The Land Geek Mark Podolsky shares his method for turning unwanted dirt and “rock farms” (aka raw land) into cash. Plus, can you aggregate rental properties into an LLC to take advantage of the qualified business income deduction? And can you avoid state taxation on your required minimum distributions (RMDs) if you move to a state that doesn’t tax retirement accounts?
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- (00:45) The Land Geek’s Raw Land Investing Model
- (10:47) Raw Land Real Estate Investing Stories and Mistakes
- (21:52) Would Aggregating Rental Properties in an LLC Satisfy the 250 Hour Safe Harbor Requirement?
- (28:52) Can I Avoid State Tax on RMDs by Moving to a State That Doesn’t Tax Retirement Accounts?
“I’m taking their asset which has now become for them a liability. I’m buying it 25 cents on the dollar and I’m converting that into an asset for somebody that really wants it at an irresistible price. It’s literally that simple.” – The Land Geek Mark Podolsky
That’s the Land Geek, Mark Podolsky. Today on Your Money, Your Wealth®, he shares his method for turning unwanted dirt and rock farms into cash. Plus, can you aggregate rental properties into an LLC to take advantage of the qualified business income deduction? And can you avoid state taxation on your required minimum distributions if you move to a state that doesn’t tax retirement accounts? But first, let’s talk about land – that is, assuming Joe can get our guest’s name right. Here are Joe Anderson, CFP® and Big Al Clopine, CPA.
00:45 – The Land Geek‘s Raw Land Investing Model
Joe: Alan, this is kind of right up your alley. You’ve been a real estate investor for what 67 years?
Al: (laughs) Yeah I thought it was more like 85. But yeah, I’ve been a real investor for a while but never land. I’ve always invested in single-family homes and then later apartments, and we have a guest that actually creates passive income through land.
Joe: The Land Geek. Let’s bring him on. We have Mark Podolsky. How did I do?
Mark: Wow. Yeah…
Joe: Andi’s looking at me like, “uh…”
Mark: That was tremendous.
Andi: Mark, it was pretty good, right?
Mark: That was really good.
Joe: I always blow up the last names.
Al: Yeah it’s to be expected. (laughs)
Joe: I was practicing! (laughs)
Mark: And you can see my marketing genius in being The Land Geek as opposed to Mark Podolsky.
Joe: Podolsky. Now we got it. AKA The Land geek. Mark, you’re an expert in looking at land – purchasing it and making passive income in a real simple fashion. And so when we heard of this, we were like, “Ponzi scheme or genius?” (laughs)
Al: Or real? (laughs)
Joe: Yes. So we brought you on to kind of figure out how the heck do we do this and help our listeners maybe to create wealth a little bit differently?
Mark: All right let’s do a deal together. So Al and Joe where do you guys live?
Al: We’re here in San Diego.
Mark: Wow. You both lost complaining privileges.
Al: Yeah. So no complaints here.
Mark: All right. So I go to this county in Texas and I see this 10-acre parcel and there are Alan and Joe and you owe $200 in back taxes – but you’re both in California. The property’s in Texas. You’re advertising two things to me. Number one, you have no emotional attachment to that raw land. You live in California, the property is in Texas. And number two, you’re distressed in some way because when we don’t value something we don’t pay for it. You haven’t paid your property taxes. Every single month the Treasury is sending you guys notices that if you don’t pay your property taxes you’re going to lose that property to a tax lien or a tax deed investor. So what I’ll do is I’ll look at the comparable sales on that 10-acre parcel for the last, let’s say, twelve to 18 months. I’m going to take the lowest comparable sale, let’s say for example it’s $10,000, and all I’m gonna do is divide by four and that’s gonna get me what Warren Buffet would call a 300% margin of safety. Ad I’m not going to be like the housing guys, I’m not gonna say I mentioned buying your land. I’m gonna send you an actual offer of $2,500. So you guys are like, “well, $2,500 is better than losing it and we’re sick of paying the taxes on it.” So you accept the offer. Now, in reality, 3 to 5% of people accept my “top dollar offer.” Still with me?
Mark: OK so now you accept it, and after you accept it, I’ve got to go through due diligence with this in-depth research. I gotta make sure that you both still own the property. I gotta confirm that back taxes are only $200. I’ve gotta check title, make sure there are no liens or encumbrances, no breaks in the chain of title. And I have this whole due diligence checklist. And we’ve gotten to a point where we actually have a V.A. team in the Philippines connected to an American title company, so costs me $11 in due diligence. Now, these are for properties $5,000 or less. If it’s $5000 or more we’re going to close through a title company just like anyone would do traditionally. But while I’m doing due diligence, I’m creating my marketing package. I’m getting the plat map, I’m getting the aerial maps, I’m getting the GIS map, I’m getting photos, I might do a local Craigslist gig for 50 bucks, have somebody shoot video and take photos and fill out my checklist, like what are the neighbors like, and that might cost me 50 bucks. So now I buy the property from you for $2,500. Everything checks out for due diligence, and then guys, I’m going to sell this property in 30 days or less. You know how I’m going to do it? There’s a built-in best buyer. Do you know who it is?
Al: Do not know.
Mark: It’s the neighbors – the neighbors. So I’m going to send out neighbor letters and say, “Look, here’s your opportunity, expand your holdings, protect your view, make your banker happy, expand your net worth, and acquire the adjoining lot.” Now if the neighbors pass, I’m going to go to my buyers list. These are people they’ve already bought from me or are interested in buying land. If they pass, I’m going to go to a little website you’ve probably never heard of called Craigslist. It’s the 10th most trafficked website in the United States. Or I might go to an even smaller one – Facebook. I might go to buy/sell groups and marketplace. But the way that I’m going to sell it is I’m gonna make it irresistible. So I’m going to try to get my money out on the downpayment – so $2,500 down payment – and then I might get a car payment, let’s say $449 a month at 9% interest over the next 84 months. So essentially it’s a one time sale. I get my money out within the down or let’s say within six months. I get $449 a month at 9% and Alan, Joe, no renters, no rehabs, no renovations, no rodents. And because I’m not dealing with a tenant, I’m exempt from Dodd-Frank, RESPA, and the SAFE Act. And therefore, the game that we play is can we create enough of these land notes where our passive income exceeds our fixed expenses, and then we’re working because we want to not because we have to.
Joe: Very well done little intro there.
Al: Yeah it is interesting – and I just have to say in our case with Joe and I, our property, I paid my half. Joe didn’t pay his half of the property taxes. It would have been worse, Mark. (laughs)
Mark: No. And honestly I could tell from Joe’s voice that that would be the case. (laughs)
Joe: Well Mark, tell me a little bit about yourself. How did you get into this? How did you stumble on your first deal? Because it sounds like you have a very well thought out system. I mean you’re working with title companies in Vietnam or the Philippines or wherever. (laughs) I mean come on, the average Joe is not going to be, “I see this parcel then I’m gonna start doing all this stuff and get it down to an exact science.” Tell me a little bit about your story. How did you start figuring out that raw land was your oasis of wealth?
Mark: Yeah. So in 2000, I was a miserable, overworked, micromanaged investment banker working with private equity groups doing mid-market mergers and acquisitions. Nothing too crazy, you know five to $500 million enterprise value. And I’m telling you, I had a 45-minute commute to work and back. It was just terrible. And it got so bad for me that I wouldn’t get the Sunday blues anticipating Monday coming around. I’d get the Friday blues anticipating the weekend going by really fast and having to be back at work every day.
Joe: Well there’s booze for that – and the scary Sundays. I just read about it somewhere. (laughs)
Al: You’ve never experienced it yourself. (laughs)
Joe: Never. I mean my Mondays are like everyone’s Fridays. (laughs)
Al: You can’t wait.
Mark: So my firm hires this guy and he’s telling me that as a side hustle he’s going to these tax deed auctions. He’s buying up raw land, pennies on the dollar. He’s flipping them online and he’s making average ROI of 300%. Well, I’m looking at companies all day long, and a great company – a GREAT company has 15% EBITDA margins or free cash flow. Great company. The average company is 10% – and I’m looking at companies all day long, less than 10%. So of course, I don’t believe him. So I go to New Mexico with him. I’ve got three grand saved for car repairs. I do exactly what he tells me to do. I buy up 10 half acre parcels at an average price of $300 each. I put them online. They all sell the next month for an average price of $1,200 each. It worked. So I took all that money and went to another auction where I live in Arizona. And again, this is 2000, there’s no one in the room, I’m buying up lots, I’m buying up acreage for like nothing. And I sell all that online. It took about six months and I made over $90,000 cash. So I go to my wife, I’m like, “honey, I’m going to quit my job and be a full-time land investor.” She’s pregnant. (laughs) She’s like, “absolutely not.” So I said, “Okay, okay, okay.” So I worked the land investing business for 18 months until it exceeded the investment banking income and then I quit. And I’ve been doing it full time ever since I’ve. Now I’m over 1,500 land deals and counting. And then over the last five years with systems automation delegation software, I’m 90% automated. So I’m only working two hours a week in the business.
Joe: You know it’s funny. I was excited to have you on because Al and I see a lot of individuals that have raw land, and they always usually have like a nickname for it – like “the biggest mistake of my life,” “the rock farm”… (laughs)
Al: They definitely don’t want it anymore.
Joe: They’re like, “we have this real dream to build our retirement home on this lot that we got sold for.” So we were thinking, “all right well how is this guy?” Because we meet a lot of people that have raw land but it was like a really bad investment for them. So these are your potential people that you’re looking for to buy from them and then flip it in 30 days with the significant profit it sounds like?
Mark: Absolutely. So I’m taking their asset which has now become for them a liability. I’m buying it 25 cents on the dollar and I’m then converting that into an asset for somebody that really wants it at an irresistible price. It’s literally that simple.
It sounds super-simple! You ever notice that the real estate investors are some of the most well-spoken, charming, gregarious people we’ve had on YMYW? Huh. I wonder if that’s a benefit of investing in real estate too. If you’re chomping at the bit to get started on this simple path to passive income, you’ll find the link to Mark’s website in the podcast show notes at YourMoneyYourWealth.com, along with the transcript of this interview, links to some of our previous discussions of various real estate investments here on the YMYW podcast, and your free download of 10 Tips for Real Estate Investors, courtesy of Your Money, Your Wealth®. Now, more with The Land Geek, Mark Podolsky.
10:47 – Raw Land Real Estate Investing Stories and Mistakes
Al: I would think that maybe in a lot of cases these are plots of land that had been inherited? So maybe it was bought by the parents and now the kids have it and they have no interest whatsoever and it’s like for them I would think any offer would be better than nothing.
Mark: Exactly. Absolutely. That happens a lot of times.
Joe: How do you go about finding the land? I see signs but a lot of times it probably is not even publicized because it’s like, “well yeah we got this rock farm in Arizona, we want to get rid of it but I don’t know. It’s kind of a hassle to sell” and how do you find the deals? How do you find the parcels?
Mark: Yeah. So we have our favorite counties and through the years places where I’ve done deals or my competition has done deals or my clients have done deals. So we know definitively that deals can be done there within our model. So you like I’m not going to waste my time on a San Francisco infill lot for $2 million because that seller is not going to sell to me 25, 30 cents to the dollar. They’re going to go the biggest, baddest broker in town and sell that thing 110 cents on the dollar. So I’m going to avoid those areas. But then again, nobody wakes up and thinks themselves, “boy, I’d really like some raw land today in Iowa.” Unless you live in Iowa. So I’m focused on California, Florida, Nevada, Arizona, New Mexico, Colorado, and then a little bit in the northwest – Washington, and Oregon. Texas as well. These are fast-growing states lots of inexpensive raw land. And so from there, we narrow it down by county. So we might go to a Web site called naco.org. That’s the National County Organization. And I get all the contact information for all 3,007 U.S. counties right there. So I can email the assessor, “hey, I want to get your list.” I can email the Treasurer, “hey, I want to get your list of people that owe back taxes.” And then what we’ll do is we’ll take that list, we’ll upload it into our software, we’ll price that list and we’ll send out our offers.
Al: So I’ve heard of things like this before. And my concern on something like this is you end up with all this raw land that you can’t sell. (laughs)
Joe: (laughs) I got 400 million acres of crap land in Iowa!
Al: (laughs) In the middle of Texas.
Joe: (laughs) You wanna come over, Al?
Al: Yeah. So I get the goal and the formula, and the goal is to sell it in 30 days, but I’m sure there are times when that doesn’t happen. And how common is that and what do you do to overcome that?
Mark: All right. So this is gonna sound nutty to you guys but I’ve never been stuck with a piece of raw land. There is a pig for every barn. (laughs) It all sells – and the reason it sells, is it doesn’t matter, I don’t care what asset you buy. You buy any asset 25-30 cents on the dollar, there’s someone else on the other end of that deal. You could wholesale it and just double your money to somebody like me and I’ll retail it. So we have a massive community of people that would just buy it wholesale from you if you really don’t want to go through the trouble of going through the marketing of it.
Joe: So let’s say I have some raw land that I want to sell. What are the best channels for me to do that if I don’t want to go through the normal brokerage channels. Do I just put it on Craigslist? It sounds like you’ve got a science. I’m just an idiot from Minnesota and I bought a bunch of land that I thought I was going to build a cabin on in the woods in Hackensack.
Andi: This is sounding like a real story here, Joe. (laughs)
Al: It is, it’s very specific now. (laughs)
Joe: (laughs) It’s about 18.6 miles from Baby Lake. So I want to unload this thing. So what do I…?
Mark: Utilities? Is it fenced? (laughs) Essentially what you would do is you would go to a website like landmoto.com, landandfarm.com, landflip.com, landsofamerica.com, landhub.com. These are platforms so you don’t have to drive traffic looking for buyers of raw land. They’re already out there.
Joe: And so do you use those particular sites to help you kind of look for the right deals?
Mark: Yeah. I prefer LandMoto, but yeah absolutely I’ll use those sites. But I’ve gotten so good at it now that I can pick up a phone now and just call up a buyer and get them excited and start negotiating.
Joe: Well yeah, with a pig in any barn, gets anyone excited. (laughs)
Mark: Yeah, but otherwise, we’ve got automation tools and we have ad writers and they’ll go out and they’ll market the land.
Joe: So let’s say I want to start building a passive income doing this. This sounds complicated and let’s say I have a full-time job, I work quite a few hours and I don’t have the time. So what are my options? How do I do this? It sounds interesting. What’s the next steps for some of our listeners maybe to get involved with something like this?
Mark: Yeah if you’re an accredited investor, you could talk to us, like a one-to-one conversation about a fund type of thing if you really don’t have the time. But like here’s a good example, here’s Roberto Chavez. So here’s a guy who’s a full-time attorney in California and doesn’t love – it’s not that he doesn’t love it but he’s not a partner, he doesn’t have a ton of control being a lawyer. He wants an option. So he starts doing raw land investing part-time – two hours a day. Last month he got to $12,000 a month passive income. It took him a year to do it, but now he really has a choice to do it. So if you can find an hour in the morning, an hour in the evening, that would move the needle because a lot of it’s 90% automated now with software. It doesn’t take that much time. The learning curve we can shortcut for you. So it’s really not complicated, in fact, compared to every other real estate niche, it’s the simplest. It’s a buyer, it’s a seller, it’s a piece of raw land. There are no banks involved, you can do it from anywhere in the world, it’s scalable, you don’t have to go out and start messing around with looking at the foundation and meeting subs and dealing with asbestos issues and is the roof leaking. I’ll be honest with you, nobody’s called me up at 2:00 in the morning said, “Hey Mark, my dirt’s leaking.” (laughs)
Andi: Mark, tell us about any mistakes that you made when you were starting down this road. What are the things that people should look out for?
Mark: I think, really, in the very, very beginning you really want to make sure that you know your comps and you know your due diligence really well. Now, I have made some mistakes.
Joe: Oh come on.
Mark: I’ve made a lot of mistakes. I think also not having a Sherpa to kind of smart cut it for you was a big mistake. I know a lot of people want to be the lone wolf. They want to do it on their own. But there’s so much information out there. Get educated as well. Don’t just start doing the stuff blindly. But once you have that under your belt, it’s really hard to make a mistake. Again, any asked that you buy 25-30 cents on the dollar, you know the old saying in real estate, “you make your money on the buy.” And that’s what I would say. I mean I remember when I first started, I bought 20 acres on a side of a mountain in New Mexico. No, it was 40 acres on the side of a mountain in New Mexico. I paid $2,500 but only 15 of the acres were accessible. So I was like, “oh gosh if I can just get my money out I’ll be happy.” I put it up on eBay and a dollar starting bid, no reserve. The first day it got bid up to $2,500. The tenth day it went up to $32,500 and I’m freaking out. “Did they not see the mountains?” So I call the buyer. And like, “why? You see it’s like on the side of a mountain.” He’s like, “it’s perfect.” He was a film director in L.A. He wanted to film out there didn’t want to deal with getting permits. So it was cheaper and more efficient for him just to buy the 40 acres than deal with the county. So that’s just another example. There’s literally a pig for every barn.
Joe: (laughs) I’m gonna say that like every day.
Mark: I think we have a show title.
Joe: I think so buddy. Hey Mark, if someone wants to get educated, someone wants to start getting their feet wet, how can you help them? What should they be doing?
Mark: I think the first thing to do is kind of do a deep dive into it and just see if it makes sense to them. So I’ve got a book on Amazon. You can get it I think for $2.99 on Kindle called Dirt Rich: How One Ambitiously Lazy Geek Created Passive Income in Real Estate Without Renters, Renovations, Rehabs. That’s a good place to start. You could go to TheLandGeek.com, you can download for free our passive income blueprint. Get our e-book, How to Avoid the Three Fatal Land Buying Mistakes. And we have a podcast that we publish every week and get that every week in your email inbox. And then just for your listeners, guys, I have a course, it’s a $97 course called The Passive Income Launch Kit and they could really start getting educated and we’ll offer that to your listeners for free.
Joe: Wow. I’m going straight to my computer.
Mark: And when I say listeners I mean Alan and not Joe. I’m gonna have you PayPal me the $97.
Joe: (laughs) Not a problem. I’ll send you a check. (laughs) The Land Geek. This was great Mark, I really appreciate your time and your wisdom. This was a lot of fun.
Mark: Thank you guys so much for having me. And I’d love to come back and tell the story of how I sold Joe’s raw land.
Al: (laughs) Yeah. You’ll be talking offline.
Joe: (laughs) Yeah, that nice little parcel up in Hackensack. Perfect. That’s The Land Geek. Check him out online. TheLandGeek.com.
Check the podcast show notes at YourMoneyYourWealth.com for The Land Geek’s Launch Kit, a $97 value, but free for all YMYW listeners except Joe. In the coming weeks on the Your Money, Your Wealth® podcast, Danielle Kunkle Roberts will help you maximize your Medicare. Rick Durso will share his retirement hustle and tell us what it’s like to caddy for the Symetra ladies’ golf tour, and Liz Ann Sonders from Schwab will return to YMYW to talk about the state of the markets now that we’re at the halfway mark in 2019. Subscribe to the podcast at YourMoneyYourWealth.com for free so you’ll get all the new episodes as soon as they’re released. And hey, if you learn and laugh when you listen to YMYW, the best thing you can do is share the show with your friends on social media or in an email. Send ‘em to YourMoneyYourWealth.com.
Now it’s time to open the email inbox – if you’ve got money questions or comments, scroll down YourMoneyYourWealth.com and click Ask Joe and Al On Air to send it in and have it answered here on the show. Speaking of real estate investing, a few weeks ago the fellas answered a question from Dennis about the qualified business income deduction for real estate investors, and that prompted another question:
21:52 – Would Aggregating Rental Properties in an LLC Satisfy the 250 Hour Safe Harbor Requirement?
Joe: Dennis, why don’t you just call us? I don’t understand what you’re doing here. We know you.
Al: We know you, Dennis, you used to work for me.
Joe: Dennis we worked together, you know. But you would rather just write in.
Al: (laughs) He wants to get his five minutes of fame.
Joe: He can’t wait to hear his name on the podcast or the radio. Okay. Dennis R. from Coronado, California writes in: “Joe and Al, your reply was exactly to the point of my question.” So he asked another question about the QB I deduction. “It did, however, generate a follow-up question in my mind. I just wondered what Alan would say about aggregating individually owned rental properties with an LLC partnership interest passing through rental real estate income into a single rental business for the purpose of meeting the 250-hour safe harbor requirement?” Dennis, what the hell?? I mean are we giving advice to one of your clients? Why don’t you get more specific? (laughs) “I have a client named Steve. He’s got a bunch of real estate and I was thinking about giving him this advice so I thought I’d ask Al. But instead of calling him, I’m going to send it in through the website.”
Andi: This way Dennis can give the audio reply to the client.
Joe: I have no idea what the hell that question even meant.
Al: I know what it means.
Andi: Luckily Al does. (laughs)
Al: So let me give a little more background and actually rephrase the question because even I didn’t understand it and I’d already read it. (laughs) So the question is relating to QBI, qualified business income deduction, which is new for 2018 and forward. With this new tax law it basically means that if you have a small business, you can take up to 20% of your profits and have them be non-taxable. So $100,000 business profits, 20% of that’s $20,000, you don’t pay tax on $20,000, you only pay tax on $80,000. That’s the concept. Now the IRS came out and said, “Maybe you can use your real estate.” But that was really vague when it first came out and the question was, well, the way it was written, it has to be a small business. Is rental real estate a small business or not? And there’s always been that confusion, Joe, my entire career. And it makes a difference when you sell the real estate in the tax consequences. Most accountants say yes it is, but not all. Anyway. So with this new tax law, it still was unclear until earlier this year. The IRS came out with a safe harbor that said yes, real estate is a business, if you fall under this 250-hour rule – meaning that you and your subcontractors, like property manager, your maintenance people, your gardener, they spend at least 250 hours on the property per year. If you follow that and if you keep records on each property and document the time, okay then it’s going to qualify for business and you get the 20%. And then it came up with, well I’ve got three single-family homes, let’s just say. And when I look at all three, it’s doubtful that 250 hours is spent on any of those three. But can we aggregate those together? Can we say they’re just like one property? Because I spent 100 on one, 100 hours on another…
Joe: Right. You’re not spending 250 on each of the three properties. But maybe in aggregate, you could add all the time on the three properties and maybe come up with 250 hours.
Al: Yeah exactly. And the IRS said yes you can do that, as long as a couple of things. One is, they’re similar type properties. So you can’t aggregate a commercial property with residential rentals. So those are separate. And the second thing is, they have to basically be in the same entity. So in your partnership, in your S corporation, in your LLC, or held personally, but it’s a little more complicated than that because if you own property in an LLC and you’re the only owner, that’s a single member LLC. It’s called a disregarded entity, and for tax purposes, it’s as if you didn’t have an LLC and the IRS recognizes that for aggregation rules. So in other words, you’ve got three properties, each in different LLCs, you’re the sole owner. It’s a disregarded entity. You can aggregate all of those because it’s disregarded, it shows up on your tax return and you can do that. So that’s the answer the question. If on the other hand, you had, I don’t know, a bunch of LLCs with other partners, so it’s not a sole, a single member LLC, then each of those stand-alone you could only aggregate properties within those LLCs.
Joe: How about if I had three properties in one LLC?
Al: Yeah that works. Yeah, that works fine too.
Joe: But you would probably recommend that anyway, wouldn’t you? Let’s say if I have three rentals, does it make sense to have three separate LLCs for the three rentals? I mean, I know it’s all a risk mitigation tool.
Al: Yeah, well the idea is you put a property in an LLC, something goes wrong with the property, there’s a lawsuit, the lawsuit’s limited to the assets in that property. Now I’m not an attorney and if there’s gross negligence maybe there are ways to pierce all that. I don’t really know, that’s a legal matter, but that’s the idea of LLCs is that you would set up an LLC for each property for maximum protection, but then you got 18 properties. Do you really want 18 LLCs and 18 filings with the state of California? You have to pay $800 for each one.
Joe: Separate tax returns too, right?
Al: Yeah but it’s a disregarded entity if it’s a single member, so there’s no federal return, but there’s a state return so you can pay your $800. It’s dumb but that’s what it is. So you’d have 18 different tax returns. So what you might do in that case is, “I’ll take four or five and put them in this LLC, I’ll take four or five put them in this LLC,” whatever combination you want. So at least if something goes wrong with one group, it doesn’t necessarily affect the other group. Or another way to think of that as if I have a high-risk property like a 50 unit apartment and I got three 50 unit apartments, I might want to put those all separate because there’s a lot of value there I don’t want to risk.
Joe: What’d you have for breakfast?
Al: I had Wheaties. (laughs)
Joe: It’s just brain juice or something. The green juice flowing. (laughs)
Al: Actually I had my usual – I had oatmeal with fruit.
Joe: (laughs) Keeps ya healthy, buddy.
Al: It does.
28:52 – Can I Avoid State Tax on RMDs by Moving to a State That Doesn’t Tax Retirement Accounts?
Joe: We got Arthur from Columbus Ohio. “Can I avoid state tax on RMDs by living in a state that doesn’t tax pensions and 401(k)s, 457 or IRA withdrawals? Of the 14 tax-free states, do some have better tax advantage than others? Our home state of Ohio has a 5% tax rate, so presumably, moving would save $5,000 annually on $100,000 income. Is that correct? I assume federal tax is still due on RMDs and Medicare will rise wherever we live, correct? My wife and I are nearing 70 in live our pensions and some interest income.”
Al: OK. I’ll take that one. So a few years ago, and I’m gonna say it seems like a few, which probably means 20 years ago – maybe it was 10, 15, something like that. I think most of the states got together and tried to coordinate how they handled pensions and other types of income coming from pension plans or IRAs. And what was decided was that your state of residency at the time of the withdrawal controls who gets the taxes. So in other words, like we live in California, which is a high tax state, and right next door is Nevada, which is no taxes at all. And so you could potentially have saved money in California putting money into retirement accounts and moved to Nevada. And when you pull the money out it’s tax-free. That is a true statement. So that would. So then you got to look at, is the tax savings that you’re getting – in this particular case $5,000 a year – is it worth moving to another state? Maybe. Maybe you want to move, maybe you don’t. A lot of people want to stay put. Most people would rather stay put where they kind of raise their family or where they went through their career. And I think in a lot of cases when you kind of look at the math, it’s like gosh, a few hundred dollars a month, is that going to make a difference in our lifestyle and how we feel about things? And the answer is probably not. But it’s a very personal thing. Maybe it is for you – maybe you want to move.
Joe: What do you want to do Alan? Do you think you’ll stay here or do you think you’ll move?
Al: I believe that I will stay here.
Joe: You’re not to Hawaii?
Al: At best we’ll probably split. And Hawaii’s taxes are almost as high as California, so it doesn’t really matter. But yeah, half the year here, half the year in Hawaii. That twould be my plan.
Joe: If you had a pension, they don’t tax pensions in Hawaii.
Al: That’s true. If I had one that’d be cool, (laughs) but I don’t. And neither does Anne. You’re right, pensions, they don’t tax in Hawaii.
Joe: What about IRAs and 401(k)S in Hawaii?
Al: They tax.
Joe: They do? Just the pension? Defined benefit plan?
Al: Just a pension Right. Because we had a client that has a pension and they they live in Hawaii and they purposely didn’t want to roll from their pension plan to an IRA. Because then all of a sudden it would be taxable.
Joe: What does that mean? How do you roll a pension plan into an IRA?
Al: Well a defined benefit plan,put that way.
Joe: So what, instead of taking the lump sum?
Joe: They had a lump sum or a pension option?
Al: Yeah. Thank you. Let me backtrack. They had a lump sum option that they could have rolled into an IRA. And then when they pull the funds out of there they’re taxable in Hawaii. You leave it inside the defined benefit plan.
Joe: They just took the the annuity.
Joe: Got it. See it’s so about planning. And that’s it for us. For Big Al Clopine, I’m Joe Anderson, the show is called Your Money, Your Wealth®.
Big thanks to our guest, the Land Geek Mark Podolsky, find the link to his $97 Launch Kit, free for YMYW listeners, in the podcast show notes at YourMoneyYourWealth.com. If there is something you want to know or hear on YMYW, drop us an email or let us know on social media – tag us, we’ll follow you, and the fellas will answer you on the podcast. All the links you need are in the show notes.
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