A Revitalized Retirement Plan Can Reduce Business Costs AND Improve Participation

Here’s a dilemma every small business owner is facing these days. How do you reduce current costs without sacrificing your growth potential? Here’s one QuickBooks line item to consider…your retirement plan. A revitalized retirement plan can help reduce your administration costs while improving employee attraction, retention and participation.

Most small business owners establish their 401(k) early in their life cycle. Because of the small size, the broker establishing the new plan modifies an existing “off-the-shelf” plan for the business owner. These plans are usually chocked with unnecessary fees to help offset the relatively small amount to be invested. And the investment choices are usually limited to a few staid mutual funds. While the plan provides all with some nice tax deductions, it’s overpriced and not helping participants save for their retirement.

But now that the business, and its plan, has grown, it's a great time look at other options. While it will require a small investment in time, a revitalized plan will save money, help increase participation levels and provide you with a competitive advantage when attracting, retaining and MOTIVATING key employees.

With trust in Wall Street waning, the fastest growing segment of the retirement market is self-direction. The law allows retirement investments beyond stocks and mutual funds. Investments in real estate, commodities and private placements are just as viable as buying stock in Google. Your inability to purchase gold or rental properties with your 401(k) is not due to IRS regulations, but the rules of you current, overpriced plan. Modifying your plan to include a broader range of investment choices will allow for portfolio diversification that will help increase participation, including that of the business owner!

To get started, find a consultant that either specializes in self-directed plans or isn’t beholden to one particular Wall Street custodian. With a little information, they can prepare options for your review that will dramatically improve your retirement plan and lower your monthly administrative costs. No small feat in today’s challenging business environment.

Three Different Real Estate Markets

The current California real estate market is really three different markets...and all are performing differently based on lending dynamics. In the under $500,000, the market is white hot, between $500,000 and $1,000,000, the market is warm, and above $1,000,000, the market is still stalled.

Financing is affecting the three markets because of our good friends Fannie Mae and Freddie Mac. Conforming loan amounts have been increased from $417,000 to $729,750 in populous CA counties, but interest rates are higher, and qualifying is more difficult for loans between $417,700 and $729,750. Just ask anyone trying to get a loan right now in this price point. The qualifying is even more strict and rates are even higher for jumbo loans above $729,750. Don't bother asking these borrowers since their reaction will probably be negative.

Fannie Mae and Freddie Mac only buy conforming loans; therefore, less money is being made available for jumbo loans. And since there is no buyer on the secondary market for these loans, banks are VERY hesitant to loan on these properties. It is not clear, however, why conforming loans between $417,000 and $729,750 pay higher interest rates and have tougher qualifying guidelines than loans made below the $417,000 amount.

In the past, all conforming loans had the same interest rates and qualifying guidelines. Unless Fannie Mae and Freddie Mac start treating all conforming loans equally, and the government intervenes on jumbo loans, as it has with conforming loans, we may continue to experience the tale of three markets. If these changes do not occur, then the upper-end market will likely see
prices depreciate even more before this market strengthens.

Before even thinking of buying a primary residence or investment property, make sure you have a solid mortgage professional on your side. Opportunities exist, but you'll need someone working hard for you to expose all that is possible.

The Seven Habits

One of my old advertising bosses materialized a few weeks ago. He's living in Orlando and got a little uppity after the Magic won A game in the NBA championships against my Lakers. He emailed to see how I was doing and to strike up a little competitive banter. Perhaps a wager or two was placed on the series.

Besides being thankful for his generous donation to the Coe college fund, I was reminded of a piece of paper that he gave me when I first started working for him in Atlanta. It's titled "The Seven Habits" and is a summary of the seven habits of highly effective people, a book written by Stephen Covey. I still have that same piece of paper, yellowed and ripped, taped to my desk today.

Here are the 7 habits:

1) Be pro-active. You are responsible for your life. Decide what you should do and get on with it.
2) Begin with the end in mind. Think of how you want to be remembered at your funeral. Use this as a basis for your everyday behavior.
3) Put first things first. Devote more time to what's important but not necessarily urgent.
4) Think win-win. Have an abundance mentality. Seek solutions that benefit all parties.
5) Seek first to understand, then to be understood. Don't dive into a conversation. Listen until you truly understand the other person.
6) Synergize. Find ways to cooperate with everyone. Value the differences between people.
7. Sharpen the saw. Continually exercise and renew four elements of your self: physical, mental, emotional-social and spiritual.

Thanks Jack for sharing these habits with me and for all of the other lessons I learned from you. To everyone else, go back and re-read these 7 tips again. I hope they have an impact on both your professional and personal life.

The Next 18 Months Could Make Your Retirement

For those with serious plans to retire self-sufficiently, retire early or, dare I say, both, a very unique investment strategy is possible in the next 18 months. There are two provisions in the IRS tax code that if implemented strategically will allow you to drastically improve your retirement outlook. But you need to take action before December 31, 2010.

The Gulf Opportunity Zone Act of 2005, or "Go Zone" is a provision in the tax code created to encourage private investment into the regions devastated by Hurricanes Katrina, Rita and Wilma. The most useful section of the code allows for a single, one-time write-off of 50% of the depreciable basis of the property. For example, if you purchase a property in the Go Zone area of Mississippi for $150,000 and the depreciable portion is $120,000, you could receive a tax deduction of $60,000 in the year the property is put into service. Obtaining this deduction is part one of the strategy.

Part two involves the Tax Increase Prevention and Reconciliation Act (TIRPA) passed on May 17, 2006. TIRPA allows for an individual to convert a traditional IRA to a Roth IRA in 2010 regardless of your income level. For those who have always wondered, traditional IRA contributions are not taxed in the year the contribution is made but are taxed when the funds are withdrawn during retirement. Roth IRA contributions are taxed in the year they're contributed, but can be withdrawn 100% tax-free during retirement. Roths are a very powerful way to save for retirement when you factor compounded annual growth rates into the size of your retirement portfolio. But Roths are limited to those households that make less than $160K per year, preventing most wealthy Americans from utilizing them.

The TIPRA exemption presents a big opportunity...here's how. When you convert your traditional IRA to a Roth, the total amount converted is considered a taxable distribution, taxed at your current rate. But the 10% early withdrawal penalty is waived. So if a $200K IRA was converted and you're in the 30% tax bracket, you would have $60K to pay in taxes. That's not cheap, but consider the long-term tax advantages.

That same $200K invested for 15 years earning 10% annually would be worth $835K in 2025. Assuming your tax bracket in 2025 is 20%, you would pay $167K in taxes upon withdrawal. By paying the $60K in taxes now, you can earn $107K in tax savings to use or invest when you retire! Of course, if you have a larger IRA to convert, longer to invest or if you achieve a higher annual return, the tax savings will be even more dramatic.

So here's the strategy in its simplest form. You purchase a Go Zone property in the next 18 months to not only obtain a cash-flowing investment property in one of the fastest growing real estate markets in the country, but you also receive a huge tax deduction. Then next year you convert your traditional IRA to a Roth. You can then use the Go Zone tax deduction to OFFSET the additional taxes from the Roth conversion and avoid "paying" any taxes!

So, using the numbers from the examples above, you purchase a $150K Go Zone property and receive the $60K tax deduction. You then convert your $200K traditional IRA to a Roth triggering the $60K tax bill. You offset the $60K bill with your $60K deduction. You're left with a cash flowing investment property AND a $200K Roth IRA that will continue to appreciate tax free until you retire. I challenge anyone to find a better opportunity.

Of course there are a lot of stipulations in the tax code that require very precise implementation of this strategy. Your financial planner, CPA, or real estate agent may not be versed with the nuances of each program, but Freedom Growth and our partners are. We know how to implement this investment strategy allowing you to take full advantage of this once-in-YOUR-lifetime gift from the IRS!.

Don't let this opportunity pass you by. Contact us to learn more about this strategy and to see how it makes sense for your retirement and long term financial health.

Retirement Dreams Disappear With 401(k)s

As more and more people have their lives devastated by their diminishing 401(k)s, more and more reports like this 60 Minutes piece will be produced. The havoc that Wall Street has wrought in the name of profit is beyond scandalous and borderline criminal. It's only a matter of time until the current retirement sytsem is radically altered to do what it was initially designed to do....help people save for retirement! Do yourself a favor and watch this 10 minute segment on CBS's website. You could also read the transcript here.

An entire generation's retirement dreams have been wrecked due to their blind faith in the stock market. And why wouldn't they? Brilliant marketing campaigns convinced them equities were the best way to grow their retirement accounts. Then the retirement accounts themselves (IRA's and 401k's) were structured so stocks and mutual funds were the ONLY investments allowed. Starting in the '80s, TRILLIONS of post-pension dollars were pumped into the market via mutual funds and IPO, tech-stock mania. The market responded with the best 15 year run in it's history averaging 17% year-over-year growth. A generation was hooked, line and sinker.

But then the tech bubble emphatically popped losing 35% in early 1999. That was followed 8 years later by last year's 43% clubbing. Will the market recover? Probably, but to what extent?

What if the next generation learns from their parent's and peer's financial decisions and become more savvy to the pitfalls of stock market investing? What if they start building diversified retirement plans that aren't predominantly invested in the market? What if trillions of dollars are permanently moved out of the market and invested in commodities, real estate, cash or other investments? Warren Buffet predicts the growth that happened towards the end of the 20th century was the heyday of Wall Street and the chances of a repeat performance are slim.

I believe our current unregulated, falsely reported, hedged and ponzi schemed system has permanently soiled Wall Street's reputation for an entire generation. I'm sure one on them. Without the mass capital, hidden fees and blind faith necessary to build their financial house of cards, Wall Street will have a tough time reproducing last century's results.

Do yourself a favor NOW and begin building a better retirement portfolio. Don't rely on the stock market to be the sole provider of your retirement dreams. True diversification is possible through self directed retirement accounts that allow you to spread your risk over multiple investment classes. And more importantly, they can prevent your retirement from being wiped out or delayed by an unexpected bear.

Change in Employment = Change in Retirement Strategy

The most unfortunate consequence of the current recession is the incredible loss of jobs. Since it began in December 2007, 5.1 million jobs have been lost, with almost two-thirds (3.3 million) of the decrease occurring in the last 5 months. While having to look for a new job means making a lot of hard decisions, what to do with your existing 401k should not be one them.

If your entire retirement portfolio has been invested in the stock market, now's the time to make a change...for the better. Roll your 401k from your previous employer to a self directed IRA. A 401k to IRA rollover is very easy to accomplish and will allow you to finally diversify your retirement savings account. Here's why:

1. True Diversification: When your portfolio is diversified, it can provide consistent performance in a range of economic conditions. The only way to truly diversify your retirement portfolio is with a self directed retirement account.
2. More Investment Choices: A self directed IRA works like your current 401k with one major difference. You're allowed to invest in anything that is legal by the letter of the law and not limited to the investments that your current custodian profits from.
   
3. Real Estate Is Proven: A self directed IRA allows you to use tax-sheltered dollars to purchase real estate with no withdrawal penalties. Once converted, you can own a range of real estate investments including commercial, multi-family, raw land, trust deeds and tax liens.
4. Gain Control: With a retirement portfolio purely invested into mutual funds, control lies in the hands of those that manage it. How have they been doing? Not well. Check out this story from the Chicago Tribune and read how Congress is finally calling these guys out to the mat. You and you alone should be responsible for your retirement. Don't leave it in the hands of someone you don't know.
   
5. Comprehensive Retirement Planning: Retirement planning should be a comprehensive approach covering the financial planning process including insurance planning, investment planning, tax planning, planning for college, employee benefits, and estate planning, as well as retirement planning. If you've ever reached out to your current Wall Street custodian and asked for guidance, they probably only offered advice on the products they sold. With a self directed IRA, you can get comprehensive advice from a qualified Certified Financial Planner.
   
6. Beneficiary Advantages: Named beneficiaries of an IRA other than a spouse (like your children or grandchildren) have tax advantages not available with 401k plans. Named beneficiaries of an IRA are able to stretch the required distribution over their life expectancy deferring income tax and allowing funds to continue to compound exponentially. Beneficiaries of 401ks do not have this option.

Losing your job is always tough and the silver linings are hard to see. But what you do with your retirement plan right now could drastically alter when and how you retire. Use the time you have to research the self directed world and possible investment scenarios. It may end up being a blessing in disguise.

If Only I Had More Time

As I speak with folks about investing in real estate using their IRAs, I hear one common concern, “I love the idea of self-directing my retirement money and investing in real estate but I just don’t have the time to do it.”

We understand and appreciate this sentiment which is one of the main reasons we started Freedom Growth. Americans are extremely busy and have little time left over after family and work commitments to plan for their retirements. It’s true that self-directing a retirement portfolio does requires some time and effort but it’s not nearly as much as you might think.

Real estate investors short on time have access to a free source of information, research, and advice. These are the services provided by your real estate broker. Real estate brokers representing investors as buyers are typically paid by the seller so they don't charge you a dime. It’s important to contact a broker who specializes in IRA real estate investing and tell him or her what results you’re looking for. If the broker does not already know of specific real estate investments that fit your needs, he or she can probably find one or more that do. This means you initially spend 20 – 30 minutes with a broker discussing your situation and needs.

The broker then finds opportunities that you might like and presents them in a clear, concise way. With real estate investing, the focus is not on how cute the property is, but on hard numbers, especially the ROI (return on investment). Your broker probably has opportunities for you but he or she might also need to find others which might take a few days or weeks. Ideally, your broker presents you a comparison of the various opportunities allowing you to quickly and easily make a decision. Done properly, this only takes a few hours of your time.

Now it’s time to make the investment. Documents are drawn and signed. In a matter of days (sometimes weeks,) the deal closes and the IRA now owns a real estate asset. You have diversified your retirement savings and paid nothing for the services provided by your broker. I challenge anyone to find a better deal.

So don't let time be an obstacle to building a better retirement plan. An IRA real estate specialist will gladly minimize your time involvement and give you great real estate investment advice...for free!