[Note: To follow is an excerpt of an interview with Jon A. Galane, Principal of Mountain West Entrust IRA, a third party administrator of self-directed retirement accounts and part of the Entrust group, the nation's largest IRA administrator, and Jeremy Hanks and Michael Madsen of RealSource Retirement Services, whose firm over the years have placed hundreds of self-directed investors into real estate investments in the right place, at the right time. To listen to the show archive or download an MP3, go to www.IncomePropertyInvestmentTalk.com/082609.]

Mosca: In a convincing sign that the worst housing slump of modern times is coming to an end, prices are starting to rise in nearly all of the nations largest cities. For weeks now, we’ve been on this show saying, "Get off that fence; take advantage of the deeply discounted opportunities." What is your sense of what is happening right now in the real estate market?

Hanks: We all know real estate is all about which part of the cycle that you take advantage of and sometimes you make your money on the buy and sometimes you make your money on the sell. Right now investors are making money on the buy. You can get properties at pennies on the dollar and really get the transactions going and get things moving back in this economy. For example, we had a client who came to us three months ago with about $700,000 and three months later he is already reinvesting a 25% return that he got on that investment and that was out of his IRA. Not everybody has that type of a story but the point is opportunities are out there and fortunes are going to be made in the next two years in real estate and in different markets with distressed properties.

Madsen: A lot of people that have been sitting on the sidelines are getting back in the game. Now is the best buyers market that we’ve seen in at least the last 20 to 25 years and might be the best one we see for a long, long time. In talking about making money on the buy, we are not going to see a lot of appreciation right now but we are, if you know the right people, going to make money on the buy. Going out and trying to do this by on your own is difficult.

Mosca: Jon, the specific title of this show is "Is now a good time to convert the Roth IRA?" Can you talk a little bit about the Roth conversion?

Galane: The conversion process is extremely simple and now is a fantastic time to convert if your modified adjusted gross income in either single or family is $100,000 or less. If so, you can convert your traditional IRA to a Roth IRA. What that means is if you take the money out of the traditional and you put it in a Roth and you pay taxes on it for this year, you pay them in April of 2010 for your ‘09 return. The nice thing is tax rates are down considerably right now so you are paying at the current tax rate. Once that money is transferred to the Roth, all investing and all income and growth from the investments are tax-free. That is a tremendous advantage as people move into retirement because you are getting tax-free instead of taxable and we know that marginal tax rates are going up next year. We don’t know what’s happening after next year but many economists believe that tax rates are going to continue to go up with the deficit spending. If you can do it this year it’s fantastic to do and it’s a great way to make your regular IRA which is taxable in retirement at current rates when you retire and take the money out, now make it tax-free.

Mosca: What happens in 2010?

Galane: In 2010, it will not matter what you are earned. If you are making over $100,000, you can convert your traditional assets to Roth assets in 2010 and not have to pay taxes until April of 2012. You would pay taxes on half of the conversion. For example, if you convert $100,000 and you take the conversion now or at the beginning of 2010, you don’t have to pay taxes until 2012 on half of it and it’s based on your income in 2011, not 2010. You pay taxes on that amount, it becomes taxable income but you don’t have the 10% penalty either this year or next year. Then in 2013, you pay the other half of the taxes based on your 2012 income. It defers taxes while building your IRA up in a substantial buyers market in real estate. It’s a tremendous way to have tax-free growth, and a lot of people have cash available in their IRAs that they don’t have outside their IRAs.

Madsen: If you self direct your IRA, you are in control and you make the investment decisions. If you want to make that happen all you have to do is pick up the phone and call Entrust, Utah and let them walk you through the process and they will get it done for you.

Hanks: The time is now for everybody to control their own assets and control their own future. That is what Entrust Utah is doing. They are helping people be in charge of their own assets and take advantage of the many opportunities available today.

Galane: If I could pop in for just a minute, there is another advantage too. Many people don't know that you can also get something called a non-recourse loan inside your IRA to buy real estate. It doesn’t have to be all cash. Part of it can be a loan that the IRA has, it doesn’t go against their FICA score or credit. The IRA actually takes out the loan and there is no personal guarantee on it. Here’s an abridged version. What a non-recourse loan is the IRA takes out a loan. They usually want 35% down of the property and then the remainder goes in the loan. It has to be income-producing property and then the rent that's paid goes to pay down the loan. Literally overnight for example, if you had $100,000 IRA and you put $100,000 property in there with a loan on it, you triple that portion of your IRA. You pay 35,000 down but you have $100,000 property so you triple the value of your IRA overnight. Then the renter pays the rent on it and the IRA even get some deductions on it, which is very interesting.

Mosca: [Adrian, caller from Texas] The last two months, being in commercial real estate, and as a CCIM, I have been asked about people taking money out of IRAs and how to invest in real estate. I am learning a whole bunch today. The question I am being asked repeatedly is if someone takes $100,000 and wants to buy real estate and I heard the idea of getting a non-recourse loan, what is the downside? What are the fees involved and will the IRA pay for that?

Galane: Great question Adrian and the downside is this, once you've got a loan in the IRA, the IRA needs to have enough cash through rents and through extra cash in the IRA so if you've got emergencies like a repair or if you've got vacancies, that the mortgage can be covered by the IRA. Obviously clients can put money in, they can put a contribution in a $5,000 or $6,000 a year depending on their age and their income levels but they can put money in to the cover those times when they've got some vacancies. That's the downside is it can't come from outside. It's got to come from the IRA because the IRA literally owns the property, not the individual. The lenders usually want 10% cash left in the IRA for emergencies anyway so that forces the client to leave cash in there for those emergency times.

Adrian: Typically most IRAs are really a lot bigger than that. What I am thinking of is maybe someone has $1 million in an IRA; can you use most of that and buy the property completely free and clear?

Galane: You absolutely can. On the investor side, like rental properties and duplexes and fourplexes, that type of thing, it’s very easy to get the non-recourse lending but on the commercial side it’s very difficult.

Adrian: And fees involved?

Galane: The fees are simple. It's $50 to open an account. It’s $95 to do a transaction, which is put a piece of real estate in and it’s also a $95 fee to put the loan in. It’s $250 a year to administer the property in the IRA and $250 a year to administer the loan because we pay the mortgage payment and all of that from the IRA. Those are basically your fees.

Adrian: Wow, that's simple.

Galane: It’s very simple and it’s not expensive. On the smaller portfolios, especially with the real estate where it can be had at 10, $.15 on the dollar that Mike and Jeremy were talking about, you can take a smaller IRA and by the way you can also if you've left an employer, that 401(k) can go to an IRA also. You don't have to leave it with the employer. So, on those smaller portfolios they can take it and buy these properties that are selling at 10 or $.15 on the dollar. It makes it a great opportunity because you are buying it at such low amounts, you can do it for cash, and then even though appreciation may not be what it was, you are still going to appreciate at a much greater level because of the deals.

Madsen: Let us be clear we are here to help educate everyone and that includes the investors that have 15, 20, $25,000 and up. The reason we also do that is because we also encourage people to diversify as much as possible. I think too many people learned in the last few years the dangers of not being diversified out of just being in the stock market. If all of your eggs are in the stock market, you are not diversified. We are allowing that and making that easier for our clients to do that.

Galane: Any type of qualified money, which is 401(k), 403B if you are a teacher, 457 if you worked for a state, or 503© if you worked for a nonprofit, all of those can be brought over to IRAs and invested. Seps are already in IRAs so they can be left in the Sep and invested in the Sep the same as a simple. That basically covers most of your plans. So anyway that you've got it, the only thing is that you can't do is if you are in a 403B, 457, 503© and with the current employer you can't get that money out but if you've left that employer, then you can take it and use it. Also, one other thing while we are on this is if you've got someone with a very small portfolio, let's say they just started an IRA a year or two ago. They've only got $10,000 in it. They can partner their IRA with a spouse or another IRA and can own a single piece of property. It can be split between two or more IRAs.

Mosca: [caller David from Santa Fe]: If you convert from an IRA to a Roth IRA, is it true that you can convert all of your principal and you’re not limited to the normal $15,000 a year contribution?

Galane: If you had an IRA for say $500,000, as long as your modified adjusted gross income is a hundred or less, you can convert the entire IRA to a Roth. You pay taxes on it but yes you can convert the entire thing and make it all tax-free at that point in time.

David: I’m in a 401(k) and I believe for IRAs you are required at age 67 1/2 to start withdrawing the funds. In other words, is there a provision to force you to use that money in retirement?

Galane: Yes, as a matter of fact, it is actually the required minimum distribution out of a traditional IRA or traditional 401(k) is age 70 1/2 whereas on a Roth IRA there is no minimum distribution. So, if you convert an IRA or a 401(k) to a Roth IRA from that point forward you don’t have to take any money out at that point in time. The theory behind it is that the person got a tax write off for putting the money in the IRA and that the money that is sitting in there is taxable so the government wants access to those taxes at some point in time. Whereas in the Roth, the taxes were paid up front on the money, which is nice because it’s paid on the seed instead of the tree that grew. It's already been paid, the government doesn't get any benefit from having distributions out of a Roth IRA so they don't care when you take it out or if you take it out.

Mosca: What is your golden nugget for today?

Galane: Whether it’s traditional IRA, Roth IRA, Seps, 401(k)s, the fact is that investing in an IRA gives you so much benefit for tax deferral or tax-free status and it gives you access to cash. A lot of people think they are diversified when they have five different mutual funds. The fact is they are still all stocks. You want to diversify your portfolio outside of paper and inside of real assets also which real estate is. Diversification is not having everything in different mutual funds.

Madsen: I would like to remind everybody that 75% of millionaires in this country have made their money in real estate and if you want to be a part of that and if you want to do that you've got to leverage deals and relationships and that's what we do at RealSource. Give us a chance and give us a call and we would be happy to talk you.

Published: September 24, 2009

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Peter L. Mosca is president and founder of BAK Communications, Inc. He has over 22 years of communications and media consulting experience, serving a variety of nonprofit organizations, including the CCIM Institute and the REALTOR Association on all three levels – national, state and local. He is the Spokesperson Trainer for the CCIM's Jay Levine Academy and trains hundreds of residential REALTORS nationwide to be effective industry spokespeople. He is consistently ranked as "excellent" by about 90% of those who attend his presentations. While his principal consulting focuses are public speaking and media relations development and content delivery and management, Peter is also the host of the Voice America Network's weekly radio program, "Income Property Investment Talk," a one-hour program that brings the powerhouses of commercial and residential real estate to property investors every Wednesday at 11 a.m. EST. Peter is married 17 years to his wife Barbara. They have two children: Ashley, 15 and Kelli, 12. Hence, the name BAK Communications, Inc.