A self-directed IRA is a form of individual retirement account that is designed to allow investors to diversify their retirement assets, including cash, beyond what is typically offered by many brokerage firms. The advantage of that are that you can increase the potential for growth by giving you the freedom to invest in almost any type of asset. In the second half of a two-part series, Marco Santarelli continues his conversation with Glen Mather, the President and CEO of NuView Trust Company, about building tax-free wealth using self-directed IRAs. Stay tuned to this episode and start taking control of your financial future!
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This is Part Two of How to Build Tax-Free Wealth Using a Self-Directed IRA. This is my interview with Glen Mather. The episode went rather long when I was recording with Glen. I decided to chop it out into a two-part episode. This is part two. If you haven’t read the first one, go back to the previous episode and read that. What we’re talking about is how to grow your wealth in a tax-deferred or tax-free basis. You can do this through a self-directed retirement account, what we refer to loosely as Self-Directed IRAs. There are several different kinds as you have learned from Glen in the previous episode. One is to help you gain control of your capital, grow as fast as you can, diversify within your portfolio, have control of your financial future and take advantage of the tax advantage accounts that are laid out by the IRS using these particular vehicles. That allows you to defer your taxes or grow your taxes tax-free and take them out later. You can pay your taxes one way or another, either upfront or down the road. The episode is filled with valued information, so pay attention, gather what you can, read it twice and recognize how you can start, grow and leverage retirement savings. Here we go with the continuation of my interview with Glen Mather.
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How To Build Tax-Free Wealth Using A Self-Directed IRA (Part 2)
Here’s what I like. With the 1031 exchange, you have to hop through a lot of hoops. You’ve got to find an exchange person and go through and identify three different types of properties you can go in. There are rules and I’m not up on all of them. We are opening our 1031 exchange business because we are starting to get many people that have money in IRA money outside the IRA. They’re twins, as far as I’m concerned. One has to do with continuing to roll up wealth and accumulate wealth. We’re doing the same thing in IRAs, but we don’t have the restriction of like-kind exchanges. I can buy insurance. I can buy a currency. A lot of people do things that I don’t do in my own retirement plans, but they love it. They love to speculate on that. You can create an LLC and buy a cryptocurrency and the next day, move it into long-term assisted living and then go do something that is lending money. You can do all of this. You don’t have to even stay in the same class. Because you’re doing it under the umbrella of an IRA and under one custodian, you can move all the profits to all those different ventures. Whereas with 1031, you’re restricted to the type of a like-kind exchange.
The answer to my question is built into the self-directed IRA because with 1031, you’re trying to defer your taxes, but if you already have the assets and the cash inside a self-directed IRA, it’s already tax-deferred. You don’t need anything else to have the same benefit as that tax deferral. It’s all done within that IRA.
The beauty is as long as I have eligible earnings, I can continue to add to it. It’s not overall the rise of the piece of equity and its earning potential. It’s also new earnings that come in and cross over there. I like it better, but soon our clients aren’t going to have to pick and choose. I understand that everybody has different mountains of money and they may be in self-direction and or they may be an IRA, or they may not be in IRAs. There are investments that make us not even put in an IRA. I’m not suggesting that everybody go on a mad dash and put money into IRAs. I’m telling you that’s where the money is. It all comes from employer plans, dumps into IRAs and there’s over $8 trillion in it. First of all, if you’re going to use your own first and second, go used somebody else’s to advantage yourself in your own investing. It would be foolish to overlook that.
I’m excited to talk about the Roth IRA and if you’d like, we can talk about the Solo 401(k). Let’s talk about what a Roth IRA is and how it compares to a traditional IRA because some people are still not clear on what the difference is.
Hopefully, they’re not going to be less clear when I finish, but let’s give it a shot. There are four kinds of IRAs. The first one was a traditional. The way that those three work, they’re all pre-tax, which means I get a tax break for making the investment. That’s the government’s best interest because you were taking care of yourself. Not only do you get a tax break going in, but you also get a tax break for the entire life of the investment until you take it out. It’s the long run and it’s hugely valuable. For most cases, and there are exceptions to this, it even doesn’t matter how much you earn. You can earn a lot of money and still get sheltered in these. The Roth turns everything on the head. The way that the government gets taxed is at the end when you take it out, and if you haven’t taken it out before ‘72, they force it out. It’s called required minimum distributions, which means they’re going to get their pound of flesh. Don’t forget, you’ve got all of these years of use of that money. It’s phenomenal.
Senator Roth from Delaware noticed that people weren’t putting enough money in IRAs. They said, “Let’s jazz it up. Let’s sex it up a little bit and make it more exciting and we’re going to put a different plan together. One that says you’re going to pay taxes before you put the contribution in.” Everyone goes, “That’s not what an IRA is all about. It’s all about pre-tax you don’t pay.” It’s like, “Once you put the money in, once you start investing it, like all those other accounts, it’s not going to get taxed. During the lifetime of investing and adding money to it, it’s not going to get taxed.” “What happens at the end?” “Nothing happens at the end.” “What do you mean nothing happens at the end?” “You’re never taxed.” “What do you mean you’re never taxed?” You never taxed. If you’ve had it five years and you’re at the age of 59.5, you can take it out without any taxes. What? The government never gives you these things. The government only gives you this for narrow things. I can take it out and go to Vegas with it. I can take it out on vacation. There are no limits. There is no use of limitation. You can do it. The accountants always try to drive away from the excitement. I’m an excitable guy in the accounts. You go hang out with accountants so they’re going to bring it down.
They go, “Glen, that doesn’t make sense if you’re older,” because you’re going to have to pay tax to get it into a Roth either through a contribution or later on you can do a Roth conversion, which is where you take your traditional and you pay tax on it. Ordinary income tax, I’m sorry to say, and then it becomes a Roth. It was interesting because I was torn with this because first of all, I don’t give advice or anything about what people should invest it. I’ll tell you what I invest in. I don’t care, but I’m not a great investor. I don’t push myself out to be. I’m a decent custodian. I read an article on the back page or on the personal finance page of The Wall Street Journal and I remember it.
The writer of this said, “I’m 60 years old. I’m in this awkward age because half the people I know,” and I guess he lives out on Long Island where all the wealthy people do in New York. In any case, half the people retired and half of them not. He said, “We go out to dinner and guess who talks about taxes and how much they hate taxes? It’s always the people that are on the fixed income.” When you’re earning the big checks and you figure out you’re going to take home 60% of it, someone’s going to get 40%, I don’t care. All of a sudden, you’ve got $3 million left and you’d be fortunate if you did. The average person’s not going to have that.
They’re saying, “I need about $80,000 to live, maybe $120,000 because I’m on Long Island. Each time I take it out, I’ve got to take out another $20,000, $30,000 to pay the tax on that. Yes, I’m in a lower tax bracket, but this hurts. I hate this.” They started to see people that were even in retirement age switching to Roths because they said, “If I want to take $100,000 out, I want all $100,000 out. I don’t want to pay taxes.” As I got this gray hair here, I realized that I’m like them too. Year after year, I’ve been taking my IRA and converting a piece of it because I too want all of the growth to be paid to me without taxes. To make a simple analogy. You have the restaurant analogy and now you have the acorn analogy, which is do you want to pay tax on the acorn, the seed, or do you want to pay it on the harvest? That’s what a traditional look like. You’re paying tax on the harvest. With a Roth, I paid tax on the seed, the money that goes in, and once it’s in, I never pay tax again. It’s amazing.
My comment about the difference between the two in simple terms is one is tax-deferred and one is tax-free. One, you’re deferring your taxes. The other one is you are paying your taxes up front, but you’re withdrawing on a tax-free basis. You’re paying your taxes one way or the other, either as you go or as you draw. The way my brain works, and I don’t know if other people are thinking about this and this may make this conversation complicated. I’m thinking given all these variables, everything being the same, the length of time that you have the Roth IRA, the amount of contributions that you make all along, where do you end up with a bigger nest egg at the end of it all? If you are making the same contributions pre-tax with a traditional IRA or after-tax with a Roth IRA, given the same contributions over the same length of time, which one ends up with the bigger nest egg at the end? Assuming the rates of return are the same too. Has anybody ever done a study?
There are lots of studies. There are lots of Roth calculators you can crank in and put your own scenario. The one part that fouls the well a little bit on that analogy, it’s not quite simple. It also has to do with estimating what your tax rate’s going to be when you take it out or you don’t take it out. That’s the part that we don’t know. We have this deficit spending. I’m not sure there’s going to be a whole lot of appetite for lowering interest rates. How do we do it in this environment? Especially the difference in time between you and the age of taking it out, it’s ‘72 if they were traditional. I’ve looked at the numbers. They sway depending if you’re going to be in a lower tax bracket in your senior year, which would make your required minimum less costly to you. You might be slightly better off. With a Roth, you’re about 5% to 9% better off, and it depends on your age too.
You’ve got a big microphone and you’ve got a loud voice that goes off to a lot of people but understand the thing that we don’t want to admit to is that investing is emotional as well as monetary. It is, isn’t it? I go to bed a lot better because I know that my retirement is not just based on how well NuView does, but it’s also based on how well single-family homes rent out. I get all of that. Where that comes in with a Roth is the fact that I know I don’t have to pay taxes ever is the most freeing thing. Even if I have to pay a lump this year, once that check is gone, only a CPA would care whether I end up winning or losing. It’s how I feel about my money.
What you described as the emotional component of it, not the logical-mathematical rate of return calculation that I’m thinking about. I’m looking at this as a math equation which one’s going to give me the biggest bang for the buck? It’s a matter of sitting down with a pen, pad, and calculator or some analysis tool and making a bunch of assumptions, keeping variables constant, and then running your numbers to see what it ends up being under your assumptions.
The other part that comes into play is if you have an opportunity to engineer when you do the conversion. If you have an off-year, if you have a down year, if you’re self-employed and you can push off revenues to the following year, let’s say there’s a lot of stuff happening in December. I have a great friend who has built his self-directed IRA. When he came through the door, he had $55,000 left and he has $1.6 million in his Roth IRA. He did that. He converted all of it in the first couple of years because he had down years. He could write losses off and people in the real estate game have that opportunity to do that. Whereas if we work traditionally and we make a good living, we might be up in the 25%, 30% bracket. That’s hard to swallow and say, “I’m going to electively write a check to the IRS for an extra $30,000, $40,000, $50,000, depending on how much we want to convert. Every fiber of my being in my business and what I do is to run away from writing checks to the IRS. It is funny and it’s strange to talk about the emotional side of investing, but I will tell you, it’s real as the non-emotional side.
It’s a big question when you ask the question, “Should I convert? Why should I convert? When should I convert from traditional to a Roth IRA? Who is it best suited for?” You’re welcome to comment on all that, but people can dig deeper into that with a conversation with you or your team. That goes off on another tangent.
It’s hard to be upset with a traditional IRA that’s performed better than you can ever imagine because you’re self-directing it. The worst case is to try whining to your neighbor that your IRA’s too big and you don’t like the tax consequences of it. I don’t think they’re going to want you over for dinner too much because they’ve been in the market and they don’t have that growth you have. It’s a choice. It’s something great and something even better if you’re in self-direction. That’s the way I would look at it.
If you have a tool like a Self-Directed IRA and you put a powerful investment vehicle like income-producing real estate within it, if you play your cards right, it ends up being favorable for you financially. I know you want to talk about the Solo 401(k). Let’s talk about that. It’s a phenomenal tool, but more people need to know about it for those people who qualify to get one.
The reason I don’t start with a discussion is not everybody qualifies. Almost everybody could qualify though. There’s a little work on your part. People that self-direct are used to doing a little work on their own, and that’s why they’re reading this is they’re willing to do that. The way this works, if you think about this is the 401(k) was created in 1975 right alongside the IRA. The reason it was created is that businesses got tired of funding their retirements and they go, “I don’t want to fund these pensions. Let’s figure out where we don’t have to put that much in. We put it all on the employee.” That what it is. We’re all used to having 401(k) plans and all of that. There’s a lot of costs associated with those because there’s means-testing. The attorneys and the actuarials have to look at it. Even if you had a 5 or 6-person firm, they start at $5,000 to $10,000 and go up, and they’re hard to administer and a lot of pain. What we figured out is we could offer this to people that didn’t have employees. You go, “How does that work? How’s it a 401(k)? How’s it a group plan?” The fact is it still has the same rules, but we don’t have to hire the lawyers in the actuarials to do it.
What if we were to create a plan that allows people to self-direct like our IRAs in anything that the IRS doesn’t prohibit? We’re going to drag in with it all of the cool features of a 401(k) plan that are even better than an IRA. There are about four items. Number one is I can borrow from it. What’s interesting is the government has increased that borrowing power. You can take up to 50% of your IRA up to $100,000 and I haven’t read the new rules. It’s called the CARES Act. Understand that you can borrow from it. The power of borrowing from your 401(k) plan is you’re not paying a bank, you’re not paying anybody else. You’re paying yourself back. Ironically, within limits, you can set even what the borrowing rate is. Keep in mind that if I was doing it, I’d want the borrowing rate to be the highest possible. I’m not trying to save. I’m trying to put more in. There’s a rule against how high you can do it but this is great for people.
For a realtor, for example, can you imagine how uneven their income is especially now? They could go borrow money to get them through these COVID prices and then pay it back over five years, at least quarterly, maybe at prime plus one. It gives them access to money. Number two is I get to choose whether or not I can make my contribution pre-tax or post-tax. We did the Roth thing. I get to put my contributions in and my contributions can be relatively large up to $22,500 or $23,000. I can make that determination. I can even change that later by converting inside my own Solo 401(k) plan. The company gets to put 25% of my earnings on top of that and the total is about $62,000 that I can put in. I can put more money into this plan than I ever could in an IRA. I earn less money, I can put more in.
For the people who are wondering why, because I know there are a lot of people wondering, why is that? The reason is, and you need to explain this, there are contribution limits per year for each of these vehicles. You can only accumulate so much capital so fast. When you look at that compared to a traditional IRA, this is huge. Maybe explain that a little bit.
A traditional and a Roth is $6,000 and let’s face it, that’s not a real wealth-building in the short-term. If you’re 55 years old, that may exasperate you because you might have the ability to put a lot more in it. The SIMPLE plan is for companies that have less than 100 employees. There’s a match associated with that. It’s still a relatively low limit. It’s somewhere around $12,500. The SEP is for solo-owned businesses. You can put up to $56,000. You can put 25% of earning up to $56,000. You’d have to be earning about $220,000 to be able to put that in. These are a lot of words, contributions in Solo 401(k) plans so that if I’m over 50, I can take the first $22,000, dollar for dollar. All I have to earn is $22,000. All of it can go in.
Where at a SIMPLE, I could only put 25%, and if I had a traditional, I could only put $6,000 in. You’re right, the contribution limits get more and more valuable. If some of us are near the end of the runway of our contribution life, we were seeking for those places to put in a lot more. That’s a good point to make. You can take a loan, you can make accelerated contributions into it. You can convert it at any time. When it comes time to leverage your real estate, I don’t have to pay this tax that’s called unrelated business income tax or unrelated debt-financed income. It’s exempted from that plan. You can imagine how attractive this is to a realtor. A realtor, when they have good quarters, they can stuff more in it. When they have lean quarters, they can borrow money out of it. You still have all the advantages of all the types of investments that you can do with a self-directed IRA. You get to do it with a self-directed Solo 401(k)
I would imagine this is attractive to anybody who’s self-employed professionals, CPAs, attorneys, doctors, salespeople or anybody in that category.
The question comes up, “Can you be covered under two plans at one time and stuff?” The bottom line is yes, you can but you can’t make maximum contributions to both plans. For example, if I work here, but I also have a side business where I buy and sell on eBay, that would qualify for a Solo 401(k) plan. I could have that plan. I could choose to be part of the NuView plan and that plan or I could say, “I’m not part of the NuView plan. I’m going to roll that plan over into my Solo 401(k) plan if my employer allows it and use that.”
Glen, this is a subject matter that we could talk about for hours. I know you’ve done that before. You eat, breathe and sleep this stuff. Let’s wind it down and wrap it up with some wealth-building tips related to any of these vehicles. What can you share with us? I have a few in mind, but I’d like to ask you.
There are lots of different ways and lots of things that clients do that I would never do. They make big bets on one thing. It’s like buying one stock and hope it goes up. When they do, they crow about it all day long. You know how that works. It depends on what you’re trying to get out of it. For me, it’s not that I’m super conservative. I started this company, I took all risks doing that. This is personal and it’s that I want to make sure that anything that I invest creates cash. There are lots of ways not to create cash. There are people that that want to buy gold, which you can buy in an IRA. I don’t dissuade people at all because it can be a good insurance policy, but it doesn’t create income.
You want to make sure if you can have gold, you’re going to have something that creates income too. Otherwise, it’s like shoving money under a mattress. I always like to be doing that, but I also look for things that protect me against inflation. You talked about inflation. I predict in the future we’re going to have some huge market swings. Even when this heals up, there are going to be total industries that go. I want to be in a place personally where people have to lay down in a bed because I know they’ll always need a bed, food and they’ll always need certain things.
Whereas I might be able to make a lot more money betting on the latest technology that I don’t understand. I put 10% of my stuff in my wild fund. I fund startups with my IRA. I have fun with that. I allow myself 10% of having fun. I never expect them to hit. It’s funny listening to these entrepreneurs. They’re like, “It’s going to take off tomorrow. I can’t wait.” I get to have fun with that. I like mailbox cash that comes in every month and nothing is better for me than a grouping of single-family homes and multifamily homes. I like to do debt on other people’s homes with a 50% ratio. They all generate cash.
My sense is that the day that I decided to step away from NuView, I got the cashflow already. It’s not going to be changing my lifestyle at all. It’s not that I don’t have a wealthy lifestyle, but whatever you grow up with, it’s a nice stepping off point rather than, “Here’s the problem.” I’ve got a couple of things in closing. The problem I hate with Wall Street and what they do is they say, “Get a lot of money up and don’t worry, it will come back. Leave it alone. Get a lot of money and then sell out of your positions until you die.” Fortunately, you die early enough that you can pass them onto your kids. It’s horrible but I much prefer this. Why not have assets that create cash all the way through until you die and you give your kids the assets that create the cash.
Hopefully, you’ve been a good steward. You’ve taught them how to be good stewards so they continue on in that process. I own two shares of stock. The total value of about $5,000. That’s it. I don’t care about the market or what happens in the market. The reason for that is we are all hardwired in as capitalists to buy stuff as cheap as we can. I will tell you, you’re the same way. I would suggest that probably the house you bought, the car you drive, almost even the shirt you may be wearing was bought on sale or it was brought at advantage. It’s not because it looks bad, it was what you wanted, but you waited and you searched or your wife searched or somebody searched.
The pods in your ear. There are some things we don’t have time and we pay retail for it. The big-ticket items, we are driven to buy it cheaper, but yet we can’t do that in public markets. We’ve got to pay a public price, retail price for Apple stock and for everything else. None of the stuff that I have in my investment funds, I paid full price for. It’s always been discounted. You make your money as an investor when you buy because the market determines what you get when you sell. With a Self-Directed IRA, I can do that. I love that fact.
I completely agree with you on the income-producing assets comment. That’s my favorite investment. That’s why I love real estate so much. It’s an income-producing asset. Those are all great points and tips. I’m going to add a couple more tips to that if you don’t mind. A lot of people understand that the sooner you start, the better off you are because you’ve got the advantage of time on your side. The sooner you start a retirement account or a self-retirement account, the more time you have to work with until it returns to grow and compound upon each other. The earlier you start, the better off you are. It doesn’t matter whether what age you are, you can start one. Is there an age limit to when you can open up a retirement account?
You have to have a Social Security Number, which your six-month-old baby is able to register for. Their handwriting isn’t good, but maybe you could stand in for them as their parent. They have to have earned income to qualify and their earned income can be modeling. That’s all a six-month-old would do. You have a business, you have a podcast. There would be a certain reader that would like to see you with a baby. Why not have a picture with you and the baby? The baby needs to get paid about $6,000 a year for that one picture. That needs to be recorded with the IRS. She or he is not going to pay tax on it because it’s so low. Meanwhile, that qualifies them and all $6,000 would go on an IRA with a Roth and it would qualify. You have eighteen years to teach them about money because, after eighteen years, they reach the age of emancipation. They take over that and you’re no longer in charge. You better make sure they don’t take it all out.
My daughter is old enough to work and earn an income. Maybe I’ll set up a Roth for her. Start early was one of my tips. Second is the diversification within that. You said there are many different things you can invest in and that’s great to have the flexibility in the options to do that. My favorite is income-producing real estate. That is my favorite asset class. Looking at it from a diversification perspective is smart. Last, but certainly, not least is choose your custodian carefully. I don’t say that to pat you on the back or anything. I know you have a great reputation, but it’s important to work with someone that you like and trust as a custodian because they’re hanging on to a lot of capital for you.
I appreciate that. Every custodian out there, especially one that was founded by them, would think they’re the best. I don’t want to go into why you should come with us. What you should do is engage us. Do you get the time with somebody? Do you feel like you’re being rushed into an account or do you get the time to answer the questions? I’m willing to answer any of your questions. All you have to do is reach me at GMather@NuViewTrust.com. I’m happy to do it, but I will tell you I’m not the smartest person in the room anymore. That’s the scary thing. I was when it was only me. I was smart. I got a great team. The one data point, which is this. The thing that irritates me when I get to a service provider call is I can’t get someone on the line. We have our staff meeting and every staff meeting, we look at what percentage of our phone calls get answered with a knowledgeable person. I’m proud to tell you that we cleared our hurdle. Our hurdle is 98%. We made it 99% for all the incoming calls during office hours. That’s the most important thing is to get someone on and then hopefully, they’re able to help you and we’d be happy to help any of your readers and explain what it’s like to have a self-directed IRA.
Glen, I’m done asking you questions. Is there anything you want to end? Any last comment or tip?
I want to encourage you, there are a lot of people that are concerned and they don’t know what to invest in. It’s hard. I would say that one of the best things you can be as a member of the right tribe because to go alone is tough. We do events and we do webinars and we try to keep people informed and we do our best. I know you do with the readers. Congratulations to you serving such a great resource to people because they’re frustrated and they’re concerned about their wealth. I would say hang in there from a standpoint and start looking at alternatives because that’s where the real opportunity lies in this economy or even an improving economy. It’s there. If you want to reach us, you can reach us at NuViewTrust.com. You can go on our website and we have a good fifteen-page summary which does a good job of breaking it apart for people that want to dig a little bit deeper but not get overwhelmed too much with the details. Beyond that, we’re happy to answer any questions.
Glen, I want to thank you very much for your time. This has been informative. I appreciate it and hopefully we can get you on again here.
Thank you so much for the opportunity.
Thanks so much, Glen. Take care.
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That pretty much wraps it up. I enjoyed this two-part episode of Self-Directed IRAs with Glen. He is a knowledgeable person and a super nice guy. I’ve spent a couple of weeks with him on a cruise out in the Caribbean. He’s got a great company and team. Feel free to reach out to him for any and more information if you got questions or you’re looking to figure out how to navigate the Self-Directed IRA landscape. Download the free report on our website, The Ultimate Guide to Passive Real Estate Investing. I appreciate you taking the time to read this. To get notified of future episodes, remember to subscribe and help us spread the word. We love it when you share this with your friends and family. Do them a favor and help educate them financially. Thanks again. See you next time.
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