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December 11, 2018

Todd Tresidder of FinancialMentor.com shares the surprising ways to reduce risk and increase returns as outlined in his new book, The Leverage Equation: How to Work Less, Make More, and Cut 30 Years off Your Retirement Plan. Joe and Big Al answer your money questions on real estate investing, buying a house with your 401(k) money, and required minimum distributions – and they talk beer, tariffs, the inverted yield curve, and Friends.

Listen to the podcast on YouTube:

Show Notes

(00:46) Todd Tresidder: The Leverage Equation (part 1)
(09:17) Todd Tresidder: The Leverage Equation – Using Financial Leverage in Real Estate Investing (part 2)
(21:21) Investing in San Diego Real Estate: Is Cash Flow Possible? (video)
(25:50) Can I Buy a House in the Philippines With My 401(k) Money and Pay No Tax? (video)
(27:51) Do I Have to Take Required Minimum Distributions from my Roth IRA? (video)
(29:18) When Is The Best Time To Take RMDs to Minimize Tax Impact? (video)
(32:31) Market Tidbits & Storytelling: Beer, Tariffs, the Inverted Yield Curve and Friends

Transcription

If you’re a regular listener, you’ve heard Joe and Al talk about leverage a number of times lately. Today on Your Money, Your Wealth®, you might be surprised to hear how you can use leverage to reduce your risk and increase your returns. Plus, the fellas answer your money questions: is cash flow possible when investing in real estate in San Diego? Can you buy a house in the Philippines, pay for it with 401(k) money, and not pay any tax? Do you have to take RMDs from your Roth IRA? When is the best time to take RMDs? And finally, Joe Anderson, CFP® and Big Al Clopine, CPA talk tariffs and the inverted yield curve, and important stuff, like beer and Friends. But first, Big Al Clopine is joined by Financial Mentor Todd Tresidder, author of the new book, The Leverage Equation: How to Work Less, Make More, and Cut 30 Years off Your Retirement Plan.

**:46 – Todd Tresidder: The Leverage Equation (part 1)**

Al: Todd thanks for joining us.

Todd: Thanks for having me on the show, Alan.

Al: So, I am real excited to talk to you, because you have just written a book called The Leverage Equation and it’s a topic that very few people have ever written about. And I think it’s, actually, one of the more important topics out there for those that would like to build real wealth. So maybe let’s start with what caused you to write the book?

Todd: Yeah, it stemmed from a course I wrote, Expectancy Wealth Planning, where I teach wealth planning a very different way. I teach it from the ground up, the foundation of wealth, which is two equations – and gee, great way to start an interview, with math equations right?

Al: Yeah right. (laughs)

Todd: This is the foundation of wealth. And I’m not going to get fancy math. It’s just to get the principles. Your wealth grows based on math. I mean that’s just the financial reality and it’s the expectancy equation, mathematical expectancy which determines your growth rate, and then the future value equation, which is the growth rate times time. And so when I teach wealth, I help people understand that foundation that expectancy is very counterintuitive because it’s probability times payoff. Everybody gets probability but they don’t understand what happens to wealth growth when you introduce the payoff equation. And so where leverage comes in, leverage takes one component of that payoff equation, which is the big wins component, and it matches it up against the other side of the payoff equation, which is controlling losses. And this is absolutely key to growing your wealth for anybody that cares about financial freedom, they want a secure retirement, any of these issues, if this is important you, then this equation is important because you have to understand how payoff affects your wealth growth. You can’t lose big. You’ve got to control the losses, and you have to play for the big wins. That means scalable, leverageable wealth plans.

Al: Yeah and I want to get specific here in a second, but maybe just kind of top level, leverage, what you’re talking about, obviously there’s financial leverage, meaning that you borrow money to do investments, but leverage is much deeper than that.

Todd: Well it’s a really important point you’re bringing up because everybody thinks they get leverage. They understand one type of leverage, sort of a little bit intuitively, which is financial leverage. And financial leverage is unique because it’s the one type of leverage that cuts both ways – it both increases risk and it increases return. But that’s the only one, there are six types of leverage. And the other five do not increase risks. As a matter of fact, you can reduce risk while increasing return. So the other ones include time leverage, networking leverage, communications leverage, systems leverage, knowledge leverage – all these different types of leverage you can employ in your wealth growth so you’re accessing resources that go beyond your own. See, the problem with wealth growth is you’re limited by your own resources if you don’t apply leverage. What leverage allows you to do – and this is very important – is it allows you to get beyond your own limitations of your own resources. And what that does is that allows you to get the return on equity. The return on equity equation, which is part of your growth, is not limited by your own resources, as well as, you’re not limited by your own time. And so now your income is no longer connected to your time. And so these are very, very important principles that very few people understand, and that’s why I wanted to write the book.

Al: Yeah, and I learned that – I go way back to my late 20s when I started a CPA firm and I was preparing tax returns and making a decent income. But the only way to make more income was to work harder. And when you’re a tax accountant, then tax season is just unbearable. And then it’s like, “gosh, this doesn’t seem like it’s good for my health. There must be a better way.”

Todd: Yeah absolutely. Trading time for money, you can earn a good living, there’s nothing wrong with it – particularly if you enjoy your work. So we’re not here about right/wrong. It’s just if you want to build wealth, if you want financial independence earlier than old, rather than just late-age maturity, conventional financial independence retirement – if you want to achieve something different in your life, you need these principles.

Al: When you think about leverage, you talked about nine principles for mastering leverage and the first one was “mathematical expectancy” that you already talked about, and we touched on the second one, “trading time for money limits wealth.” And we talked about that briefly too, and that’s what I noticed in my CPA practice, I can only grow so big unless I increase staff, which I eventually did at some point. You talk about a few other things. “The opportunity cost problem.” What is that?

Todd: The opportunity cost problem is that you have limited resources and when you’re stuck with your own resources, any time you expend a resource, that’s it. You can spend it one way. You can spend your time one way, once you spend it, you don’t get it back. You can spend your money one way. Once you spend it you don’t get it back. And so the idea is that you’re stuck by opportunity cost – there’s always an opportunity cost for everything that you do, everything you spend on. When you go into leverage, you’re using other people’s resources, you’re accessing resources beyond your own, and so you get beyond the opportunity cost problem.

Al: And I think another one of your principles, and I think this is a big one, which is “growing wealth by solving problems.” And I think that’s, in a lot of cases, if we can take a look and see what some of the pain points that people have, or businesses have, and figure out solutions, then we can create something, as long as we’re trying to think about whatever we’re doing to be scalable, we can create some real wealth.

Todd: Yeah. Solving problems is a key, key point in the book and this is something that’s not well understood. If you look at every limitation to your growth, particularly for the entrepreneurs listening in this crowd, or you can even look at it in your job. Any limitation to growth, any limitation to further achievement, if you look at it, the solution is always leverage. There’s a reason it’s a limitation to you. There’s a reason it’s an obstacle holding you back. Is it something you don’t have access to? Something you’re not easily solving? And so the solution is always leverage.

Al: And another one of these nine principles is making yourself unnecessary – and that’s an interesting concept because that’s something that we kind of don’t necessarily want to do. However, if you’re putting these leverage principles into practice, it’s like, well, you’re gonna have to figure out how to delegate virtually everything to be scalable, which then makes you less important.

Todd: Yeah. Ultimately we don’t want more money, right? Nobody really wants more money, what they want is what they think money will get them. And usually behind all this is this value of freedom. Most people, they run into this conundrum, they either have time or they have money, but seldom do they have both. And that’s where this idea comes in that you can’t be the superhero, you can’t do everything because then what happens is as you become more and more successful, you have less and less time, and we see it all the time. We see successful people who are running around crazy and they’re not really happy. And so that’s where leverage equation comes in is where you start learning how to get the freedom with your time so that as you become more successful, you actually become more free.

Al: Another concept is, “expand the gap.” What do you mean by that?

Todd: As I said earlier, wealth is the compound return of both personal resources and financial resources. And so what you’re trying to do when you expand the gap, it works two ways: most people understand it from traditional retirement planning, which is that you save money, and it’s the gap between your spending and your earnings. That’s your savings. And so you save that money, and then you multiply it out. You compound it. And so that gap of savings then becomes assets that you compound. Well, in the advanced planning framework, which is what I’m teaching here and the leverage equation as part of, is that it works differently because you can expand the gap geometrically in other asset classes like business and real estate because the value of the asset is a multiple of what it earns. And so, if you increase the earnings or expand the gap of the asset, the equity grows geometrically – and so it’s another way to really accelerate your wealth growth.

Visit the show notes for this episode at YourMoneyYourWealth.com to read the transcript of this interview and to find links to Todd Tresidder’s website and his new book, The Leverage Equation – How to Work Less, Make More, and Cut 30 Years off Your Retirement Plan. I’ve also added links to other YMYW episodes where we’ve talked about more traditional form of leverage – the financial kind. There’s the episode on the Risks and Rewards of Vacation Rentals and Real Estate Investing, and the one on Mobile Home Park Investing. Check it all out in the show notes at YourMoneyYourWealth.com. Speaking of using financial leverage in real estate, let’s hear Todd’s take on it:

**09:17 – Todd Tresidder: The Leverage Equation – Using Financial Leverage in Real Estate Investing (part 2)**

Al: Todd, why don’t we go through some examples of how to do this. How did some of these principles work?

Todd: All right, so let’s say you buy an apartment building, and let’s say that it’s got four units in it, and yet there’s this basement that could have two more units in it. And there’s this beautiful attic space that, if you put some dormers in it and whatever, it could have another unit – so you could take it from four to seven units. And so by doing that you’d increase the income of the property. Well, the property is priced at a thing called NOA – net operating income. And so it’s a multiple of that net operating income, so if you grew the property from four units to seven units – not quite double, but pretty close to it in terms of its operating income – that would multiply the value of the property. And so, that’s an example of expanding that gap, the difference between the income and the expenses, and then the value of the property is a multiple of that.

Al: In your book, you talk about, maybe you find this really good real estate deal, but you don’t have the money. But that shouldn’t necessarily stop you.

Todd: Yeah, I did the exact same thing in my own life, except I had the money at the time. So it’s actually a really stupid move on my part. (laughs) But I found a really good deal on a property, I had this kind of dream, I wanted to buy a large apartment building that was 102 units. I wanted to buy it with none of my own money. It was just to see if I could do it. And so I spent a lot of time, did a lot of work. I found a large apartment building out in Oklahoma and got the deal under contract, and it was a great value, but it was a really complex deal. It required some upgrades before we could really close on it. I’m sorry we could close on it, but it required upgrades before we could lease it up. Had a lot of problems but they were the right things that were wrong. There are certain things you don’t want wrong with the building, but these were the right things that were wrong. And so I brought in investors and we closed on roughly about a million dollars of equity. And so I was leveraging other people’s money, they were leveraging my skills, my ability to put together a deal, and everybody benefited.

Al: And I think that’s an example of one of your six types of leverage – networking and relationship leverage, and perhaps maybe being one of the most important things is, if you can draw on some of your contacts to help fill in some of the gaps, then you can maybe create some great things.

Todd: That’s a key concept in the book again that you’re hitting on, which is this idea that so many of the forms of leverage – I break them up and I categorize them, but really they cross over as you start applying it. So like if you look at that real estate deal example, so there was network leverage involved, I had a network of investors, people who trusted me and knew I knew what I was doing. I was leveraging my own knowledge to create the deal, I was leveraging my resources to locate a better than market deal. They were leveraging my knowledge, my skills, I was leveraging their money. So what happens is like, in a single transaction or a single situation, these forms of leverage will cross over, they will start connecting, and so it’s one of the key principles I teach in the book is, don’t get hung up on the demarcations, it’s just for teaching it so you can understand it and how to apply it. But when you put it in practice, what will actually happen in real time, is you’ll cross over these. So just find the form of leverage that you’re most attracted to, that you’re most capable of. So for me for example, I’m very skilled at systems leverage. It’s my natural orientation. I’m not very good at networking leverage. I’m naturally shy, I’m naturally reserved, reclusive, and so I’m not as good at that. And I talk about that in the book. And so, just focus on your strength, and you’ll naturally connect over the other forms of leverage – you don’t have to worry about being perfect at all of them, it works.

Al: Right. I think a lot of people that are listening, they’re employed somewhere. So what might you tell them if they want to increase income, or if they want to maybe take the next step – how could they apply some of the principles in this book?

Todd: Yeah, there is a great example in the book on that, where what you can do is, you can focus on your knowledge, because essentially if you’re in an employment position, people are leveraging your knowledge and your skills and your time. You’re being leveraged. And so, one of the ways to expand that gap that we talked about earlier is to increase your earning capacity. And so for example, a common question I get interviewed on is people say, “if you had $1,000 to invest, Todd, what would you recommend somebody do?” And I say, “well, if it’s your first $1,000, I say invest it in yourself and your earning capacity, because that would give you the highest compound return over time,” and that’s how you expand the gap as we talked about earlier.

Al: Yeah that makes sense. Let’s now maybe switch gears a little bit and talk about financial leverage. It’s easy to understand when it comes to real estate because you buy a million dollar property and you don’t necessarily use a million dollars of your own money. Maybe you use $200,000 or whatever the number is, and maybe you even have a friend that helps you pay for that, you borrow the rest. So what should people think about in terms of leverage in investments? It obviously can improve your – but it also can work the other way.

Todd: Yeah. So the first rule on using financial leverage is, the asset that you’re leveraging must return more than the cost of the leverage itself. Which is typically interest cost. So in the example of a property, it only works if the property pays. You know, mortgage financing in this case, which is a form of financial leverage, only works if the property’s returning more than the cost of the leverage. Now here’s an interesting fact a lot of people don’t know, this is kind of a little off-track from the book, but it’s fun to apply to this example you brought in. The long-term returns on property basically track inflation. They deviate on long-term housing returns, it’s plus or minus 10% from the long-term inflation track. And so what a lot of people don’t understand about how wealth is built in real estate is it’s done through leverage, financial leverage. Because what you’re essentially doing is you’re leveraging inflation. Let’s say you have 20% down, you get five traunches of inflation if you will, and you’re only losing to inflation on the equity you put in. And then what happens is your payments get worth less and less in real terms, while the value of the property grows based on inflation, five times what you have in on the investment. And so it’s pure leverage. It’s leverage straight up about how you build wealth in real estate, and it works long term because inflation is not a constant, but it’s prevalent ever since the Federal Reserve of 1914. And so inflation’s a dominant factor and it’s very consistent, and that’s why real estate is a very reliable asset for building wealth. And that’s why also banks are willing to lend with such low down and at the lowest interest rates. So anyway, a little side note there, but it’s fun to understand.

Al: Yeah and just thinking about that in my own experience, because I’ve been a real estate investor for over 30 years, and I guess the way I explain it is, if you buy a $100,000 property, which, I don’t know where you do, but it’s just an example. (laughs) $100,000 property, and if you put a $100,000 of your own money, and if it goes up 5%, then you made 5% on your money. Now, if you’ve somehow put $10,000 down, 10%, and you were able to borrow $90,000, the property still went up $5,000 but your investment was $10,000, so your rate of return is 50%. And that’s actually how you make money in real estate. Now it’s not that simple, because the more debt you have the worse your cash flow, and of course, you’ve got to factor that in. But that’s how folks make a lot of money in real estate, particularly like, we’re in California, in San Diego. We don’t really have the best of cash flows here. But the appreciation over time has been pretty good, it actually outpaces inflation and has for quite a while. But then on the other hand, when properties go down – so your $100,000 property went down to $90,000, so in essence, your investment is gone. You lost 100% at that point. So that’s why it can obviously work both ways.

Todd: Yes you bring up a couple interesting points that are mentioned in the book, and again this is unique to financial leverage. The other forms of leverage, the other five forms of leverage, you can reduce risk while increasing returns. But with financial leverage, it’s consistent. It increases risk and increases return if you get it right. But if you get it wrong, so I said it makes the good times great in the bad times unbearable. But the interesting thing about financial leverage is mentioned in the book – so you brought up a couple points here, Alan. One is that financial leverage gives asymmetric returns. You have to subtract the interest costs from the positive return, and you have to add the interest cost to your loss. Your losses magnify more than your gains multiply. And so that’s an important point for people to understand with financial leverage. And that’s why financial leverage is the first form of leverage treated in the book, it’s the one people automatically think about. It’s also the one that requires the greatest caution. And so you brought up a great point about California real estate. California real estate is one of the more volatile real estate markets in the United States. One of the things about financial leverage that I taught in the book is that you don’t want to apply financial leverage to volatile assets. Now, I don’t know if I’d call real estate that, I’m really applying that more to businesses – certain types of business assets are more volatile, or certain types of businesses. So anyway, that’s another characteristic of financial leverage. Where you bring in the risk management factor is where you apply financial leverage intelligently – again it’s all taught.

Al: Let’s spend just maybe a couple more minutes on the other five types of leverage and how they kind of interact with each other and how to think about them.

Todd: Sure. So we can talk about systems leverage as an example, one of my favorites. And that’s where you’re replacing human activity with systems activity. So in my business, I’m in the online education business, and so I sell courses and books as we’re talking about here, the book. And so if you look, it’s almost pure systems leverage. So I have content marketing on the website which is leveraged through Google as a search system. That’s how people find me. And then they come in and they enter funnels where I give value. That’s another principle taught in the book about giving value. I give valuable information, educational resources, build relationship and trust. They come through that funnel, and eventually it makes sense for them to take the next step and make a purchase – that might be a book or a course, as their education grows, they realize that this is a piece of knowledge they want to acquire. And so these are all examples of leveraging both technology and business systems. That’s what makes the business scalable. I mean, I can serve millions as easily as I can serve 10 people.

Al: Todd, I think that’s a really good point. I think it’s a really good summary of the whole point of your book is, you could mentor one person at a time, which is fine, but then you’re limited in your own time and resources, or you can create good systems and good content as you have, and now you can help almost an unlimited number of people. Who knew there was so much leverage out there, huh?

Todd: Right. The thing about this book is that what I’m really trying to do is make this conscious. We all know leverage. We all understand it intuitively. What we don’t understand is how to use it consciously to produce the results we want in life. And that’s the key here. That’s what I’m trying to communicate.

Al: Well Todd, you’re full of a lot of great information. Any other final thoughts that I forgot to ask you?

Todd: A fun final thought that I left in the book and I’ll leave it with you on this interview is that, what people want to do is, they want to look at their daily life, their hours and how they spend their hours, and assess how much of your time is spent pursuing high leverage activities, and how much your time is spent either wasted away or trading time for money? And that’ll tell you how long it takes you to achieve your financial goals.

Al: Good thought. So that’s Todd Tresidder, and you can find him on FinancialMentor.com. Todd, thanks so much for joining us.

Todd: Thank you, Alan.

We’re not done with real estate just yet, Joe and Al answer some of your email questions on that very topic momentarily. Coming soon on Your Money, Your Wealth, Julia Wang from ValuePenguin shares some holiday scams to look out for and how to avoid them, and Refinery29’s Lindsey Stanberry talks about Money Diaries. Subscribe to the podcast at YourMoneyYourWealth.com so you can listen free, on demand. Don’t know how to subscribe? I made a video that’ll walk you through it – you can find that in the show notes or on the podcast page at YourMoneyYourWealth.com.

And hey, if you get value out of this show, why not share it? Email a link to your favorite episode to your friends or post it on Facebook, Twitter or LinkedIn. Now, let’s get to some of those email questions. If you have a money question, comment, or someone you’d like to hear us interview on the podcast, email info@purefinancial.com or click the “Ask Joe and Big Al” button at YourMoneyYourWealth.com

21:21 – Investing in San Diego Real Estate: Is Cash Flow Possible?

Joe: We’ve got Natalie from San Diego. She goes, “Hello. My brother and I have property for sale in Pacific Beach and we have an interested buyer. After all is said and done, we’ll have just under $600,000 in hand and want to do a 1031 exchange. I can get a multi-family that has high cash flow. It’s a priority for me because I depend on this monthly income, but I don’t want to deal with constant hurricane damage.” All right. “I’ve been told I could get a property 10 or 15 miles inland in San Diego, upgrade it, and it will yield higher cash flow than something on the beach. I have a hard time believing that if I were to take out a million dollar loan I would get any cash flow after paying off the loan and possible upgrades. The other option I was thinking is a triple net lease, but I’m aware of the risk associated with those – not getting a good location, not backed by corporate, if the tenant goes bankrupt, etc, etc, etc.” So let’s talk about a couple of things. Alan, you’ve been a real estate investor for quite some time. And when you’re looking at a property for cash flow, I guess one of the things that you have to look at is just what’s the market value in the particular area that you’re looking at? In my opinion – and my opinion it is only gauged on the information that you have given me over the years –

Al: Yeah let’s see if you’ve remembered it correctly.

Joe: But San Diego is not really great for rentals, because the market values are so high and especially if you’re looking to get a single family residence or something like that? Maybe a duplex on the beach? I don’t know, that’s going to cost you a couple million bucks and I don’t know if the rents are going to cover that. So she’s right on, she’s like, “You know what? I don’t believe it. I don’t see how I gotta put in more money into this thing. I got $600,000 from this, I can exchange that, buy this place, have a large note. How’s this thing going to cash flow?”

Al: Yeah. And I agree with that, but I will add some more tidbits. Because single-family homes and condos in San Diego – I’m just talking San Diego right now – they’re gonna have probably, in general, the worst cash flow of any real estate. A duplex tends to have a little better cash flow, triplex even better, fourplex even better. You get to five units and up, it’s a commercial property. Now you’re buying a property more based on cash flow than you are market value. And so, you tend to get better cash flow on units. Five units and up. Part of the reason is, it’s harder for people to buy, because they have to get commercial loans, they have to put a lot more down payment. And then another factor is, and this might sound kind of weird, but the lesser the neighborhood, in general, the better the cash flow. So if you’ve got a place in Pacific Beach, you probably don’t have very good cash flow relative to, let’s say, a place in El Cajon. And no disrespect to El Cajon, but it’s just that, closer to the beach you generally have lesser cash flow. Inland, you have better cash flow. So that’s kind of some general things to be aware of. Now, within that framework, every single property stands on its own, and you’ve got to look at the neighborhood, you’ve got to look at the financials, you’ve got to look at, “can I increase the rents if I do some little improvements.” In a lot of cases in San Diego, you can get a decent cash flow with units if you get a good enough deal and you put a little bit of money in and you can raise the rents and kind of turn this thing around, kind of put a little bit better active management in it. It can work, but it is a lot of work.

Joe: Triple net lease?

Al: Triple net leases, I agree with her concerns. I mean, if you triple net lease the Starbucks you’re home free because Starbucks, they don’t franchise, it’s a corporate guarantee, but you don’t get a very good cash flow. And in fact, I just saw a client that had a triple net lease with Starbucks in Texas, and the cash-on-cash was 4%. And Texas usually is 6 or 8 or 10 even. So a Starbucks in San Diego would be, I don’t even know, probably two and a half? I’m just guessing, I don’t really know, but yeah, I’m not a huge fan of triple net leases just because you’ve got one tenant and if they leave, if they vacate, probably it’s a franchise, it’s based upon the strength of the franchise. You might have a vacant property for a year or longer.

25:50 – Can I Buy a House in the Philippines With My 401(k) Money and Pay No Tax?

Joe: This is Ervin. He’s from San Diego. Ervin is asking us, “Can I buy a house in the Philippines using my 401(k) and not pay tax on that money?”

Al: That’s a nice idea. The answer is No.

Joe: All right, next? (laughs)

Al: Well actually I got more. (laughs) You take money out of your 401(k), it’s taxable, end of story.

Joe: You can absolutely take money out of your 401(k) and buy a house in the Philippines.

Al: Yes you can but you have to pay tax on it. There is a- should I talk about the self-directed?

Joe: Sure.

Al: Yeah why not. So Ervin, if you’re so inclined, you could roll, if you’re allowed to roll, your 401(k) to an IRA, then you would have what’s called a self-directed IRA. You can actually buy real estate inside of some self-directed IRAs. There are some custodians that will allow that. Could you buy a home in the Philippines? Potentially, but be very, very careful if you go that route because…

Joe: You can’ live in it, you can’t visit it, you can’t see it, you can’t touch it.

Al: Yeah, it’s a rental. It’s an investment.

Joe: You can’t even drive by it.

Al: You can drive by it but can’t even go and fix it up yourself. You have to hire people. You certainly can’t use it yourself, and if you want any relatives in there, I would not do that. So I don’t think that’s the way you want to go.

Joe: So good news Ervin, you have money in your 401(k) plan.

Al: Yep, and you can withdraw it. You will pay taxes, and you can buy a property in the Philippines. But you cannot get out of paying taxes.

Joe: Yes. We get that a lot. I think because we’ve seen these mistakes a lot. “I have this 401(k), which is an investment, and I want to buy another investment. Why can’t I just take the money from this investment and buy this investment?” Well, it just doesn’t work that way.

Al: Yeah. Once you take it out of a shell of a retirement account, it’s taxable.

27:51 – Do I Have to Take Required Minimum Distributions from my Roth IRA?

Joe: Alice from San Diego. “I have a Roth IRA and will be 71 in February 2019. Am I required to take a required amount of money out every month?” Alice, with a Roth IRA, there is no required minimum distributions. So you do not have to take any money out of that account if you choose not to. Where, if you have a traditional IRA, or a 401(k), that is where the required minimum distributions come into play. So Roth IRAs are exempt from RMDs. So hopefully that made your day.

Al: Yeah. And I’ll just add, so if you have a regular traditional IRA. you just have to take out the RMD, required minimum distribution amount, by year-end.

Joe: Or you could take it out monthly.

Al: You could do it monthly but you don’t have to.

Joe: Sure. How do you take your RMDs? (laughs)

Al: (laughs) Wow! That’s decades off. (laughs) I will say one little caveat though, Alice, is at some point when you pass away and whoever gets the Roth IRA, if they’re not your spouse, they’ll have to take a required minimum distribution on an inherited, non-spousal inherited Roth IRA. But you don’t have to take a required distribution.

29:18 – When Is The Best Time To Take RMDs to Minimize Tax Impact?

Joe: All right. Maria from San Diego. “I just turned 70, and a friend told me I could start taking RMDs…”

Al: Now.

Joe: “…now.”

Al: I pre-read it because it was a typo. (laughs)

Joe: I was gonna read “nor.” (laughs)

Al: Thought I’d help you out. (laughs)

Joe: Thank you. (laughs) “Now or in January.” As you can tell I don’t pre-read these.

Al: (laughs) Because if he were to read it it would be, “I just turned 70 and a friend told me I could start taking RMD nor or in January.”

Joe: Yeah, nor sounds good to me. (laughs)

Al: I think it’s now.

Joe: Got it. “And then another one in 2020 to minimize the impact of taxes. Is this true? What is the best time to start RMDs to lower tax impact? Thank you, Maria. What say you, Big Al? So she just turned 70.

Al: So we’re in 2018. So I’m going to assume by just turning 70, you’ll be probably 70 and a half next year in 2019. So you don’t really have to take your first RMD until 2019 – actually 2020 to be exact, that you’re required beginning date would be April 1st of 2020. You agree with me so far?

Joe: I do.

Al: OK. However, if you wait till 2020, you’re going to have to take two RMDs – one for 2019, one for 2020. So if you’re trying not to pile up too much income in one year, take one required minimum distribution in 2019 and one in 2020, and then keep on going.

Joe: Yep. So your friend was accurate. But what is the best time to start RMDs to lower tax impact? Well, I think if you’re 70 now, Maria, you might want to look, at how much income do you have? You might want to start bleeding some of these dollars out this year as well, before the end of the year.

Al: Depending on your tax bracket.

Joe: Yes. Because we have very low tax brackets right now. Let’s say if you’re in the 12% tax bracket, I don’t know, maybe you fill up that 12% tax bracket. So you would want to take a distribution from that. Maybe you convert that into a Roth IRA. So you can still stay in a very low tax bracket. That money is out of the IRA, now it’s in a Roth IRA. There is no required minimum distribution on Roth. So next year when you take your RMD it’s going to be lower because you got more money out the retirement account this year.

Al: Right. Completely agree.

Joe: So a little bit of extra planning there for Maria.

Al: I’ll just say, yeah, that’s right, Joe.

Joe: Hey, that’s right, Al. You are correct, sir!

Videos of Joe and Al answering these emails are, you guessed it, in the show notes at YourMoneyYourWealth.com – along with links to free resources on how to get started investing in real estate and buying real estate in your IRA. By the way, if you haven’t noticed, the end of the year is upon us already. Surprise! Make sure you check out this week’s episode of the Your Money, Your Wealth® TV show on Year-End Tax Planning Strategies while there’s still time. Watch it online at YourMoneyYourWealth.com and click “Special Offer” to download the 2018 Tax Planning Checklist for free.

32:31 – Market Tidbits & Storytelling: Beer, Tariffs, the Inverted Yield Curve and Friends

Joe: I just drank, like, this…

Al: Monster?

Joe: Yeah, it’s really syrupy. (laughs) Probably not very good for radio.

Al: Well I’m sitting here drinking Earl Grey tea.

Joe: Ooh, is that a beer?

Andi: Is that beer?? (laughs)

Al: No, it’s a cultured person’s drink.

Joe: Oh. You know all these IPAs have these weird names now. Did I tell you about my Spotted Cow?

Al: No.

Joe: Have you ever heard of it? New Glarus, Wisconsin. I was in Minnesota over the holiday weekend, Thanksgiving and my cousin lives in Wisconsin. He actually lives in New Glarus and he brought me a few Spotted Cows. I’m usually just a Blue Mountain kind of guy.

Al: Yeah. So how did they taste?

Joe: Not bad. You know, when you’re freezing…

Andi: So this is an IPA?

Joe: I don’t know what it is.

Al: No it’s not an IPA because he gets headaches with IPAs.

Andi: See, I’m thinking like his buddy from Wisconsin brought him an actual cow.

Joe/Al: No. Well, that could be. Yeah. He could have done that too. Maybe thought about it. Yeah. (laughs)

Al: So I went actually last night I went to Ballast Point with my brother Todd. So they do have good IPAs there.

Joe: I’m not a big fan.

Al: But you have to drink in moderation because you do get headaches – or at least I do if I have too many. As you know from seeing me do this before. (laughs)

Joe: (laughs) Oh, what a week we’ve had.

Al: Yes. Are you gonna give us some highlights?

Joe: I can. I can give you a few high points. But I’m not an economist by any stretch of the imagination here.

Al: No one was guessing that you were.

Joe: Really, I thought people were, they tune in for this market update. So what the hell did happen? What, is it Trump with the tariffs and then the non-tariffs? It’s a truce but not a truce?

Al: Well it looked like there was an agreement and then it’s like, “well, no, it’s going to happen fast.” It’s like well what does that mean? The market shoots way up and then it goes way down.

Joe: Yeah.

Al: Is that your analysis? That the best you got? (laughs)

Joe: Yeah that’s it. (laughs) Eh… next! Well we can talk about the inverted yield curve? (laughs)

Al: Oh wow, okay. What you got there?

Joe: I don’t know, I need Brian Perry’s help for this one. But that is a trigger in some cases. That’s what some people say. Some people disagree.

Al: What is an inverted yield curve? (laughs)

Joe: Well, I can explain it. I don’t really know how it happens because it’s somewhat illogical to me. Because if I look at risk and return. They’re supposed to be related in some degree. The more risk I’m willing to take, I should anticipate a higher expected rate of return.

Al: Yeah. So now we’re talking about bonds, fixed income.

Joe: So let’s say if I have a short-term bond, a bond is a loan. And so if I say, “Alan, I will lend you money for 30 days versus 30 years.” The 30-day loan is a lot less risky for me versus giving you money for 30 years.

Al: Yeah that’s true.

Joe: Does that seem logical to you?

Al: Yeah. Because I don’t know if you gonna be around in 30 years.

Joe: Right. So if I’m giving money and loaning money out to a corporation, a government or something like that, and if it’s a short-term loan, then I’m saying, “okay, I know that I’m going to get my money back. I’m looking at your balance sheet, you have cash flow, you just need a short-term fix. OK. I will lend you the money for one year, two years, three years. But I’m not going to ask you for a huge interest rate, because there’s not that much risk. But I do need a little bit for the use of my capital.”

Al: Yeah, and of course that’s if they’re strong companies, a strong lender.

Joe: Exactly. So if I’m lending that money out longer. Well then hey, I need a little bit more return, because I’m giving you my capital for a longer period of time, so I’m taking on more risk, and I should anticipate a higher expected rate of return.

Al: Right. And so that’s a normal yield curve.

Joe: So if you look at a yield curve, short-term, your interest rates are lower. And as you go longer, the yield that you’re receiving from those loans should go up. That’s a curve, and it’s curving up.

Al: That’s a kind of a normal curve.

Joe: Yeah that’s what the smart people call it. (laughs) “We’re right into a normal curve!”

Al: (laughs) This is what we expect.

Joe: An inverted yield curve is the opposite.

Al: Higher interest rates for short-term, lower for long-term.

Joe: It doesn’t really invert that much. But it’s almost like, flat. If I look at the 10 year Treasury versus the 20, they’re very similar.

Al: Got it.

Joe: Can I explain why? (laughs) No. I have no clue.

Al: And I can’t either. But that’s why we need Brian Perry. (laughs)

Joe: (laughs) Yes. But I know the definition of it.

Al: Right. But does it mean anything? What does it mean? I mean no one really cares what it is. What’s it mean to you and your investing?

Joe: Well you’re getting the same rate of return for a longer-term note than you are for a shorter-term note.

Al: Yeah. So why go longer term in that particular case?

Joe: Right. But I think it has a lot to do with a lot more than individual investors. It’s corporations, it’s big money, it’s pensions, it’s endowments.

Al: Potentially the future of the market?

Joe: Exactly. So it’s forward-looking within the overall markets. And let’s say if I’m an endowment or CALPERS or CALSTRS, I buy certain bonds because I have certain liabilities at certain timeframes, so a lot of these big institutions buy these bonds because they have certain liabilities at certain times where those coupons are going to come up or the bond has come due. So they can fulfill those liabilities. Yeah, that’s way over my head. I’m not a bond trader. (laughs)

Al: I wasn’t even listening. So I don’t care.

Andi: But wait, isn’t the concern the fact that the inverted yield curve has something to do with it’s signaled recessions in the past?

Joe: Yes. It’s a trigger, it’s a signal. But some economists… I was going to say economicists. (laughs)

Andi: Them too. (laughs)

Joe: Yeah, those guys too. They’re like, “Yeah well, after the fact sometimes, but it’s not all the time, and it’s like maybe 40% of the time.” So it’s a signal but it’s not necessarily a fact.

Andi: So in other words, don’t worry.

Joe: Yes.

Al: Well we’re not saying that. (laughs) I’m worried about everything you tell me. (laughs)

Joe: (laughs) OK… You hear about Friends on Netflix?

Al: No, what happened?

Joe: You like Friends?

Al: I do. It’s actually one of my favorite shows.

Joe: Okay. So you can stream Friends on Netflix. And then did you see the sign? When’s the last time you saw an episode?

Al: Probably like a week ago.

Joe: All right.

Al: So because like when there’s nothing on I flip the channels and there’s a Friends episode, I go, “good enough.”

Joe: Oh. I mean are you watching Friends on TBS or are you watching on Netflix?

Al: On TBS. Because I don’t normally watch it, just if I happen to be, like, I hardly ever watch regular TV because now there is Netflix and there’s DVR, so why would I? But I guess if I’m in a hotel and I want to watch something and I’m sort of limited.

Joe: So anyway, Netflix has this agreement with AT&T to stream Friends, because they’re the owner of the rights to Friends. So they were gonna stop showing Friends. And everyone went crazy I guess over the past couple of weeks. They were like, “the only reason I have Netflix is because of Friends.”

Al: Yes, I’m getting out of it.

Joe: Yeah. So like, 80 million bucks they’re going to pay, just to continue to stream. 80 to 100 million – something like that.

Al: Wow, yeah. And we actually have the box set for Friends. That was before Netflix. (laughs)

Joe: Yeah so do I. (laughs) I’ll sell that for $80 million! (laughs) I will come to your house and I will bring my DVD player and we will have it streaming forever. (laughs)

Al: Until your discs get scratched up and it doesn’t work.

Joe: Any time. Any time you want. That’s it for us today. Wanna thank our lovely producer, Andi Last. For Big Al Clopine, I’m Joe Anderson, we’ll see you next week.

_______

Special thanks to today’s guest, Todd Tresidder – learn more about The Leverage Equation at Todd’s website, FinancialMentor.com

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