Wealthy & Wise: Getting the Most Out of Your Retirement Account

About the Video

Start utilizing your retirement savings by investing your money in real estate, the stock market, and much more!  Watch Cort Christie, the founder of NCH, and David Chafkar, our Senior Analyst, discuss how you can unlock your retirement savings and use it to supercharge your investments.

Prefer to read? A full transcript is provided below.

CORT:

Hello and welcome to another edition of Wealthy and Wise. I’m your host, Cort Christie. And today we’re going to have a lot of fun. We’re going to be talking about how to tap into the wealth that you have right now in your retirement accounts and how to deploy them in a different way than you might traditionally look at those accounts. And we’re talking about being able to utilize that money and unlocking it so that you can directly invest into alternate investments like real estate or crypto trading, or maybe you’re into trading, day trading in the stock market. These are all things that traditionally you can’t do with your retirement money, unless you take advantage of some special techniques that allow you to open the door for that. So, I have a special guest with us, David Chafkar, who’s one of our senior analysts at NCH. And Dave has been working with clients of NCH for 20 years and years.

DAVID:

Yeah, a very long time.

CORT:

You’ve worked with thousands and thousands of people, and I know one of the areas of specialty for you is helping people unlock the wealth that they have in their retirement plans. And kind of, you know, give them access. Now, I’m familiar with, you know, self-directed IRAs, and I’m less familiar with what they call Solo K’s are utilizing a 401K type product in order to allow you to self-direct. Can you kind of give us what the difference is between, you know, having a traditional IRA and then being able to utilize something more advanced like a 401K and where you might choose to use one versus the other?

DAVID:

Yeah, that’s always a great question. We get asked that quite a bit, as you can imagine. We work with business owners in all industries, really high in the real estate investment world as well, commonly utilized. You know, IRAs are typically an account that most individuals either start to put money aside, you know, maybe I’m leaving my job, maybe I’m self-employed. You know, I no longer have access to my 401K plan at work. So, I have to either, you know, find a different vehicle to do my investments through or start building a retirement plan for myself and my family by contributing to IRAs. Individual retirement accounts, I would say, are probably the most common entity or vehicle I should say used by, you know, individuals that are self-employed. Most of your financial planners in the US will commonly direct you to using a self-directed or an IRA itself, individual retirement account. They’re going to be used for every aspect, not only for building retirement. You can utilize them for reducing tax rates and those are things we can talk about. Also, investments, you know, there’s commonly you can self-direct these types of vehicles. But I think what you’re looking for as an investor is something a little bit more flexible. IRAs can be somewhat limiting. It’s important to understand the rules, the dos and don’ts of what they can. They’re all governed under the ERISA laws. So, it’s really important to make sure you’re doing things properly. IRAs, are commonly referred to as a traditional trading vehicles, you know, stocks, bonds, mutuals, these are the common things that most individuals utilize it. But if you are an investor going into more of a specialty like real estate, sometimes as an investor we need more flexibility, the ability to borrow money, the ability to be able to direct our investments. And those sometimes IRAs can be limiting in that manner. As I can’t borrow against an IRA, there’s minimal contributions I can do on an annual basis. And this is why as many times we look at, you know, what’s going to be the best option for you as a client. And then mostly we will then probably refer you over to something like a Solo (401)K.

CORT:

OK.

DAVID:

Solo K vehicles are just amazing. They’re one of my favorites of all times there.

CORT:

Let’s hear how they work.

DAVID:

Yeah. Imagine a 401K plan. And having the ability to actually self-direct it yourself, you know, to be able to control the investments. Maybe I worked for corporate America for 30 years. Putting money aside in my retirement account. Now I’m retired and I’m trying to figure out what, how I can leverage my retirement account and you know, IRAs again, you know, commonly used for stocks, bonds, mutuals. And in most cases I can’t borrow money, nor can I go into the type of investments that I maybe want to go into. Maybe I want to build a real estate investment business. Also, they’re very limited on control in a sense that commonly you’re using a custodian to be able to give you the ability to approve a transaction or deal. Whereas a Solo K’s, they sort of stand on the benefits. They give you power of trustee. We can talk about that. They give you a full self-direction, higher contribution amounts to be able to lower your overall tax burdens throughout the year. So, when you start doing a side-by-side comparison, in my opinion anyways, Solo K’s are just a much more flexible vehicle for investors.

CORT:

OK, so I’ve got the ability to direct the money in different ways. I’ve got the ability to contribute to it.

DAVID:

Correct.

CORT:

You know, as I’m thinking about the folks that are listening now, they’re thinking 401K, I had one of those and for the company that I used to work for and then I took the money and I put it into an IRA. And now how would I have, can I be just a one person? Can I set up my own 401K? And how do you do that?

DAVID:

Yeah, that’s a that’s a good question. You know, for one case can be set up, you know, as an individual account either under your name, we sort of refer them as sole proprietor type set ups. Commonly, though, they’re going to be used very similar to 401K plan. In other words, I’m an employee for Microsoft as an example. They have thousands of employees and then Microsoft as a benefit gives me the ability to make contributions or build a retirement account under their 401K plan. So, in that example, Microsoft is the host of that retirement account, providing that as a benefit to all employees as an option.

CORT:

Yes.

DAVID:

Well, imagine now I’m no longer working for Microsoft, but maybe I want to go into and build an investment business, whether it’s, you know, actually trading real estate, whatever that is. You know, unfortunately, when I’m no longer working for a company, I lose some of the advantages. I lose the ability to contribute anymore. So, my annual contribution goes away. So, I can’t put any more money aside. I can’t borrow like if I was an employee being able to borrow up to $50,000 for my 401K, I no longer have that as an option, you know. And I’m going to be limited to just, you know, market investments for the most part, whatever it currently is trading in.

CORT:

They are limited.

DAVID:

Yeah. You know, how they have been going the last couple of years. Not so, not so great.

CORT:

And that’s one of the biggest things why I wanted to have you on the program because there’s so much uncertainty in the stock market today that people are like wanting alternatives, you know. So, then I left my job, as you mentioned, at Microsoft. Now that money’s sitting somewhere, right? How do I get it into this vehicle, this Solo K? And when I call it a Solo K, because it’s solo, one person.

DAVID:

Correct?

CORT:

It’s just you.

DAVID:

Right.

CORT:

You can have a 401K for just one person, you, that you get to direct. How does that work?

DAVID:

Yeah. That’s a good question. You know, commonly again, all the money that I’ve been putting away. The company’s been matching to elevate or grow my retirement account. Now, I’m no longer working for the company so now I want to be able to tap into this retirement account and do other investments to be able to grow that. So, there’s a process referred to as a rollover, you know, so I’m typically, let’s say, I have $200,000 sitting in my 401K from the company I just came from. I’m now going to take that $200,000 and I’m going to roll it over into either an IRA or in this case a Solo (401)K. As you mentioned, the Solo K is an individual 401K plan. Thus, the term solo, one person commonly. And now I can create that either under my company that I’m conducting business in or we can even create one under you, in some cases. But by rolling it over, this now gives me the access to the funds that I once have, and it opens up a lot of additional benefits that I can utilize in this vehicle.

CORT:

OK, now I’ve heard in some cases you have to like petition a trustee or somebody that oversees the money in your retirement plan. You know, in this case, you have to have someone else involved in the investing decisions or do you get to make your own investments? How does that work?

DAVID:

Yeah, that’s a good question. That’s the downside about normally traditional retirement accounts. Commonly, you know, you have to have something called a custodian, a custodian that actually manages that process for you. They have something referred to as power of trustee. All retirement vehicles have to have someone named as power trustee. This is the individual that when I want to do a particular investment, I typically have to pick up the phone, call the custodian and sort of ask their permission to invest my own money into whatever I’m looking to invest into. And if they say no, then unfortunately that’s not an option. You know where this is where the Solo K becomes a very powerful vehicle. Commonly, when we’re talking about self-directed retirement accounts, there’s typically three qualities that I always recommend, regardless of what type you’re using that you want to try to implement within your vehicle. Number one, you want full self-direction, meaning I have the ability to invest in just about any type of qualified investment that I want. Actually, the feds actually have a list of qualified investments, and you’d be surprised as to what type of investments they allow you to do.

CORT:

But there are some things that people would be surprised.

DAVID:

Common stocks, bonds, mutuals, real estate. Maybe I want to do, you know, any type of crypto money, money transactions I want.

CORT:

You could invest in crypto too.

DAVID:

Exactly, and you know, what If I want to be a private lender? If I want to become the lender and make the higher rates of return on that money versus me now going out and borrowing money from someone else.

CORT:

So, you’re saying, you know, if you did roll over from your IRA into this 401K plan.

DAVID:

Correct.

CORT:

And you mentioned $200,000, I could actually use that to lend to other people for their investments.

DAVID:

I can, yes. And that’s the advantage. Now here here’s the qualifiers. Usually when you become a private lender, there’s three qualifying rules that you have to sort of follow. Number one, I have to find a qualified investment to go into. Private lending is a qualified investment. I’ve essentially met rule number one. Now rule number two is, of course, if I have power trustee and I can make the decision as to what I’m investing into now, I have to find a qualified individual to loan that money to. It’s sort of referred to as a linear rule. Linear rule sort of dictates who you can never private lend money to. You know, typically your immediate family, you know, grandma, grandpa, mom, dad, spouse, son, daughter, grandchildren are usually prohibited, but that leaves pretty much anyone else. My neighbor, my close family friend, other investors, you know, I can be that lender too. So as long as I find a qualified individual that doesn’t fall under the linear list, I can now loan money. I’ve met rule number two. And then finally, once I find a qualified individual, all I have to now do is secure the loan amount that I’m loaning you, if I approve it against an asset. And the interesting thing is I don’t have to really necessarily dictate what asset or what investment they’re going into. Commonly, the asset becomes the promissory note. So, you know, as the individual that controls my account, I simply draft a promissory note. I act as power of trustee over my own account. So, I’m authorizing that loan. The individual I’m loaning to once they approve the terms, you know, you set a term, an interest rate, and once they, you know, accept it, now, at that point, we both signed. And now I can literally pick up open my checkbook in my account and physically write the check.

CORT:

And so, you’ve got full access.

DAVID:

Full access.

CORT:

You get to direct how you want to invest your money.

DAVID:

Yeah, they’re amazing.

CORT:

You know, as some of the viewers are looking at this, it sounds a little complicated. Is it complicated?

DAVID:

You’re going to be surprised how easy it really is. You know, the main thing is just to understand the basics of what you can do. And that’s sometimes really, a really good team comes into play. Making sure you have good advisors, you know, good professionals that you’re working with that can give you some direction as the dos and don’ts of what is common. But for the most part, because of the control you have over this vehicle, you pretty much have the ability to make that decision yourself as to, you know, what is common, what type of investments you want to go into. Again, as long as it falls under a qualified investment. And so, I’m not having to now worry about having custodian approval on it. I don’t have to worry about that. And, you know, having someone actually, you know, approve a transaction that I want to go into, I pretty much become that for myself. I mean, after all, it is my money you know, I want to be able to control my money in that.

CORT:

Well, I know. And so, I have had some funds that have rolled over from another company. So I have an IRA and I haven’t set up a Solo 401K. Some of the reasons I already am involved in a current 401K plan, and I believe there’s some, there’s allowances to have a secondary.

DAVID:

Sure.

CORT:

But, you know, I haven’t looked at it. But I do know one thing, is that you know, with my traditional IRA is I have a person. And I have to call that person, which is kind of a pain in the butt. And then they tell me, like you said earlier, yes, no, you can’t do that. You can do this. I love the idea that I get to make all the decisions myself. I don’t have to call anybody. I could do my trading, however I want to do my trading. I can buy real estate, I love that. I’m also, I do have accounts in crypto and the idea of being able to leverage my retirement money, which there’s no tax on, on any growth or any capital gains until you take it out. Now, if you can find great assets, whether it’s real estate or something else that you really want to invest in, you could buy physical gold too…

DAVID:

Without question.

CORT:

And put that in this plan. So, it really allows you a lot of options and you know, I know because you’ve been doing it for as long as you have helping support people go down this path that, you know if they work with NCH, and they work with you as an advisor, they have a resource to call to say, what can I do? How does this work?

DAVID:

Right.

CORT:

And so you actually are there to help them not only set it up, but then to use it later.

DAVID:

Yeah. And that’s the important part is understanding what can be done. You know, in fact, when you do a little research on your own, and you take a look at really what the growth rates are, I mean, after all, we’re utilizing retirement moneys and assets and the goal is what? To grow, to grow our retirement. You know, in this day and age, you know, I remember when I was growing up, my father used to always tell me, you know, put as much money away in retirement as you can. And you know, let it grow. Never touch your retirement until retirement time. That used to work 30 years ago, 40 years ago, because, you know, the market investments did quite well. But nowadays, if you’ve seen the last couple of years, the trend in IRAs and 401K growth, I mean, what’s considered average nowadays is 2 to 3% growth. What’s interesting you know, cost of living increase is 2 to 3%. So even if I’m getting 3%, I’m not even…

CORT:

Or higher.

DAVID:

Yeah. I’m not even going past the cost of living and we wonder why we have to work to 90. You know, so it’s always going to be a better, a much better option to find different investments that I feel confident that I can actually help utilize, invest into, to increase my retirement. For example, I work with a lot of real estate investors and you can imagine a lot of real estate investors want to be able to tap in, utilized retirement because they got a big chunk of money that they’ve been putting in a way for years. You know, commonly, you know, what are the rates of return that you see in real estate? Well, a common investment in real estate would be maybe I’m buying a rental property, you know, so, take the example of $100,000 as an example, you know, $100,000 in the stock market in this day and age, you know, commonly 2 to 3%. You know, most of your financial planners will tell you 5, 4, 5, 6% is amazing. And they put sort of put that cap on you that that’s what you accept. But imagine if I have $100,000 in the stock market, even at 5% on what’s considered to be good, you know. I might recognize $5 to $6,000 growth that year. So, it’s very limiting. So, it’s not really growing at the rate that we need to actually have a good lifestyle when we retire. Now, imagine taking that using real estate still as the example and converting that to maybe a real estate asset. Maybe I’m an investor that wants to buy some rental properties to develop a rental portfolio. You know, now because I have the ability to direct and control my Solo K, what if I authorized that same $100,000 to be used to acquire a rental property? There’s a lot of markets in the US where you can buy a $100,000 rental property. I’ll give you example. I have a client that just did that two months ago. They bought a rental property in upstate New York for $100,000. They don’t have a mortgage because they actually utilized their funds in their Solo K to buy it outright. So this asset, this real estate project is now a retirement asset. So all positive cash flow, all monies they gain goes back into the retirement account to grow it. But in this particular property they charge $1,500 a month for their client. Now they don’t look at all $1,500 as positive because they, you know, they spend about $150 a month on management fees to manage this, to manage the property themselves. Now they always take about another $200, $250 off the top of that, put it in a small account to let it grow in case there’s ever a major repair. So, the full $1,500 is not really positive. Even without a mortgage, they’re probably recognizing more along the lines about $1,100 of that is positive. Simple math, take $1,100, multiply that times 12 months. That puts you close to $13 and a half thousand dollars of profit, which on a hundred grand that reflects a 13 and a half percent rate of return. And even in the worst case, in the worst day in the US, you’re seeing a 3 to 4% appreciation rate on real estate. You add that 3% now that puts you at 16 to 17% rate of return many times.

CORT:

Way better than the stock market.

DAVID:

Much better than 4 to 5%. You’re talking almost three times the growth rate now. That’s the kind of growth I like seeing in my return.

CORT:

And that’s such a simple example, right? And you can, you know if you have more than $100,000…

DAVID:

Oh sure.

CORT:

Like people do, you can leverage it to multiple properties. Can I also borrow from the bank if I want to do more?

DAVID:

Yeah, there’s, there’s different resources that you have available. In fact, when you’re utilizing a Solo K, there’s something called a non-recourse loan. So, using that same $100,000 as an example, I might be able to take the full sum that’s in my retirement account and go out and buy that $100,000 dollar property. Which we talked about the types of rates of return that are common, you know, with investing into passive, you know, positive cash flow positions. But imagine now instead, if I get a non-recourse loan, a lot of lenders specialize on that, where I can take $50,000. So, it requires you to put half. So, I take $50,000 from that $100,000 I have my retirement account, I put it as a down payment. I then borrow the other $50,000 from that specialized lender. You know mortgage rates are, you know, my mortgage is very low, a few hundred dollars a month. But now that means I’ve only leveraged half my retirement.

CORT:

So, you can get a second property.

DAVID:

Exactly. Then you take the other $50,000 and sort of duplicate that process. Now I’m doubling the assets and really highly increasing the positive cash flow I’m seeing. So yeah, leveraging that is amazing.

CORT:

That’s fantastic. Well, David, thank you for giving us some high-level kind of insight into how people can use retirement money that they have and maybe they’re not happy with the returns they’re getting and look at other assets that they can buy like real estate, but be able to invest it directly yourself from your own retirement money. And I think one of the most important things is not to trigger and you do not trigger in this case, any taxation in your retirement plan, until the day you decide to start taking it out and paying yourself from that. Then you will pay taxes just like any IRA or traditional Roth or anything else that you might have. You ultimately have to pay taxes on it. Actually, not a Roth, but a regular traditional IRA or 401K plan, there are taxes due. But this is a great way. It’s an alternative way for you to tap into your retirement money and look at a Solo 401K and how flexible it is. And there’s a lot more that we could spend the next hour. And I know that’s got so many examples of how we can go much further with it, you know, especially if you have an active business or you’re earning money and that rental income comes in. And you could potentially pay yourself a salary and then you can actually put money into your 401K. In addition, the company itself that you form, can be matching that also. So, there’s some great ways of leveraging how much you can actually keep adding to your 401K besides the optionality that you have of investing in different types of assets. So, thank you for educating us.

DAVID:

My pleasure.

CORT:

My point to all of you, because there’s so much more to it, is to pick up the phone, talk to one of the consultants at NCH and more specifically ask for David Chafkar. He is an expert in this and he’s great with our clients. There’s just such an incredible job. So, thank you for being on today.

DAVID:

Always a pleasure, Cort.

CORT:

Thank you, David. And thank you everyone for tuning in today to another episode of Wealthy and Wise. I’m your host Cort Christie. Have a great day!

Subscribe to our YouTube channel!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.