Look to Set Up an IRA to Invest in Tax Liens

Lead-in:

You can use your retirement money to invest in tax liens in a great tax free way. By investing with your IRA’s…

There are many ways to make money in today’s world. One of them is a little known and explored method using self-directed IRA’s to purchase tax liens. This is different from that traditional IRA that you are familiar with because instead of investing in the stock market with the money you invest in taxes. Interesting isn’t it? You can do much more with your IRA than that, but most third party administrators don’t tell their clients about it. Why?

Well, you’ll have to understand that if you talk to a broker, financial planner or attorney, etc. they will tell you that they don’t know if you can have a self-directed IRA that can buy tax liens or they’ll tell you that it’s too risky.

Again, why? Because all these people will want to keep your money at their business. A banker will want to keep your money in their bank. A lawyer will want to keep your business so they can get their income. So almost all of them will say that they have either no idea what it is or whether it’s possible or even legal!

Folks, it is legal and it is possible to set up a self-directed IRA that invests in tax liens. You’ll want to find a Custodian or Trustee company to handle your money and take care of all the steps, while you sit back and earn interest.

What is a Custodian?

A custodian or trustee must be approved by the IRS to be able to handle other people’s money. They have to prove that they have the computers, security and insurance and personnel to process money safely. Trustees are also audited each year by several agencies just to make sure that client’s money stays safe.

There is a big difference between a third party administrator and a trustee. A third party administrator is basically a bookkeeper; someone who keeps track of your money in its different accounts. A trustee actually handles the money and keeps it safe or does with it what you want to be done with it.

A trustee will help you set up and invest in self-directed IRA’s. A good company won’t call you and try to sell securities or push you to make certain investments but will let you direct them in the purchases. If you are lost or uncertain they’ll be right on hand with suggestions and if you want to invest in tax liens they’ll take care of it. Taking the money and placing it in a FDIC insured bank then filling out the paperwork and making the transfers necessary to take part in the benefits of the tax liens business. Most orders are given through fax or email so you don’t have to spend a lot of hassle dealing with the trustee representatives.

What are IRAs and why are they Beneficial?

Lead-in: The IRA can be a great tool to use when you are investing in the tax lien business. You earn money and in some cases don’t have to pay taxes…

Before you get too far in your investment strategizing you’ll want to find out what an IRA is so you know you are doing the right thing with your money and your desired to invest in tax liens through them. IRA’s are accounts that you can deposit money into for the future. These accounts can be invested in the stock market and in tax liens and they are a good place to stash your money because it can grow tax-deferred or in the case of the Roth IRA, tax-free year after year.

Why should you have an IRA?

There are many reasons to set up an IRA account. Here are just a few and nearly all are concerned with the future of your money;

1. To save for retirement

2. Social security is lacking

3. Lack of benefits at work

4. Just a need to have some money set aside for the future.

5. Save for a child’s education

IRA’s are really a great way to invest in tax liens because you can invest your ‘contribution’ which is the money you add to your account each year and earn interest tax-free or tax-deferred. ‘Deferred’ meaning you don’t pay taxes until you begin withdrawing money from the IRA in your later years.

There are five kinds of IRA’s. Two are set up for small businesses to invest in, one is the traditional IRA that most people are familiar with, there’s the Roth IRA and there is the Coverdell Education Savings Account. You can invest in tax liens with all five types of IRA’s. All of them, except for the Roth IRA, are tax deferred. The Roth is special because it’s tax-free.

If you choose the Roth IRA to make investments with you don’t take a tax deduction for you contribution each year so you end up paying taxes on it now, but later on when you withdraw your money you don’t have to pay taxes at all. This is great because later on your money will have earned a lot of interest and you’ll save yourself a lot of taxes from the IRS for withdrawing it.

It’s very easy to set up an IRA. You’ll typically fill out some forms and mail them into the trustee company to apply for an account. When you do this you’ll also provide information on how they will receive the money to fill your IRA. Some choose to have money deducted from their paychecks straight into the account; others make deposits from their checking accounts.

The end result, IRA’s are for everyone. No matter your age or your income. There are limits on how much you can invest if are under a certain age for some of the IRA’s. This is meant to be a long-term investment choice, but it’s also a secure way to ensure your money is there for the future.

How exactly do you go about Buying Tax Liens with Your IRA?

Lead-in: Most Americans only bring home $70 out of every $100 they make, but with careful investment in IRA funds and the tremendous opportunity for success in the tax lien business you’ll be able to preserve that money for the future.

IRA funds are a great way to protect and invest your money for the future and you can use them to bring in profits from investing in tax liens, too. It sounds a little tricky but following the steps outlined in this article will help ensure that you’ve got everything in order for the best possible chance for success in purchasing tax liens with your IRA.

First, you’ll need to open an IRA account with a company willing to work with you on investing in tax liens. It will be entirely up to you to inform the company ahead of time of what you what to invest in so they can be involved. Clear understanding of the plan on both sides will save you a lot of hassle down the road.

Next, you’ll have to find yourself a tax auction. Most IRA funds won’t have a list of tax auctions on hand because as trustees they are obligated to keep your money safe and do with it what you want done, not try to sell you on investments.

Once you find a tax auction that you want to go to and invest in you’ll need to contact your trustee company about ten to fourteen days before the auction starts and request money from your IRA account use at the auction. The company will often send you the money in the form of checks. Its best to have several checks made up in increments send out. For example: if you want to invest $5,000 at auction have the company send out five checks for $1,000.

The trustee company will make out the checks to the county where the tax auction will be and they will be in the IRA funds name. Why? Because you are investing for your IRA, not yourself.

Don’t worry about losing extra funds from your checks when you purchase a tax lien at auction. If you win a tax lien for say $4,565 and you turn over five of the IRA’s checks for $1,000 each the county will send the extra monies from those checks back to the IRA in the form of $435.

Be Aware: when you go to register for bidding at the tax auction, that the tax lien needs to be in the name of the trustee company that manages your IRA and you’ll need to provide the company’s tax identification code instead of your own social security number. This is very important, because the tax lien has to be in the name of your IRA fund rather than your own name.

These extra steps are well worth the effort involved for the viable and healthy income you’ll be adding to your IRA in a very short period of time. What better way is there to save your profits for the future and protect them from income taxes in the here and now?

See how a Tax Lien Investor earns profits in Tax Deeds and Tax Liens through an IRA

Lead-In: Even experienced tax lien investors worry about how they can keep some of their profits from being taxed by the IRS. There is a little known method that these investors use…

Bob Schumacher of Macon, Georgia has been investing in Tax Deed/Tax Liens for the past three years. He’s recently discovered that you can make money that’s protected from federal income taxes by investing in tax liens and tax deeds through an IRA. He’s just one of the few who have found this valuable opportunity to earn money for the future without worrying about taxes. Read on to learn how and why Bob takes advantage of the benefits from investing through his IRA.

What’s so good about it?

Any IRA protects the money you have in that account from income taxes for the time being. As with most IRA’s any money you take out in your later years will become taxable, but if you choose to set up a Roth IRA you won’t pay taxes on your well-invested and grown IRA later on. Instead you pay taxes on the money that you put into the IRA now, so you save taxes on the profits later on. In Bob’s words, ‘the profits that you make will never be taxed.”

With a tax lien or tax deed your profits that be quite high. Bob’s invested in three tax liens so far through his IRA and in one case he made a twenty percent profit in only six days because the property owner paid up the back taxes plus interest. Say he purchased that tax lien for $5,000 that means he earned $1,000 profit that goes directly into his IRA without ever being taxed.

How he goes about it…

Bob starts out by having his IRA company issue checks in the name of the county official who will be conducting the auction. This can be the country treasurer or some other county official.

He bids on the property with those checks and uses the amount from those checks that he needs in the purchase. The county refunds any extra change from checks that over pay the balance to his IRA and he also sends back unused checks so his account balances out.

Then he just waits. The property owner usually has two years to go into the county treasurer’s office and redeem his/her property by paying up the back taxes and the interest that Bob earns as profit. The county takes all of this money and sends it to the IRA.

In the end Bob has his original investment back plus a nice profit that goes directly to his IRA without being taxed.

There are lots of options for investing with your IRA. As Bob says, “you’re limited only by the amount of funds that are in your IRA and also by your imagination and what the law allows.” You are clearly allowed to invest in properties with your IRA funds. It’s an excellent way to earn high profits without taxes.

A Few IRA Tax Lien Investment Pitfalls

Lead-in: There are always a few steps and procedures that get overlooked in the tax lien investing business. Here’s a handy little guide to stay on top of things when investing in tax liens with your IRA.

Before you open up those IRA accounts make sure you are well aware of the process involved in investing in tax deeds and tax liens with the money from your account.

The Auction Rules Change

You’ll find once you start traveling around to attend different tax auctions that the bidding process is different in each county of every state you go to in order to invest in tax liens. Make sure you check those state statute books and make nice with the clerks in the local county courthouses so they’ll be inclined to help you out if you get confused with a procedure.

There are Only Two Requirements to Open an IRA

• You must be alive

• You must have an income

However, if you open an Education Savings Account in the name of a child that child doesn’t have to have an income. Even if you are making investments with your own money in that child’s name.

Limits on How Much You Can Fund Your IRA

You are allowed to open as many IRA’s as you want but the government has set an annual investment limit of $3,000 for those under the age of 50 applies to all of them. So you can have one IRA and invest $3,000 in it per year or you can have ten IRA’s.

This means you can only fund your accounts with $3,000 of your own income each year. However, that is not the limit on how much profit you can make on tax lien investments. Let’s say you open your first IRA and fund it with $3,000. You can take that $3,000 and invest it in a tax lien which has the potential to give you lots of profit. So if the property owner redeems their property by paying for that tax lien you get the $3,000 back in your IRA plus whatever interest you were charging for it. Doing this repeatedly during the same year can dramatically increase the amount of money in your IRA fund.

Penalties for Closing out Early

Before opening an IRA account be certain that you can afford to keep the money you invest in that account in there until your retirement. The government has set up tax penalties on accounts that close early so you’ll lose a higher percentage of your investment if you take the money out.

Register at Tax Auctions with the IRA fund’s Name

Since you will be investing in tax liens for your IRA, all the paperwork should be in the name of your IRA. That means you’ll request checks from your IRA fund, in their name and made out to the county treasurer for the purchase. The tax lien title should be in the IRA’s name and you’ll list their tax ID rather than your social security number.

Give Them Time to Issue Checks

Notify your IRA fund 12 to 14 days before the tax auction that you need them to release funds in the form of a check.

An IRA for the Self-employed or Small Business Investor in Tax Liens

Lead-in:

IRA’s to save for the future aren’t just for employees of businesses. The self-employed or small business owner can also use IRA’s to take part in the tax lien investment business…

Even if you work for yourself or have a small business you can set up an IRA and save for the future too. The Simplified Employee pension (SEP) program is a fund just like the traditional IRA but created for the small business owner. It is just another of the great ways you can also invest in tax liens.

The SEP, also known as the SEP-IRA to some can be set up in a matter of minutes and it allows you to invest as much as 20% of your self-employed income. If you run one of those small family businesses you can set up a SEP fund for everyone in the family, even the kids as long as you can show that they are helping out with the business. Also the amount you can invest is variable so you aren’t required to put money away each year.

How can you invest in Tax Liens with it?

Investing in tax liens with this IRA works just the same as with the others. You look around for the tax auction. Notify the IRA fund of your need for some funds to invest in tax liens and use the checks at auction to purchase.

Most people feel like there are only two ways to invest their money for the long run. One is by putting it into a savings account with a low but safe interest rate and the other is by investing in the stock market. Yes, the savings account is terribly safe but its growth is slow. Yes, the profits on the stock market can be high, but its widely variable. Investing in tax liens is the third, unseen, option for your SEP fund. It provides a safe return of your funds with the possibility for very high yield profits, making this an excellent way to diversify your portfolio.

Tax Breaks!

Even better the government gives you lots of tax breaks on your investment when you use a SEP fund to purchase tax liens. Any of the up to 20% of your self-employed income that you place into the SEP fund is protected from income taxes until you withdraw the funds from the IRA in your later years. How? Well, you can take a tax deduction of up to $7,000 per year per person in your small business.

So, if you run a small family business with yourself, your spouse and the two children you can possibly take a deduction for all of them and invest that same amount of money into your IRA. You could invest up to $28,000 per year in the SEP fund and have that money available to invest even further in tax liens. Many investors are making around a 10% return on their tax lien investments. So each year you could be adding an additional $2,800 in profit that isn’t taxed to your SEP.

So you see Tax lien investment through a SEP is a safe way to add a bit of security to your portfolio.

What’s the Difference between a Non-Taxable Account and a Taxable Account?

Lead-in:

So you’ve earned a tidy profit from your investments in the tax lien/tax deed market, but now you need to store it somewhere for the future. Learn about the benefits of a tax-deferred account for keeping that money safe and helping it grow…

When you look for ways to store the money you plan on investing in the tax deed/lien business seriously consider opening an IRA account to save for the future. For those who haven’t already learned this, an IRA is a non-taxable or tax-deferred account that earns and compounds interest yearly. IRA’s were set up by the government to help people take control of saving for retirement and there really is no other way you can make an investment and not have to pay taxes on it.

A taxable account can be a regular savings account or money market fund with a brokerage firm or a bank. It is taxed so each year when declare it on your income taxes. So you end up losing part of your earned interest from these accounts in taxes.

Taxable Account vs. Non-Taxable Account

Say you invested $100,000 in tax liens in the state of Florida. That’s means you would have earned on average about 18% interest on all those liens in one year. You’ve earned yourself a tidy little income of about $18,000 for your efforts. If you have that $18, 000 in a regular savings account you are going to have to pay income taxes on it at the end of the year.

However, if you had that $100,000 in an IRA account your $18,000 profit would be added to the account. Since this is a tax-deferred account there are no taxes until you begin taking monies back out of it. Unless you have the Roth IRA which is tax-free, even better!

So money goes back into your account and it’s compounded each year until you reach 70 and a half. Then you are required by law to take a little bit out each year and pay taxes on that with the tax-deferred account.

Your money’s growth potential is greatly increased by the tax-deferred environment of the IRA. Let’s say you open your IRA by the time you turn 35 years old. From the age of 35 until the age of 65 you contribute $2,000 a year. In all that time you manage to contribute $60,000 to the account.

Assume your account has a 10% rate of return each year. By the time you are 65 your account will be worth $400,000. That’s great!

However, if you put the same amount of money, $2,000 per year into a money market fund or a savings account with the same rate of return at the end of that time you’ll have only really earned $220,000. Why? This is because you’ll be paying an average of 28% taxes each year on the money you have in this taxable account!

Kids can have IRA’s Too

You can also open an IRA for your child. If you start the account the day your child turns one year old and put a one time contribution of $2,000 in it and assuming you have the same 10% rate of return, by the time your child is 65 years old that same IRA will be worth over $1,000,000! What a great inheritance to leave the kids.

Tax lien/Tax Deed Investors Can Use a SEP Plan or a Simple Plan for Retirement

Lead-in:

There are two IRA plans set up by the government to ensure small business owners and the self-employed can really save a lot of money for the future. Here’s how you can decide which to use…

In the business of buying foreclosures, fixing them up and reselling them? You can set up a retirement IRA-type account to help preserve some of your income for the future. The cost of living is expected to keep on increasing so you really need to set some of those profits aside in an interest bearing account to help your money grow and keep up with rising prices.

Even if you are only purchasing tax deeds and tax liens on the side and have a regular job, you can’t expect those social security contributions to support you later in life. The social security system was not meant to be the only source of retirement income once you stop working! It is a severely overtaxed system and you’ll be much better prepared for the future by investing in tax liens with some money from an IRA account.

SEP vs. Simple

There are two accounts available to small business owners, sole proprietors and the self-employed. The first is called the Simple Plan, also referred as the Simple IRA. This plan is ideal for those operating a small tax lien business that earns $40,000 or less a year.

Small business owners and the self-employed can put away a good portion of their income. The IRS allows you to place up to $7,000 a year into the account, plus 3% of your earned income. If you earn the $40,000 a year you can place $7,000 plus $1,200 into that account each year.

If you work in the tax lien business or any other kind of area and make more than $40,000 a year you should go with the Self-employed Persons (SEP) Pension Plan. The SEP plan lets account holders place a percentage of their income into the account, rather than a fixed amount and a much smaller percentage. The plan allows account holders to place a good 25% of their earned income into the account each year.

So, if you make $100,000 in tax liens per year you can put $25,000 away. There is a limit on how much you can stuff away into the SEP of $40,000 per year, but that’s quite a lot of money to be saved for the future.

A Practical, Safe Plan

As tax lien investors you get to put your money into an almost guaranteed profit returning machine by purchasing the tax lien and waiting for the owner to redeem the property or going for tax deed and reselling the property. So it makes sense that you’ll want to take some of that earned money and put it somewhere safe where you are guaranteed to continue earning money on top of your profits. Using these two IRAs is a way to allow you that opportunity to ensure you have a great future.

Benefits of Using a Hard Money Lender in the Tax Lien/Tax Deed Business

Lead-in:

Once you know all the ins and outs of the tax lien/tax deed business you’ll still need some help getting the funds to invest in your first few properties together. Should you go with a bank or a hard money lender?

It is more than possible to get a decent amount of money from lenders to use in investing the tax lien/tax deed business. Before you head to the local bank you’ll want to consider using a hard money lender.

What’s a Hard Money Lender?

This type of lender operates by taking in money from investors in his/her company and puts it back out there for investors. Most hard money lenders will loan out at most 65% of the value of a home for short periods of time. So, if a home is worth $100,000 on the market the lending company will at most give you $65,000. However, the interest rates on these kinds of loans are high. They can be anywhere from 15-18% of the loan amount.

That high interest rate may have you saying to yourself, ‘that’s a lot of money’ and you’ll probably just want to go to a bank for the loan. On the downside, banks can take a long time to process loans, they probably won’t want to lend on a broken down house and they’ll look at your credit. When the bank learns that you have interest in a fixer-upper, they’re going to want to get that property appraised, which can really put the brakes on any loans you want to get.

Hard money lenders are not credit based. They look at the value of the property, how well you know the business and whether you have good title on the property.

Partners?

Many consider getting a partner to help with the investment, but as high as the costs of going to a hard money lender can be, you’ll soon find that having a partner can be more expensive.

How does the partner idea work? Well, try to think of it as if partner A went and found the property, did the work to fix it up and so on and partner B acted as more of a silent partner and really only offered the money.

Typically, most partner arrangements are 50-50 splits on the profits. So, if they sold a house and made $20,000 profit, partner A and B each get $10,000. This seems fair, but partner A did all the work and partner B just wrote the checks. You can get rid of partner B and get a hard money lender who will only ask for an 18% take at most.

Now look at a Money Lender!

Take the same idea of selling a house for $20,000 profit, but with a hard money lender instead of a partner.

It will take about three months to complete the job from purchasing the tax deed at auction to selling the house on the market. You’ll be making monthly interest payments to the lender and at the final sale you’ll have some closing costs. So in the end you’ll probably only have about $4,000-$5,000 paid to the lender for the use of his money. That leaves you with $15,000 profit.

What does a Hard Money Lender look for on Inspection?

Lead-in:

Don’t be nervous about that property inspection, be prepared. Learn what hard money lenders are looking for in a property before giving that important loan…

Hard money lenders end up saying no to new investors a lot and it can be discouraging. Why does this happen? It’s not because the investor is brand new. In reality it’s often because the deal doesn’t make sense. On inspection the lender finds that the house may be selling for way too much or there are just too many repairs needed and the lender can’t cover the cost. But that doesn’t mean you always get turned down.

To give you more of a chance at success the first time you approach a hard money lender here is a brief outline of what’s going to happen during that all important inspection process.

1. The lender will start by looking at 10-12 comparable property sales in the area. They’ll want to get an idea of what similar houses have sold for before they jump in on the deal.

2. The lender will also look at the average sale per square foot. Or on average what each square foot in the house can be worth.

3. Finally they’ll look at the tax assessment ratio.

All of this happens while the lender is still in their office. These three steps give a good indication of the viable market value of the home before they even see the property.

4. Next the lender will call and talk to you to give an idea of how much can be lent on the home.

5. They’ll set a time to look at the property and invite you to be there for the inspection. Take this opportunity. Even if you don’t get the loan, the inspector can help you figure out where you went wrong in your property choice.

Finally the lender heads out to the property for an onsite look at the home’s condition.

6. The lender may arrive a bit early to see what’s on the property and if it’s still standing.

7. Expect the lender to take some pictures for their files. This is so they can show their own investors just what they are lending on.

8. There will be a walkthrough of the house. They may not care if the house has no floor, no roof and needs extensive repairs. They are just looking to see what’s on hand and whether the amount they can loan will be enough to cover all the repairs and the purchase price. The house can even have a demolition order on it and the lender can still give you the loan to fix it.

9. Finally the lender can use the time in person to assess you to get an idea of whether or not you know what you are buying and that you have the ability to fix the house. This can be you or a contractor.

Keep this inspection outline in mind when looking at properties to invest in. A lender can be a great resource for your new business, so it’s important to understand what they are looking for.