the portion of that investment that you borrowed money. That doesn’t apply to a 401K, correct?
Terry: Yes, I’ve heard that that’s because the lobbyists are much better than the individual real estate owners lobbyist so they got that provision in the 401K, it’s not in the IRAs are exactly correct.
Larry: Right. Which can add up, which can add up. Even if you borrowed money on a deal on your IRA, if you pay, then you can also use depreciation and deductions and things like that to offset it as well.
Larry: Yes, so let me ask you a question, what is your favorite type of account. Do you have a favorite type of account?
Terry: You know, I think my favorite type of an account would be a Roth and I think, you know, simply because you pay the tax when you go into it but you don’t, like you said, you pay the tax on the seed but you don’t pay the tax on the crop.
Terry: And so, what I would encourage people, I mean, if you’re young and if you’re in your 30s, man you should be putting money into a Roth and looking for some good investments for that because that thing can build. It’s amazing how fast and how large that can grow and then when you’re 59 and a half, you’re going to really appreciate that when you can take that money out tax free.
Larry: Absolutely. But you can also leave it in there.
Terry: Yes, you can leave it in there. Leave it to your kids and then they can take it out over their lifetime. It could last a couple of generations which is really awesome. Again, that’s another point that I think you’re leading to is the fact that with a traditional, so the rules are, with the traditional and a Roth, you can’t take it out without penalties until you’re 59 and a half, other than the principle and stuff. There are caveats to that.
Terry: But then if you have a traditional, when you turn 70 and a half, the government makes you take that money out. Makes you start taking that money out on a traditional. But a Roth, that doesn’t apply. So, it’s interesting to me and a lot of people might find it strange but it’s interesting how many people turn 70 and a half and they don’t want the money out of their IRA. I mean, it’s like pulling teeth to get them to take their RMDs because they have other sources of retirement income and they’re wanting to leave those IRAs to their heirs.
Larry: Right. And RMD is required minimum distribution. If it’s a traditional IRA, you must take the money out, the required minimum distribution every year and you must pay tax on that money, right?
Larry: With the Roth, you don’t get the deduction when you put it in, but never pay tax on it when it comes out.
Terry: You know, two rules on that, Larry, you have to have had the Roth for 5 years, and you have to be 59 and a half. So those two rules, if you meet those two rules, the income that was produced by that Roth comes out tax free.
Larry: That’s great. That’s great. Man, this is good stuff. One last question I have for you. Everybody wants to get, oh I want to get a great return. I want to get 25%. I want to get 18% return. Talk a little bit about risk versus reward.
Terry: That’s a great question because people don’t understand that. I am an accountant by education. I don’t know what your education is buy we, I know you understand that risk versus reward. People just don’t aren’t taught that and don’t understand and so what that means is, you know, probably the safest thing what you would consider the safest thing investment out there is something an investment, lending money to the federal government. Although maybe that’s safe or maybe it’s not but that’s considered the safest investment therefore that pays the lowest interest rate, right?
Terry: So then you look at these things that people call you on the phone and say, I’ve got this great deal that pays 18%, 20%, well first of all, if they ever use the word guarantee, hang up the phone and run as far away as you can from that, because nothing is guaranteed in life except debt and taxes.
Terry: You have to understand the higher the reward you get, the higher the risk, meaning that the chance of losing your money altogether is greater the higher the reward. It’s simple. If I have to pay you that higher return to get your money it’s because the people that are willing to lend it with less risk aren’t willing to lend it the lower rate. So if you see, you know, 20% to 25% return, that’s inherently a risky investment. Now, I wouldn’t say that I wouldn’t necessarily do those and people have to make that decision for themselves, but you know, I’ve made investments where I made 25% or 30% or 40% return on my money, but I’ve made those exact same investments and lost all my money. So you have to be aware of that.
Larry: Yes, that’s really good. That’s a really good point. Terry, thank you so much for being on today. I really, really appreciate it. It’s been a lot of good info, a lot of good info.
Terry: Thanks, Larry.
Larry: Do you want to give out your websites again for people?
Terry: Yes, just real quick. So Sunwestescrow.com if they want to go there, I don’t think it shows on that website, but I have a book that I wrote about real estate contracts which is really only applicable to New Mexico residents, so that might not be a lot of value to your listeners, but if they want to go to SunwestTrust.com, I have a book that I have written about self directed IRAs. it’s called If All You Have Is A Hammer. They’re welcome to that. We will be happy to send them, the physical book, or they can download an ebook there. I would also encourage people if they have an interest in self directed IRAs to go to Youtube and look up Sunwest IRA and those videos are just 5-8 minutes long, and they’re short to the point. I’m sorry. My son has done some of those videos. He’s much better looking than I am, but I do the best I can with that. It’s some good information. I encourage people to go there. If they want to contact me, they can go to sunwesttrust.com and just click on the “contact us” put in there that they heard me on your podcast and I will get back to them with an answer to whatever their question is as fast as I can.
Larry: Sounds great. Man, I really appreciate you being on. Thank you so much. It’s really good info.
Terry: Thank you. I appreciate it too.
Larry: Thanks a lot everybody for watching. I really appreciate it and we’ll see you on the next show.