I get asked a lot about rolling over assets from one plan to another, especially self directed 401k plan rollovers. Sometimes even the company doing it for you leaves out pivotal forms.

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Transcript:   With regard to 401K plans, if you are rolling over any funds from an old 401K plan that you participated in before or an IRA, those are going to be rollovers and there’s very specific IRS rules pertaining to that rollover which must occur. I’m not suggesting that you not rollover funds into your new plan. Of course you would, or of course you probably would like to do that. What I specifically mean is you want to make sure that before you do that you exactly know what the IRS rollover requirements are. Quite honestly, this is an area that some companies actually make mistakes with. Let’s use a hypothetical example. If you had a hundred thousand, you set up a brand new 401K plan, and you’re wanting to rollover a hundred thousand from an IRA plan that’s in your name or an old 401K which you were a participant of, those funds can be rolled over to that new plan. A lot of the companies out there, the financial services companies, will not issue the correct paperwork related to that rollover. They call it a custodian to custodian transfer. In their world they think it is absolutely permissible for that rollover to occur from that IRA to the new 401K plan, your self directed 401K plan, without reporting anything to the IRS. In my humble opinion, that is flat wrong. Any time a rollover occurs and funds get moved into a qualified plan, such as a 401K, a rollover has to occur, a 1099 has to be issued, and you have to report it on your 1040 tax form with the assistance of your tax professional. Let’s break that down a little bit more. The originating custodian, or the company that held that IRA, for example, must send a 1099R to you reporting that it is a qualified rollover, it must be coded as a G which just means that it’s going to a qualified plan. Who gets that? You get a copy of that, the IRS gets a copy of that. Basically when the IRS gets it they see that on paper anyway, a hundred thousand was in the IRA, a hundred thousand got moved into the 401K as a permissible rollover. That effect is zero, no taxable event to you as long as everything was done correctly. Like I mentioned, some of these companies, they’re not preparing the 1099R. As I mentioned, in my humble opinion, that’s a mistake. Moral of this story is if you rollover funds into your 401K plan you must make sure that a 1099 is being issued for that rollover. Likewise, you must consult with your tax professional to make sure that that rollover is correctly reported on your 1040 tax form. Solo 401K’s are awesome, but this is just a continual effort to show people that you have to do it the right way.

The subject of self directed 401k plan reporting is important to say the least. It’s not complex as some think. But knowing the requirements makes life easier for sure.

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Transcript:   Facts and circumstances. What do we mean by facts and circumstances? As it pertains to a 401K plan there’s very specific rules and regulations that must be followed, not only with what the plan can do; how can it invest the funds, how it must report for those funds. The bottom line is with the individual solo 401K plan one huge benefit that it has compared to a 401K plan with common law employees is the fact that if the assets of the plan are under two hundred and fifty thousand there is no annual reporting that must occur on the assets of the plan. Now, saying that, you still have to make sure you dot the I, cross the T, on things that you need to do, but what do we specifically mean from a plan reporting and what are the exceptions? The exception is, we talked about it, if the plan assets are under two hundred and fifty thousand you do not have to report that annual value to the IRS. Let’s talk about two other exceptions. What if the plan assets are more than two hundred and fifty thousand? Well, in that case the IRS requires you to submit what’s called a Form 5500EZ. Now, EZ stands for, presumably, easy. It is a relatively easy form. It’s a two or three page form where you report the assets of that plan. Once you’ve surpassed two-fifty you always have to prepare the 5500EZ, even if your assets drop back down below the two-fifty figure. That’s exception number one. Exception number two. What happens if you were to stop your self-employed business? Let’s just use an example. You run it for twenty years, you’re now in your sixties, you’ve made a great deal of money in your lifetime, you’ve done well with your 401K plan, not only from the standpoint of making contributions, but having successful returns on your investments, but you’re done. What does that mean for the plan? Some people think that they can continue just to operate the plan as it is. That would not be correct. When a plan is terminated because the business terminates the plan has to submit what’s called a Final Form 5500. A little bit different than the EZ form I talked about, but a Final Form 5500 to report to the IRS that the plan has been terminated, and what is the end result of the assets within the plan. Keep in mind, the great thing about an individual solo 401K plan is that you have very, very little reporting requirements that are responsible for you, but there are some requirements. Always keep in mind, if the assets are more than two-fifty or you terminate the plan you need to make sure you file the respective forms.

In a case study part 3 we examine the end game income at retirement. Also talk about how regular folk do this all the time.

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Transcript:   I’m going to end this series with going back to the beginning and the reason for doing this kind of exercise in case studies. I get asked all of the time, “How is it that you’re always talking about people retiring when it’s 15, 20, 30, sometimes way more than that per month and a huge portion of that tax-free by definition? We can’t do that. We’re regular folk.” I’m here to tell you, even if you’re not these two that are making 180, maybe your household income is 50, 60, 80 thousand dollars before taxes, and you’ve scraped up enough to buy one note, one duplex. You may retire later than this couple does, but I’m telling you, if you are just disciplined, and you show up every month doing what the plan calls for, you can end up with a retirement. Most people end up doing this over time where the monthly income after tax in retirement is equal and more likely, more times than not, more than they even earned at a job. It’s not just possible, it’s probable. You’ve got to just show up every month. You’ve got to do the boring things. These people are going to end up this way. They’re going to have two to four duplexes. Murphy’s spreadsheet says every duplex is going to give them 16 grand a year free and clear worst case. That’s 20 years, 30 years, of no increase in the net operating income. We both know it’s going to be more than that. Let’s say they ended up with 4 free and clear in 30 years. That’s over $5,000 a month just from their duplexes. They don’t owe any money on them. What about their EIUL? Well, maybe they started pulling that EIUL together at 62. Let’s be conservative and say, that’s give or take, about $8,000 a month. That’s tax free. Now they’re making $5,000 a month that’s taxable and $8,000 a month that’s not. We’re up to 13. We haven’t even talked about notes! They bought their first notes when they were in their early 30s. For heaven sakes, they’re 62! It’s been 30 years of rinse and repeat, rinse and repeat. Even if they only went through that portfolio three times in three decades that scenario, I’ve been investing in these things for 38 years. That’s highly unlikely, but let’s say that it happened. They are going to own two commas worth of notes in 30 years without even trying. That’s going to give them an income, give or take, of at least $8,000 dollars a month or up over $20,000 a month. These are regular folk, people. All they did was the boring things year in and year out. All of this note appreciation and real estate. Thirty years of no appreciation, no income as far as their net on their real estate. We took twice the length that most of these notes are going to pay off. Now, let’s go to their Roth notes. They’ve got 30 years of never being taxed on the payments or the note payoffs—30 years! They were able, every year on a Roth IRA, which is the worst kind to have, because they can only give $5,500 to $6,500 a year to it. They gave and gave and gave. Do you realize that if they wanted to wait until they were 62 and just have all of this income happen at once, that those notes over 30 years with their contributions, as little as they were, halfway through that 30 years the payments from all of those notes would be buying more notes? Fifteen years of those payments buying more notes and another 15 years, 30 years total, of those notes paying off and never being taxed. Let that sink in. How much is that going to be in 30 years? I have no idea. I’ll tell you what it’ll be at least,

Investors often mistake detailed online research as the equivalent to boots on the ground. Not in my experience, that’s for sure. Here’s how to do a rent survey, at least the way I do.

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Transcript:   Everybody talks about knowing the rents in the market in which you’re in. How to do that though has become far too easy as far as I’m concerned. We just go to the computer. You open up the laptop or the desktop and you start doing your research and you find all kinds of examples that are maybe even close to what you’re looking to buy, or maybe you’ve got a vacancy or two that happened at the same time in something you own and you’re really trying to figure out, you keep hearing everything going up so what should I ask? That’s okay. That will establish the bar for you. Don’t believe it. The first thing you want to do is get on the phone. You want to call any owners that you happen to know in the area. If you’ve invested out of the area you probably don’t know anybody. But if you’re local, ask them, find out. Then the next thing you do is get your handy dandy clipboard, your legal pad, and a pen. Put on your running shoes and start knocking on doors. Go to the exact neighborhood where your place is and go to the rentals. Go to the manager if they have one. No tomfoolery, no “I’m going to college and I’m writing a paper.” Say look it, I run some apartments here, or I have a rental over here. I’m just trying to figure out what I should charge for rent. What do I have to pay here? Nine times out of ten or more they’ll tell you. You want to start writing everything they tell you down. Sometimes you luck out and you get to be shown a place. You’ll find out that yeah, they might get more rent than you but you find out that the reason is your people are paying for trash and theirs aren’t, and they get a little bit more rent because of that. There’s all kinds of reasons the owner of that duplex might be paying for both tenants’ hot water. That adds up. There’s just a lot of reasons, so you want to find out all of the little details. You want to knock on all the doors. You want to go to local property management firms. You want to say look it, here’s what I have found today. Share your information. Usually you’re not going to tell them anything they don’t know, but you never know. They’ll at least appreciate the offer. They might be able to tell you. Of course they’re going to try to recruit you, and maybe you’ll say okay because you’re tired of doing it. The bottom line is if you’re nice and they’re feeling generous that day, do it to two or three management companies and you’ll be surprised at how easily they might share information. You want to find out what expenses you have that your competition does not have, and vice versa. That, like I said, factors in big time. You want to find out changes you might be able to make. For instance, you might have a duplex that has one meter for water. Is it prohibitive, or affordable, to have it re-plumbed from the street so that you have separate meters? That will usually amortize itself more quickly than you think. The people are used to the rent. When you get new ones in there, now you’ve raised your net operating income. Same thing with water heaters. Maybe instead of having one water heater you get two and you have the plumber come in and do that. There’s all kinds of things you can do, but you don’t know to do it until you know what you’re competition is doing. Get that clipboard and find out. You can’t change things for the better until you know what needs to be changed.

Before the real estate investor the micro analysis, they should first decide whether or not they like the results of the macro analysis. In this video we explore macro vs micro analysis.

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Transcript:   We get caught up in the numbers so much. I recently talked about all the various incomes and expenses and what this and that means and how you get to cash flow. I want to just make a quick note that when I’m doing analysis for a client, yeah, we show them the pictures of the buildings, and here’s the spreadsheets and these line items are vetted down to the dollar when it’s able to be done. When it has to be estimated, it’s always estimated high rather than low, but here’s what happens. We end up with an NOI that reflects about a 40% vacancy and operating expense on brand new property which leaves an NOI reflecting therefore about 60% of the gross scheduled income for the year. That’s all well and good. Murphy knows where we live. You will get visited, sooner or later by him, and you’ll have your turn in his barrel. Just take that gross scheduled income, cast the spreadsheet aside, divide that GSI by 2, and just say, that’s the NOI. That’s going to be a lower figure than the real spreadsheet said. If your NOI is lower than the Murphy NOI, what I call the Murphy spreadsheet, where you just divide into gross scheduled income by 2, something went horribly wrong. On the other hand, if it actually adheres to the spreadsheet that you vetted, you’re not unhappy. You made more money. That’s all I’m saying. As an aside, if you still have decent cash flow using Murphy’s spreadsheet, smile. You should be happy. Now, macro analysis is doing the cash flow analysis. You’re finding out how does this property perform. You’re doing all of it. You’re doing it for maybe 5 years. Some people want to do it 10 or more. You’re finding out what the expenses are. Did you buy an older property, so you’re going to impute more expenses. Is it a younger property? Is it in a higher or a lower vacancy rate, location, relatively speaking? What kind of property is it? Is it office, retail? I do residential income. I prefer that. That will affect the micro analysis. The micro analysis then expands to the local market. We want to talk about that. Then I make it a macro. I don’t just look at the local market. That’s easy. If I’m in San Diego, my local market is first the county, and then the state of California. I say, well, we have an opportunity cost, and we have a choice. I can invest in Texas, or Idaho, or I can go to Tennessee or 1 of the Carolinas, whatever floats your boat, or I can stay in California and keep local because it’s always best to be able to drive by, bleh. Here’s the thing. The macro analysis tells you if you even want to mess with the micro. Here’s why. You go to California, that’s the best example of a crummy place for your investment capital. They tax everything to death, sometimes more than once. They regulate it within an inch of its life. You almost can’t breathe in business here. Businesses are fleeing California. The highly educated and the big earners are fleeing California. Why? Because of high taxation, high regulation. You can’t breathe. If you look at the rent price ratios, and let’s get it right down to the 2 to 4 unit level, a mile, 3 miles from my own office, in La Mesa, California which is about 20 minutes due East of the gas lamp downtown San Diego. You will pay over 400,000 dollars for a half century old, completely functionally obsolescent duplex with a floor plan that even grandma would laugh at. The income would be 30, to 32,000, gross scheduled income, and yet you’re paying 4, 450.

Most of us, including me before I got my own Solo 401k set up, didn’t know about 401k plan sub accounts. A must have for most taxpayers.

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Transcript:   Within a 401K plan, a trustee, a participant has various means in which they can put money into the plan. The first one is what’s called elective deferrals. Think of it in simple terms as, it’s a bucket that you are personally taking from compensation that you have received and putting it into that elective deferral bucket as your contribution to the plan. Now, where we can actually separate that out is, what happens now if you want to make an elective deferral in traditional pre-tax manner, where you get the tax write off. You can do that. What happens also if you want to make it in a Roth after tax contribution. You can potentially do that as well. What about if you want to roll over funds into the plan? That’s another bucket. What happens if your business is very successful and you wish to make profit share contributions from the company? That’s another bucket. So you can kind of see where I’m going with this, is that there’s different buckets of funds. So why are we talking about buckets? Somebody might say, why wouldn’t we just put all those funds into one plan, into one account? Here’s why, because there’s different rules that affect those different sources of funds. When you establish a self-directed 401K, you really want to look at it from the standpoint of making sure that you have sub-accounts under your master plan that is there for roll overs, is there for Roth, is there for pre-tax, is there for profit share. That’s dotting the I’s and crossing the T’s, and as I always explain to a client, you always want to think of it this way, since the IRS treats those funds different, even though they’re all within the same 401k, even though you have the control of the funds within that plan, there’s different accounting that has to be done for each one of those plans. By having them in separate sub-accounts, you’re now able to be able to show anyone what you’ve done with those accounts, what you did with those funds, where the funds came from, and as I always explain to somebody, if you were ever sitting across the desk from an IRS agent, is it better to have more detail or less detail? At the end of the day, self-directed 401K’s are awesome, but again remember, when you have those different buckets of funds, you want to keep them in separate buckets for accounting and reporting purposes.

First thing is understanding the terminology of residential income properties. It’s surprising how many don’t.

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Transcript:   So you take your GSI and your vacancy rate from that, and you end up with your GOI. After you look at your GOI and operating expenses, you end up with your NOI, then you end up after that being able to calculate your cash-on-cash return. You got all that right? Well, let’s take it one step at a time. What is GSI when you’re talking about income property? Gross scheduled income. Well what’s that? That’s just the rent. On gigantic apartments, it’s not just tenant renting income, it could be where you get income from parking, from a garage and a car port differently. You have laundry, see what I’m saying? You might have rec rooms where you’re making rent for their wedding reception, things like that. We’re just talking 1-4 units, so gross scheduled income is what’s the rent scheduled for the year, if everything went according to what the lord did to bless you. So gross scheduled income, let’s say in a particular case, is $33,000. Well now you have a vacancy factor. What are vacancy factors? It’s not just did the tenant move out, it’s what’s the percentage of income that you lose while they’re out? What people never add to the vacancy factor, is that the real phrase for professionals is vacancy and credit losses, because sometimes people don’t pay. For instance, in San Diego for years, the only vacancy rate was a courtesy rate, because it was really how long it took your cleaning crew to get it ready for the next person who was impatiently parked next to the idling moving van, waiting for you to finish. Then you have horrible times when a vacancy rate is double-digits, 10-15-20%. Hello Detroit, sorry guys. So let’s take a place in Texas like Austin. Depending where you go and who you’re talking to, you’re just north or south of 4%. So for every $100 of gross scheduled income GSI, right off the top you’re going to lose 4 bucks, vacancy factor. You have some credit loss in there, maybe because somebody didn’t pay, I don’t care what it is. If it’s under 5% I never use less than a 5% vacancy factor. So if we have rent – let’s use 35 instead of 33, I’d do it in my head better – you have 5%, that’s $1750 dollars a year, right off the top. It’s just going to be like steam in the air, gone. So what we call that is gross operating income, GOI. Most people never heard of that one, because most don’t use it. I hardly ever use it, but it’s something to know because you want to know ultimately how to get to your NOI which is net operating income, and it starts with GSI, and goes to GOI. So you got gross scheduled income minus your vacancy and credit loss, which equals your gross operating income, and from that you take away your operating expenses. Let’s start – you’ve got 35,000 a year, that’s your gross budget. First thing off the top you got vacancy and credit loss. Now you’re only working with 95 cent dollars. Now from that, you’ve got real estate taxes, real estate insurance, if you don’t live where it is – or even if you do – it doesn’t say manager on your forehead, you’re hiring a property manager that is a professional. That’s normally going to cost you 8-9-10%. In a market like in Texas where the demand is high for quality management professionally, it’s probably going to be closer to 10 than 8. My clients in Texas – because we command a lot of doors and have that authority – our guys only pay 5-7%. But if you’re buying in your local market you want to budget 8-10%, and by the way,

Though investors wanting expanded choice and more control of their future love self directed retirement plans, they sometime don’t understand self directed plan responsibilities.

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Transcript:   Self-directed plans are great plans. You have that freedom, you have the ability to invest in things outside of the traditional world, outside of stocks, bonds, and mutual funds. You have that control. You have that benefit of being able to invest in what’s called nontraditional assets, whether it be real estate, whether it be precious metals, whether it be discounted notes, whether it be hard money loans. These are all great things that are afforded to you, but now comes the responsibility. This is not a candy store. There are rules that have to be followed. When you have your self-directed IRA or your self-directed 401K keep in mind a few things that you really want to give serious thought to. One, is it a proper investment, not only is it complying with the IRS code on investments, but is it a proper investment that you fully have researched and done your due diligence on? Number two, are you even the person who should be directing your investments? Everybody is enamored, loves the concept, and is romanced by the concept of controlling their own retirement account, to do what they want to do. Sometimes we have to do some soul searching and look at ourselves as, are we the best person to do that? Not saying that it doesn’t necessarily mean that you shouldn’t self-direct, but maybe you should also be working with professionals, in various fields, to get guidance, get good due diligence on whether or not you should invest in certain things. The next one is very, very critical, and quite honestly it’s one that people unintentionally make mistakes with all the time. These are very specific plans that have to meet certain requirements established by either the IRS and/or Department of Labor. Are you the person who’s best suited to keep proper plan accounting, plan reporting, making sure that you dot I’s and cross T’s? Some people are very organized, some people are not. For those of you who aren’t it doesn’t mean that you can’t self-direct, but you should always make sure that you’re doing the adequate steps to make sure that you have good plan accounting and reporting features. Does that mean hiring a CPA to assist you? Possibly. I would even say probably. With all cases, when you’re dealing with retirement plans, you do probably want to have a tax professional assist you from start to finish with that. It’s just a good thing to do. Again, with this concept it doesn’t mean that self-direction is bad. I’m not trying to scare people. It is a wonderful tool, but again, remember, are you the right person, is it the right investment, are you doing the proper reporting and accounting for the plan? Those are all critical things that you need to determine when deciding whether or not to establish a self-directed IRA or 401K plan.

Though most are acquainted with self directed IRAs, the majority haven’t heard of or don’t know much about self directed 401k plans. I’m speaking of what’s known as a Solo 401k.

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Transcript:   When you establish a self-directed solo 401(k) plan, that plan — the key word there is solo. It is for you. Its’ not for anybody else. Now there’s an exception to that. You can have a self-employed business and if your spouse is an active participant and legal participant in that business, your spouse can be included on that solo 401(k) plan and the IRS still considers that a one-person plan. Also keep in mind if you hire a spouse and he or she is part of your business, you of course have to follow any state or federal regulations pertaining to the establishment of the business, so always keep that in mind and review things with your tax professional. The bottom line is solo plans are just for you. Saying that, what are some pitfalls or some traps that people can intentionally or unintentionally get into with a solo plan? Let’s say a person hires a spouse or their spouse is part of that business. That’s great. They can be an active participant, they can be paid wages, they can make their own contributions as elected deferrals into their 401(k) plan, but, what if the spouse is added as a participant but they’re not truly a participant? They’re not truly an employee of that business? Well, now let’s say that spouse rolls over funds into the plan. Big problem, because that person’s not even an active, justifiable participant of that plan. Better yet, what happens when somebody, they’re getting busy, they’re making a lot of money, they’re doing a lot of transactions. All of a sudden, they’re getting busy and they hire somebody and they don’t even necessarily intentionally think about this. The bottom line is, remember, those documents for your plan, for that solo 401(k) are just for you and potentially your spouse; no other what’s called common law employees. Common law employees would be somebody that you hire on full-time. They’re not part-time, they’re not seasonal, they’re not under the age of 21, and you bring them on. Guess what? Now you’re plan documents are no longer valid documents because they were written solely for that individual solo plan and by you adding on that participant, that just created a problem with compliance with your plan documents. Remember, always keep in mind that if you’re establishing a 401(k) plan, it’s a great plan because there’s a lot of great benefits that are going to be afforded to you, but keep it simple. Make sure that it only is a plan for you and potentially your spouse.

Here’s something in which many have expressed interest. A case study part 1.

 

Transcript:   Here’s a case study, and it’s about a young couple. They both work, maybe they have kids, maybe they don’t. Between the two of them they’re highly paid, but not super highly paid. Between them they make somewhere around $180,000. They own a small home, and they don’t have a lot of toys. They don’t live up to their eyeballs. They save a lot of money but they have fun, too. Here’s their goal. They’re 32 years old. They want to retire before they’re 65. When that happens is up to how things work out, and everybody’s crystal ball is as reliable as the other guy’s. If they can retire in 20 years, that’s great. If it takes 30 years or more, they understand. What they have now is $150,000 that they’ve saved up, and $100,000 is in a personal account, $50,000 is in a Roth IRA. Now, that Roth IRA can’t be rolled into anything. They were not happy to hear that. Just so you know, almost anything can be rolled into anything else, but a Roth IRA just stands alone. Here’s the thing, we’re going to take a lot of different plates that we’re going to have spinning at once. The first is going to be because they were young enough, in their early 30s, we’re going to get them hooked up with David Shafer in what’s known as an EIUL. We don’t need to go into that. I’ll give you the bottom line. It’s an acronym for Equity Index Universal Life. It’s an insurance policy designed to hold assets or create retirement income. For them, it’s going to be income. The income, by definition in its IRS definition, is tax free. It’s way down the road, at least 20 years. The second plate is going to be real estate investment. They’re going to buy a small Texas duplex. They’re going to pay $300,000 or less. It’s going to cash flow. They’re going to love it. It’s going to be managed, blah, blah, etc. The third thing they’re going to do is take that $50,000 in the Roth and buy a discounted note with that. That play is going to be, give or take, at least 17 years because 59 and a half is the earliest they can access that. What we have is EIUL, real estate investment, and notes personally versus notes in your qualified retirement plan which is IRAs and 401ks. The next step we’ll be talking about specifically how we’re going to interweave those investment strategies together to enhance one or more of them such that they’re either bigger at retirement when it comes to income, they’ve been turned into after-tax or tax-free income, or they’ve been turned into greater income at retirement. Here’s the first thing they do. They buy a piece of real estate. They have $100,000 saved up, I said. It’s going to cost them about $80,000; maybe $75,000, maybe $85,000, down payment, closing cost, and all of the different things that come in an escrow when you buy. They’re going to end up owning a property that the spreadsheet says is going to yield north or south of $5,000 a year. You know what Murphy says? Murphy says we’re just going to take the gross rent for the years scheduled and divide by two. Their cash flow’s going to be a little over $2,000 a year. I much prefer that. Let’s do the spreadsheets, but let’s just believe that Murphy exists, and he knows where we all live. Now, that left give or take $20,000 in their bank account. Now, they make about $180,000 a year. They told me when they did their budget that after taxes and after everything, their family is able to save, give or take, about $4,000 a month. What I’m going to have them do for the first six months is add give or take $25,000 to that $20,000 extra. Their cash reserves are now going to be labeled “untouchable” in bi...