Jason Hartman interviews returning guest, Bryan Calderon, Director of Business Development with Acceptant Benefits Services, for a timely discussion on breaking out of 401k jail and putting your retirement money to better use. Bryan explains the differences between the various retirement plans, such as IRAs and 401ks, and though a 401k is a great way to save money, there are some pitfalls as well. Some of those traps have been scams, employers stealing funds from employees and the concerns over business failures. Jason reminds listeners of why it’s so important to be in control of your money. For details, listen at: www.JasonHartman.com.
Bryan says there are less than 2 percent of plans that are self-directed. That’s a scary figure with all of the current economic uncertainty. Bryan talks about how people are concerned enough about the funds in their retirement plans that some still employed ask for early termination in order to get control of their money by putting it into a self-directed IRA or solo 401K. One of the best methods of control is investing in prudent real estate. Jason includes a recorded audio explanation of the manipulation by fund managers and how to break free from the 401k jail by becoming a real estate investor. Bryan shares options for getting out of their current plans, and he also explains how a solo 401k works for the self-employed. Unlike a sponsored plan, a solo 401k or self-directed IRA can be directed into real estate, promissory notes, trustees, etc. Bryan says that there is about $20 trillion in retirement plans across the nation, with only $4 trillion of it self-directed, and the Social Security sector funds are about $5 trillion. Bryan wraps up with some valuable advice on getting your funds freed up.
Female Voice: Welcome to Creating Wealth with Jason Hartman. During this program Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing fresh new approaches to America’s best investment that will enable you to create more wealth and happiness then you ever thought possible. Jason is a genuine, self made multi-millionaire who not only talks the talk but walks the walk.
He’s been a successful investor for 20 years and currently owns properties in 11 States and 17 Cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it. And now, here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman: Welcome to the Creating Wealth Show. This is Jason Hartman, your host and this is Episode Number 256. Thanks so much for joining me today. A couple of things we’ve got here before we get into our guest today and he’s been on the show before as we have talked about self directed IRAs, but this time we’re going to talk a little bit about self directed 401Ks. Kind of some distinctions that that you need to know about, and if you want the full show on self directed IRAs just look back into the old episodes — forgive me I don’t have the Episode Number in front of me. What we have done actually a couple of shows on that subject and of course Bryan is a regular speaker at our Meet the Masters Event. The next one will be coming up in about, oh five months or so, I guess.
Today let’s see, what do we got before we get into this topic with our guests? Well, a couple of things. First of all, more upbeat news from the National Association of Realtors, and you know what, I’m buying into this. I believe it. I — again, I debate a lot of stuff, NAR, National Association of Realtors comes out with, but a few years back, oh gosh I want to say maybe five years back actually, started a new index and it’s a very helpful index. It’s not often used and we’ve talked many times on the show before about how statistics are so far behind, because when you look at Kay Schiller FAO statistics on the housing market, they’re basically looking at what happened three to five months ago. So, I won’t belabor that. We’ve talked about it many times.
So NAR a few years back, came up with this new index, which I think is an important one to consider. It’s called the Pending Home Sales Index, and that shows the number of properties entering into contracts, okay. And so again, they won’t all close. Some of the deals will fall through, but it is a much more timely or a much more real time indicator of what’s going on in the market place. And again, with Kay Schiller, the other problem we have, it’s only really about four to five percent of the entire housing market in the Country, because it only profiles 20 major metropolitan areas, and of course there’s about 400 markets in the Country.
So this article, very rosy again, says the Pending Home Sales Index nears a two year high, and NAR is saying the housing market has turned the corner. I wouldn’t go that far as to say that, but I do think in the right markets in the segment of good investment properties, the housing market has definitely turned the corner. I think we are seeing major appreciation, what I see — look maybe I’m sounding a little too rosy myself. I’m going to correct myself there. I don’t think we’re seeing major appreciation by crazy, historical standards, but we are seeing significant appreciation and maybe it’s not even called appreciation. It’s really not called appreciation in the markets we’re talking about. It’s really just nothing more than what, you know the phrase, my phrase. Regression to replacement cost, because still these properties are far below the cost of construction.
But I’ll tell you folks, what we’re having to do internally, and I just had a big talk, we have a weekly conference call with all of our investment counselor team in the company, and we do this every Tuesday. And we had a big talk about this probably discussed it for about 40 minutes just on this topic alone of how we are having to internally and you, our clients, are having to adjust your expectations. Folks, we are no longer at the trauth of the market where the deals were just plentiful and many people were afraid to buy them. Some weren’t. The more courageous people are always the ones that make the most money, that’s just true in life. If you read biographies of incredibly wealthy and successful people, they always are willing to take risks and do things counter to the trend because they have confidence in themselves and their ideas about things, but the deals aren’t as good as they used to be. Just face it okay, they’re not as good as they used to be.
Now granted, they’re far better than they were at the peak of the market, at the peak of the seller’s market in 2006, 2005, but they’re not as good as they were in the gloomy, grey, ugly days of the financial crisis. Prices have definitely gone up whether you call appreciation or regression to replacement costs. And again, this isn’t true in highland value markets, because in highland value markets where the land to improvement ratio, the LTI Ratio, not to be confused with the LTV, or Loan to Value Ratio, the common you hear. I’m the one who coined the phrase Land To Improvement Ratio, LTI Ratio. In those markets where you have highland values and add LTI Ratios for investors, you’re not seeing price improvement at all. You’re still seeing deterioration in prices, but in the markets that make sense, you are seeing rather significant regression to replacement cost, price increasing or appreciation, whatever the heck you want to call it, the fact is things are turning the corner and things are getting better for sellers, and worse for buyers. And I think frankly, they’ll get a lot worse for buyers.
So what is the lesson there, what is the moral of that story? Act now, hurry and act, because you can still get good — or you can still buy below the cost of construction. You can still get very good RV Ratios or rent value ratios. They’re excellent still. So, great opportunities are bound but are they as good as they were two years ago? No, they are not. Adjust your expectations. We have to adjust our expectations too. So, that is just a reality of the market place.
Do I think the economy has turned the corner? Heck no, I don’t. I think there are a lot of bad times ahead. I think we’re in for the W — the second part of the W in our double dip recession but it’s an inflationary part, which will benefit us as investors.
An interesting little comedy skit here on the unemployment rate. We had John Williams with Shadowstats.com on a couple of episodes ago, and I’ve — many, many times I’ve been saying this for years, probably I don’t know, on the show for about six years but before that I was even saying it because I knew this when other people didn’t know, as a business owner, and this is why having actual business experience is so much different than being an ivory tower like our empty suit President Obama, who just — the man has no real world experience. I mean he’s never employed anybody, he’s never invented anything, he’s never created a job. Government can’t create jobs. But when you have people looking at text books and sitting in the ivory tower discussing theory, if you read Karl Marks, in theory his plans sounded brilliant. If you read the book, what’s it called, Das Kapital? It’s great in theory, but in practice just doesn’t work at all, obviously. Mark says it was a terrible idea.
But you know, when you look at Government statistics, here again what I say about that business experiences is this just part of that equation that I’m about to share with you, this little Abbot and Costello skit. But it’s even worse than what Abbot and Costello were about to tell you, because what’s happened in real life is you’ve got the independent contractors that don’t count on the roles and all sorts of things. So, the real unemployment rate, when you include independent contractors, discouraged workers, etc., etc., etc., and even the underemployed is above 20 percent right now. It is at the levels of the Great Depression.
So, times are tough out there for many people. No question about it. By no means do I wear rose colored glasses when I’m looking at this stuff. Again, I’m just all about how do we use the current situation to invest properly and prudently an to serve as many people as we ca, especially these poor GEN Y’s with these huge student loan burdens because those will be our clients for many, many years to come. Unfortunately, for them but fortunately for us as investors, we don’t have to play that game.
So, my friend Bill sent this to me a while back and it just says, the following will prepare you for the nonsensical jobs data from the Government and it’s Abbott and Costello just talking about it. So, I’ll do both parts.
Costello: I want to talk about the unemployment rate in America.
Abbott: Good subject, terrible times. It’s nine percent.
Costello: That many people out of work?
Abbott: No, that’s 16 percent.
Costello: You just said, nine percent.
Abbott: Nine percent unemployed.
Costello: Right, nine percent out of work.
Abbott: No, that’s 16 percent.
Costello: Okay. So it’s 16 percent unemployed?
Abbott: No, that’s nine percent.
Costello: Wait a minute. Is it nine percent or is it 16 percent?
Abbott: Nine percent are unemployed, 16 percent are out of work.
Costello: If you’re out of work, you are unemployed.
Abbott: No, you can’t count the “out of work” as unemployed. You have to look for work to be unemployed.
Costello: But they are out of work.
Abbott: No, you missed my point.
Costello: What point (getting frustrated, obviously).
Abbott: Someone who doesn’t look for work can’t be counted with those who do look for work. It wouldn’t be fair.
Costello: To whom?
Abbott: The unemployed.
Costello: They are all out of work.
Abbott: No, the unemployed are actively looking for work. Those who are out of work, stopped looking. They gave up, and if you give up you are no longer in the ranks of the unemployed.
Costello: So, if you’re off the unemployment roles, that would count as less unemployed?
Abbott: Unemployment would go down, absolutely.
Costello: The unemployment just goes down just because you don’t look for work?
Abbott: Absolutely it goes down, that’s how you get to nine percent, otherwise it would be 16 percent. You don’t want to read about 16 percent unemployment, do you?
Costello: That would be frightening.
Costello: Wait, I got a question for you. That means there are two ways to bring down the unemployment number?
Abbott: Two ways, that’s correct.
Costello: Unemployment can go down if someone gets a job?
Costello: And unemployment can also go down if someone stops looking for a job.
Costello: So there are two ways to bring the unemployment rate down and the easier of the two is to just stop looking for work?
Abbott: Now you’re thinking like an economist.
Costello: I don’t even know what the hell I just said.
And now you know why Obama’s unemployment figures are improving. So folks, that’s a great little lesson on government statistics and how misleading they are and that only includes two of the issues, really one issue, the discouraged worker issue. There’s obviously much more to it than that.
Last thing I want to share with you before we talk about self directed IRAs and 401ks for a little bit here with Bryan, but this is an article that is talking about how banks are destroying America’s neighborhoods. And it’s just a short little piece, so I’ll just basically read it to you. This is off a real estate blog, JustinHolman.com, and it says, Banks are destroying America’s neighborhoods, March 14th.
I read an excellent piece this morning in the New York Times written by Greg Smith about why he was leaving Goldman Sachs. Now folks, my comment — remember I shared that with you and you probably read it yourself in the media. Going on here and he just totally stuck it to Goldman about all of their misdeeds and so forth. It was really quite telling. Anyway, back to the article here.
In short, he says it’s becoming too sleazy as short term profit motives are now trumping all other considerations. In the past two and a half years, I’ve been investing in real estate in my home town of Pueblo, Colorado. What I found is that large banks are dragging out the foreclosure process so that homes are left vacant for 18 months or more. This is bad for everyone. And then he has some bullet points here. And by the way folks, this is really — it speaks to that shadow inventory issue that we keep talking about on the show and you keep hearing about it in the media.
So number one, it’s bad for banks because while the homes sit vacant, they deteriorate and lose value. Two, it’s bad for the neighborhood because it drives down prices and vacant homes invite criminal activity. Number three, it’s bad for local Government because the value declines. The value decline results in lower revenue while additional criminal activity requires higher expenditures.
So what he’s saying there is that, when values decline, property tax revenue goes down and of course, the local Governments need to pay the police and the Fire Department, the fires, vandalism, criminal activity to police these vacant homes. That’s what he’s referring to.
Next, it’s bad for investors and prospective buyers because they have to spend more money on repairs. And last, it’s bad for renters because the reduced housing inventory decreases the supply and drives up rental costs.
And then he goes on to say, I’ve read a smattering of articles about “Shadow Inventory” and everyone seems to accept that what banks are doing. The argument seems to be that people basically view this as reasonable behavior because the banks don’t want to “flood the market” and drive prices lower than they’ve fallen already. What a crock. The real reason banks are stalling is because of the following:
- They don’t want to recognize the losses on their books;
- They don’t want to report those losses to Wall Street, and
- They don’t want to take the ensuing hair cut on their stock prices.
In other words, their actions are driven by short term greed just like Greg Smith’s description of the culture at Goldman Sachs. I would love to do an analysis to demonstrate the correlation between slow moving foreclosures and crime, that the raw data aren’t readily available or they cost too much from providers like CoreLogic and Realtytrac. The Federal Government could help by requiring that these banks who owe their survival to the taxpayers, disclose all the details of their foreclosure inventory, addresses, amount owed on the property, estimated value, square footage, bedrooms, baths, etc., and post it on Data.gov or some other central repository where everyone can download the data for analysis.
This would allow everyone, including Wall Street, to more readily access the losses that will be coming when the homes are finally liquidated by the banks. If banks are no longer able to hide their impending losses, hopefully they’ll do a better job of processing foreclosures more efficiently so American neighborhoods can begin to recover.
Well you know, the writer really brings up some very interesting points in that article and I applaud him for doing it. And this is the problem — well one of the big, big problems with really blighted areas in places like Detroit or many areas of Michigan, frankly, because it’s like this spiral of doom. And frankly, I’m saying this even Detroit prices as lousy a market as that, would ever be to invest in. Detroit prices have actually improved slightly, but if you look at the statistics, they are very, very deceiving because that does not mean by any stretch of the imagination, it’s a good place to invest. At least not now, but you’ve got these vacant homes that are being bulldozed. You’ve got this criminal activity, drug dealing, homeless people, vagrants occupying these houses and it’s just unbelievable. It’s like this self defeating circle. It just makes things worse and worse. It’s a flywheel of momentum in the wrong direction. So, this is one of the big factors that takes place in blighted areas like Detroit and like many other blighted areas around the Country. So, watch out for that.
Okay, let’s get to our guest and by the way, I have to mention again, St. Louis Creating Wealth Boot Camp coming up in May and our price is just about to increase on that. You can still grab the early bird pricing for about another five days, I believe, before the price goes up and take advantage of that. It’s just going to be awesome because we’re going to have the Creating Wealth in Today’s Economy Boot Camp. The big one. I’ve had about 8,000 people come through that. That is my core teachings, the fundamentals. You know, on the show here you get random information, you get current event information, you get more news oriented information, you get commentary from great guests, very famous guest, very renowned though leaders in the field of economics and real estate investing and so forth, but you don’t get the foundational principles on which I recommend people invest. And so you can do that with me and my team in St. Louis, Missouri where we’ll have the Creating Wealth in Today’s Economy Boot Camp. A full day on that on Saturday and then we will have the St. Louis property tour where we’ll all get on the bus, we’ll go look at properties, we’ll roll up our sleeves. You’ll see properties from later model single family homes to more urban core type stuff with unbelievable cash flow in really surprisingly good neighborhoods, that I’ve visited myself and toured completely and you’ll learn a lot about construction and rehab.
And then on Monday, you have the optional St. Robert, Missouri tour and that’s about an hour and a half from St. Louis. Our provider will be driving you down there, so no need to rent a car. And again, that’s a market that I own. I have a 10 unit property in that market in St. Robert, myself. I love that market. It’s one of these under the radar markets you just never hear about and it has so many totally unique great characteristics for real estate investors who want good, solid income property and many of the properties in St. Robert are brand, spanking new construction. So, you learn some interesting stuff about construction financing and the way you can really kind of work the system and gain the system. And I don’t mean that in any sort of illegal or unethical way, but just the unique way in which it’s structured and the way the incentives align with what we have going on in St. Robert is very, very interesting. And personally, I’ve taken advantage of it myself. Many, many of our clients have. We’ve been doing business in that market for oh, I guess about — I’ve been in it even through a couple of different companies about four years now, and just love that market. Very good experiences coming out of St. Robert.
So join us. Meet me in St. Louis as the famous saying goes, and Creative Wealth Boot Camp, St. Louis tour, St. Robert tour, it’s like three things in one in a matter of three — three and a half days. So, I hope to see you there and let’s get to our guest here. By the way, register for that at JasonHartman.com. Click on Events and get the early bird pricing for about five more days and let’s get to our guest here and let’s talk about self directed IRAs and 401Ks.
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Jason Hartman: It’s my pleasure to welcome Bryan from Entrust back to the show. You’ve heard him before and he is a specialist in self directed retirement accounts. However, today we’re going to talk about something in particular the lot of you listeners have asked me about, and that is breaking out of 401K jail. And if you type in — you just Google breaking out of 401K jail or just 401K jail like the third result is a video that I published. It’s about four minutes long and we’re going to play that video probably during this interview and Bryan and I are going to talk about it and if you want to watch the video so you’ll see the visuals, you’re welcome to do that as well, just Google 401K jail. But this is a big problem. You know, we’re going to talk about different kinds of retirement plans today. We’re going to talk about self direction in general for all the different types of retirement plans. We’re going to have a specific focus on 401Ks because many of you, I know, have 401Ks you either currently have or at one time had a corporate job and your 401K is in jail. It’s time to potentially set it free.
So, we have our expert here with us to talk about that. Bryan welcome, how are you?
Bryan Calderon: Good Jason. Thank you very much for having me. I do appreciate it.
Jason Hartman: My pleasure. So first of all before we get into this four minute video and just wanted to kind of talk really broadly here you know, at the 30,000 foot level. How many retirement plans are there? And what I mean is personal or individual retirement plans. You know you hear all these acronyms being [inaudible] about KEO, IRA, SAP, defined benefit, defined contribution, 401K and who knows what else. Tell us just very broadly what’s out there and maybe comparing — contrast some of those as we go down the funnel here and get more specific.
Bryan Calderon: Yeah, not a problem, Jason at all. Yeah, there are quite a few different plans out there. I men really what a client can be aware of is really that where you draw the line between a 401K, which is considered an employee/employer sponsored plan or a qualified plan and IRA. An IRA again, that’s under the Internal Revenue Code of 408 and again, those include traditional IRA, Roth IRA, SEP IRA, and again with an IRA again, you’re able to make a contribution and can usually deduct those from your annual income. And again, with those again the rules are a little bit different than with the 401K.
With the 401K again, those are employer sponsored plans, meaning that they will deduct a portion of your income, putting in their 401K or their plan, and often times they will match a portion of that amount that you put in your 401k. It’s a great way to save money. There are all deferred ways to save your money, tax free or tax deferred. But issues about 401Ks though sometimes you’ve got to realize too is that when you are [inaudible] your 401K which is a great thing to do. But Jason is right. And again, you are sometimes being put in a 401K jail. They’re holding your funds pretty much hostage.
I have a lot of clients that actually work in a company that actually contributed and have been there for 30 years and some odd years and they’re retirement is going pretty large but the concern about their company that they may be having some financial problem and their complete retirement could be in jeopardy and if not, get it out.
Jason Hartman: Yeah, a lot of people and maybe if you just want to stop and talk about for a moment, there have been a lot of scams as they come to company managed retirement plans. The executives have raided the till of these poor employees’ plans and people have really have suffered some ugly losses with their company sponsored plans, haven’t they?
Bryan Calderon: Absolutely. And again, it almost seems that there must be a reason for it that you’re not allowed to leave these plans, and so again, I don’t know exactly what those are but again it does seem like your funds are held hostage. I have a lot of clients calling me right now saying is there any way they can get their 401Ks transferred out to either a new IRA with me or a solo 401K with me. So, there are different ways to do it. And again, I’m sure we’ll discuss that, but again, that is exactly right, Jason.
Jason Hartman: So, remember everybody, my 10 commandments of successful investing, commandment number 3, is Thou shall maintain control, because when you relinquish control to somebody else, you are at the risk of three major problems. Number one, the person managing that money may be an idiot, and they may lose your money. Actually, I said that backwards. Idiots usually number two, but it doesn’t matter. They don’t need to be in order.
So, they may be an idiot and they may just lose your money because of their incompetence. The other reason is, they may be a crook and they may steal your money. And then the third reason is, they take a big management fee off the top and that’s something that it is really becoming more and more common knowledge is the huge, huge totally legal management fees that are charged inside of these funds and inside of all of these different mutual funds and the managements of these 401Ks and so forth. So folks, I say trust yourself. You are your own best advisors. Stop relinquishing control to somebody else. So, if you want to break out of 401K jail, or any IRA jail, we’re going to talk about that today, but you know with kind of most of our focus being on the 401Ks, because we’ve done shows in the past with Entrust representatives where we’ve talked about self directed IRAs and so forth. So you can go back and listen to those. Today we want to focus a little bit more so on the 401K, specifically. So go ahead Bryan, what else do people need to know about this?
Bryan Calderon: Another thing that I think is very important is again, from our information there is less than two percent of the population across the nation that’s self direct and get their own retirement accounts and control it themselves, less than two percent. Again, this is just conditioning from the money managers and the large brokerage houses that actually teach you that, no you need to put your retirement account with us in a money market or mutual fund or stock or bond.
And what we’re just suggesting is that again, investing may be what you know. It’s just like Jason said, control your own retirement. Put it in real estate. Invest in real estate and something that you can actually touch that’s a tangible investment, an asset.
Jason Hartman: Yeah, and the trust deeds and the private lending opportunities are also great as long as they’re not very long term because I think there is a big inflation risk coming our way, but boy, I love making these short term private loans. I tell you. I’m getting upwards of 12 percent on my money and I get it back in about four months. I just love it. And I do a few of the longer ones. I just did one recently inside myself directive plan that I set up through you. And gosh, I never accomplished those kind of returns in the lousy stock market. So it’s just great. You know, you have control, you see what’s happening and this is the way to really, really feel comfortable about your financial future.
Bryan Calderon: Absolutely.
Jason Hartman: So, you had some numbers that you shared and I know you want to make the disclaimer that you’re not sure of these numbers, but they were pretty interesting. You know, I think you read them somewhere. Tell us about the only two percent of the plans in this Country are self directed. That is amazing and scary at the same time because you know Bryan, and listeners that heard me talk about this on past episodes, but I think that one of the things that is coming our way, I tell you, maybe call me too paranoid if you want, but I think the Government is going to try and nationalize retirement plans the way they did in Argentina and Hungry broke mismanaged government as we have, but on this show we talk about how to profit from that complete stupidity that our government engages in regularly. They just look for money any where they can get it and if they can engineer a crisis or if a crisis just happens and come in and of course, save us from ourselves, the politicians will say, you know we need to manage your retirement account. And I think one of the advantages of having a self directed account, is that it fragments the account and it will make it very difficult in my opinion, to nationalize that account because it will be in all these random assets, income property, some trust deeds or notes, mortgages. It might be in precious metals. It might be in whatever, right? And what happens there is that it becomes very hard for them to get their hands on it, even though it’s in their qualified plan, you just can’t send out a memo or an order to all the brokerage houses in the Country, whether it be Ameritrade, Charles Schwab, Merrill Lynch, whatever, and just say all of these qualified plans, turn them over to us. It’s just too hard to do that with the self directed plans.
Bryan Calderon: Right and I think you’re exactly right. I mean, I hear about it a lot from a lot of our clients that actually signed up with me. And the figures, you are right. Again, self direction has been around for about 30 years and it’s less than two percent of the people nationally, aware of it or do it.
I think there’s going to be a big search in the near future as again the economy changes and people are concerned about their funds. I’ve had clients with large accounts at some of the large brokerage houses in the several million dollar range actually open accounts and just transfer them into a self directed so they have their own LLC or their own type of bank account. They just want to know where it’s at.
Jason Hartman: Yeah, let those other 98 percent of people who aren’t self directed, let them be the suckers that get their plan nationalized, if that ever happens.
Bryan Calderon: And hopefully it’s pretty soon, although there no longer is a 98 percent [inaudible]. We actually get a lot of those clients and they actually listen to what we’re saying and put it in real estate.
Jason Hartman: Yeah. I think it behooves them too. And remember, when it’s a self directed plan, you direct it. You control the investments and you can invest in a whole variety of things, a whole cafeteria of things. Of course, I like income property and I like notes and trust deeds quite well, but you can do other things as well and so you just have the choice. You’re in control. So, that’s the great thing about it.
Okay, did we go over all the different types of plans, Bryan?
Bryan Calderon: Let’s do that. We did talk about the IRAs, about the traditional Roth and stuff. Again, those are all IRAs and really the only difference between any of these IRAs is the amount you can contribute. So, they’re all the same to us or to an IRA company, but if not you contribute a little bit higher on a separate and self employed person.
We also offer what’s called a Solo 401K, which works like a 401K with IRA qualities also. So, it’s kind of a mixture of two. It’s still classified under the IRA Group, but again it does — you’re allowed to borrow it and have other managers that you can with a 401K. So again, those are the retirement accounts that we offer and they d differ pretty much dramatically from existing 401Ks or [inaudible]. Again, just remember those are all employers’ sponsored plans. They’re great plans but again, once you’re in them you’re kind of stuck with them. You money is in jail with them.
Jason Hartman: Okay so, is the solution for the person who is in 401K jail, as we like to call it, is there a solution to have a solo 401K?
Bryan Calderon: That very well could be depending on what their criteria situation is. And again, I’d do something if they called us or contact me, I can tell them what probably would work best. Again, I couldn’t advise but I could tell them people just like them, here’s what they do. Again, just as a funny story. I have a couple of clients that are actually employed and they really wanted to get their funds out of their 401K now, so they asked for early determination and are going to get their job back. So, I’m not saying for people to do that, but a lot of people are really concerned about their 401K and where they’re headed, and they have no access to it.
So, a lot of people are trying to find ways to actually get access to their current 401K and actually convert them into a self directed IRA or solo 401K plan.
Jason Hartman: Okay Bryan, let’s just play this video. I’m going to play — of course the listeners only hear the audio portion of the video, so you can always Google 401K Jail and you’ll find my video. But let’s play this and let’s talk about it afterwards, and I’m just going to play it live here, so it won’t be officially dubbed in, but I think the sound quality will be okay. So, hang on a second here.
Audio Video: 401K Jail, what to do when you are stuck investing in stocks. There are many investors who have headed the advice of Jason Hartman and are looking to diversify their investment positions out of the stock market. However, many of these people have a large percentage of their investment assets tied up in a company 401K that has limited investment choices.
What can a person do who is being held captive to a limited menu of investment options in the current environment? In this situation, the optimal strategy is to capture market returns while minimizing the costs associated with acquiring those returns.
Fund managers have a tendency to charge hefty fees for their services and frequently under perform their comparable market indexes. The reason for this is not difficult to reason out. When the gains and losses of all the market players are added together, they average out to the market rate of return. This simple arithmetic dictates that if one manager over performs the market, then he must be off set by another that under performs the market.
Furthermore, fund managers must overcome the hefty fees that they charge in order to beat the market return. The net results is a zero sum gain created by everybody chasing the same market returns that turns into a negative sum gain when costs are factored in. So, how does a 401K investor get out of this fund manager prison of high costs and disappointing returns? The answer to this dilemma is achieved through the use of index funds in a stock portfolio.
By capturing the average market returns at a minimal cost, index funds allow investors to ignore the noise of daily stock market volatility and focus on the fundamentals. For investors who are looking for further diversification, without losing the advantages of indexing, they can choose market indexes for small or medium sized companies that tend to be more volatile and produce higher returns. Similarly, index fund investors can choose international indexes that produce favorable returns and reduce portfolio volatility. In addition to this, there is another option available to jail break some of your money out of the 401K, and that option is to take a loan against your retirement plan. This strategy is typically advised against, because most people use the loan from their 401K to purchase items like cars or boats that decline in value.
However, if you are astute and aggressive, there may be an opportunity to use your 401K as a vehicle to acquire capital for investment in other assets like rental real estate. It is no secret that prudent investors should seek to limit their exposure to the stock market. However, for investors that are in 401K jail, with their employers, there is a viable way to structure your stock market investments in such a way that the major pitfalls of traditional stock investing are mitigated.
And for those who are more adventurous, most 401K plans allow the owners to take a loan against the plan balance for outside investments. By thinking creatively, prudent investors can mitigate the impact of 401K jail and use this tool to help build long term wealth.
Welcome to the Platinum Properties Investor Network, the source for innovative forward thinking investment property strategies and advice. Founder Jason Hartman spent two decades developing the complete solution for real estate investors. Jason appears regularly on television and radio, at speaking engagements, seminars and with his ultra hot Creating Wealth Podcast.
Jason Hartman: Okay. So Bryan, the first part of that talked about how fund managers really — they’re really kind of a joke. I mean, in the Wall Street industry, they keep perpetuating this myth and it appears to be a myth from every study I look at and every guy I hear talking about on the radio, they can actually beat the Street that they can beat the market. And if you read the classic book, A Random Walk Down Wall Street, it really seems to be true.
If you’re going to be in stocks, just buy an index fund. It seems to be the real wisdom there, but hopefully not going to be in stocks at all because Wall Street is nothing more than really a big organized crime syndicate, but that’s just my humble opinion.
Bryan Calderon: And a lot of people feel that way though Jason. I understand.
Jason Hartman: I’m not the only one, I know. So then the second part of that really kind of addressed one method for breaking out of 401K jail, but it’s not your method, is it?
Bryan Calderon: Right. Exactly, that exactly right. Yeah I mean again, when you are with an employer sponsored plan, they really do have your funds hostage are in jail. There are a few ways to actually get out of those 401Ks and someone contacted me and we discussed different situations, but again, they really do limit you to suddenly getting your money out. There are ways to get it out, or if you — previous employer. It’s the employer that you’re no longer working with or you’re no longer in service, so you completely have access to those funds.
So, a lot of clients think that they are still stuck there and they have no options with it and the answer is, they do have options.
Jason Hartman: Okay so in that scenario, you’ve seen — I know some clients will come in to see you and they’ve literally quit their job just so they can get control of their 401K and then they either have been hired back for the same job or they’ll go to work. I mean, we used yesterday — as we were talking about this, we used the example of the person who works for Micro Soft and then they go to work for Apple, but when they leave — when they’re — when they get out of that company, their 401K is up for grabs and that’s a time that they can self direct it, right?
Bryan Calderon: Yes, and they need to be aware of that, and that’s exactly true. I actually have had quite a few clients with an interesting story. They actually work for a large oil company here in California, and they have massive layoffs. So, a bunch of clients got laid off. They ran down to my office as fast as they could, open accounts, transferred their 401Ks out until they knew that they were getting rehired.
So, they had a short window of opportunity and they took it. So, I felt they were very, very smart investors. They took their money out of the company 401K plan, put it into a self directed plan so they can invest in real estate. So, there are different ways or different situations that happen that do allow you to get access to those funds. And again, if anybody has any questions, I’m definitely here to answer the best I can and kind of lead them in the best direction that you’re going.
Jason Hartman: What if they don’t want to quit their job? Can they get control of the 401K?
Bryan Calderon: there are some options where they can. I’m going to tell you this. It’s usually up to that plan or that plan administrator. So, sometimes —
Jason Hartman: Well, they’re not going to say yes, are they?
Bryan Calderon: They — probably not. So, that’s — I got to let you know if I’m — probably not but again some situations — I’ve actually had some clients that have been employed for quite a while and may be allowed a certain percentage out. So they definitely want to hang on to some of it but you never know, depending on what that plan administrator allows, so it would be someone that they want to contact that administrator.
Usually too, if the client’s over 59 1/2 and they’re still employed, they can then take a portion of that or sometimes all that. So, you do have options and people don’t think they do. And again, when the client’s [inaudible] and they open their accounts and they put their money in something that they can touch, like real estate or land or whatever, they decide to buy, purchase with their [inaudible] account, they call me back just so happy. They’re like, we never knew that they could do this.
Jason Hartman: Yeah, that’s great. Tell us more though about the Solo 401K. I mean, that’s not something that someone sets up when they leave their job, right? That’s where a person who’s already self employed?
Bryan Calderon: Yeah. Solo 401K is similar to an IRA but it’s for a self employed person. A lot of people say, well I’d like to be able to contribute to a 401K. So, usually if you’re in real estate or just any type of self employed person, where you know employees, you can create a solo 401K so it’s a one person 401K. The benefits of those are that you can actually contribute more than an IRA.
With an IRA, the most you contribute per year, and that’s your traditional type of IRA, is $5,000 per year, if you’re less than 50 years old, or $6,000 if you’re over 50. With a solo 401K, you can contribute — it’s up to 100 percent of the first $16,500 of your self employed income. So, if you made 420,000 in one year of self employment income, you can contribute $16,500 just to start. It’s almost 100 percent of your income so you’re able to commit more to your retirement account quicker. And if you had a need to borrow it, you can put it in and also if you need to borrow it later, because you just got into a bind, with the solo 401, you can’t. So our standard —
Jason Hartman: Okay. Now wait a second though, Bryan. There are other plans where you can contribute a lot more money than the traditional IRA though, right? I mean there’s KEOs, SEPs, defined benefits, defined contribution type plans. What happens there? I mean, why is — does the solo 401K beat those for some reason, or —
Bryan Calderon: Well, I’ll say this is with the solo 401K through us, you get it self direct. So, all the money that comes into this plan as you’re building the plan up or building the amount that you contributed up, you can invest in real estate. You can invest in anything you want, notes, promissory notes, trust deed, anything you want.
Jason Hartman: But they can self direct any of those other plans, not just the solo 401K, right?
Bryan Calderon: A KEO you cannot and an employer sponsored plan you cannot. Yeah, if you open up an IRA or a SEP, with interest or self direct company, you can. So, yes you can.
Jason Hartman: Okay. All right. So, there are some advantages then to the solo 401K?
Bryan Calderon: Yes, you can contribute quicker so your balance can grow larger if you want to actually get that, so you can invest in real estate. And you also can borrow from it, so if you open up a SEP account with me, or an IEA with me, which is [inaudible] then you cannot borrow. Once that money’s in there, you cannot borrow from it.
Again, so everyone has different requirements or needs for how their current situation is. So, we just offer them options. Whatever’s going to be best for them, we’ll definitely assist them to do it.
Jason Hartman: Okay, good. What else should people know about this whole area of IRAs, of self direction, of solo 401Ks, just anything in general you want people to know?
Bryan Calderon: Well yeah again, I would just say that again, we really just allow you to invest in what you know. I mean again, less than two percent of the population is doing it. I feel there’s going to be a large surge of people doing this in the near future or over time. I’ve heard that there’s about 20 trillion dollars approximately, in retirement accounts, meaning IRAs and 401Ks across the nation.
Jason Hartman: Wow. And only four trillion of that is self directed.
Bryan Calderon: Four trillion is self directed.
Jason Hartman: Amazing.
Bryan Calderon: Four trillion is self directed. They’re saying that in the Social Security Administration, their reserve fund is about five trillion. So, in the private sector there’s about four times more funds available that are sitting there, which the Government knows about because what we’re required to do every year at the end of the year is [inaudible] know this — John Smith has an IRA and this is the value. So, they know the values of all the retirement 401K accounts. And it’s four times the money that they have in their reserve. So, we do tell people, hey be aware of that. But again, if you’re thinking hey, the economy may be running in some rough spots which it currently is, and we’ll see what happens in the future, you actually have an availability to pull your money out and get control of it and diversify it.
So, we’re talking about true diversity. So meaning not just stocks, bonds, mutual funds, CDs. Those are all stocks and bank related. We’re saying, pull your money out, get control. You have the option to put it in real estate, trust deeds or other types of investments.
Jason Hartman: Very good idea, very good idea. Get it self directed. You know, you’ve been a frequent speaker at our Meet the Masters Events that we have twice a year and Bryan, thanks so much for joining us today.
Bryan Calderon: Okay, thank you very much for having me, Jason, appreciate it.
Jason Hartman: Everybody, maintain control. That’s commandment number 3, thou shall maintain control. So, get your plans self directed, at least as much as you can. Okay. So, I hope this has been helpful to you on that. Thanks Bryan.
Bryan Calderon: Thank you, Jason.
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