Turn $100 into $250,000 of Tax Free Income

Three years ago I wholesaled a property to a seasoned, very experienced investor. He’s been buying and selling houses for longer than I’ve been alive. And lucky for me, he loves to hear himself talk.

When I stopped into John’s office to pick up the assignment agreement, he started talking. I was polite and unhurried. Here was a guy with a lot more experience than I. Besides, I was waiting for him to sign the contract. John lectured for over 2 hours before I left with his signature.  But when I left, I walked out with a nugget of knowledge much more valuable than my assignment fee.

The underlying theme of John’s dissertation that day was what a great investor he was. He told me about deals he’s done, properties he’s flipped and money he’s made. About 30 minutes into the lesson, John said something the grabbed my attention. He told me he’d just sold one of his properties and made over $200,000…tax free.

Suddenly, I sat up in my chair. My eyes opened wide. And I made my first contribution to the conversation. How? I asked.

I’ll spare you the self indulgent 90 minutes that followed. Here’s the Cliff Notes version: Roth IRA.

A Roth IRA is an investment vehicle set up by the Federal Government. The money that an individual places in their Roth IRA is taxed as income prior to entering the account. But any income earned in the Roth IRA is tax free.

I am not an expert on tax shelters or retirement planning. Thankfully, that’s not the topic of this article. For Roth IRA specifics, consult your CPA or retirement planner. You can get the Wikipedia basics here.

So how can you turn $100 into $250,000, or more, in tax free money? Real Estate deals.

Since the Roth IRA is a retirement vehicle, the income is not available until you are “of age.” For the younger reader, that means you have time. For those quickly approaching the magic birthday, there’s still plenty of time. The process is still the same, but the exit strategy will vary.

Let’s say you are 34 years old. At age 59.5 you can begin taking distributions from your Roth IRA. That leaves roughly 25 year to build up a nice nest egg. But let’s just say that there you can only find $100 to put aside. That money gets deposited in your new Roth IRA.

Now you have a Roth IRA with a $100 balance. The next step is finding the deal.

If I only had $100 to work with, I’d target wholesaling as my income strategy. Over the next 12 months, you’d have to wholesale only 1 deal with a $10,000 profit. The agreement of sale will require an earnest money deposit of $100. Document the transfer that money from the Roth IRA to the title company. At closing, have the assignment fee payable to the Roth IRA.

At the end of year 1, the balance of the Roth IRA has jumped to $10,100.

Every year for the next 25 years, this wholesale strategy can be duplicated. Even if the account balance is not placed in any other safe, interest-bearing retirement vehicle, when you are ready to retire, you’ll have over $250,000 of tax free money.

And there’s more.

You can also buy property and borrow money through your Roth IRA. If you want to beef up that account or have less than 25 years until retirement, change the exit strategy.

Rehab investments often have returns ranging from $25,000 to $100,000 per project. By purchasing the investment through the Roth IRA, any profits from the sale go back into the account. With the assistance of a hard money lender or local banking institution, these returns can be realized with very little money out of pocket.

Roth IRA investing is a great tool whether you want to be a full-time Real Estate investor or just want to make some extra money with one or two deals per year. This vehicle provides the real opportunity to turn a few bucks into hundreds of thousands of dollars. The best part is that all the profits come tax free.