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Lessons of 2008 for Self-Directed IRA Investors Today – Episode 346

Adam Talks

In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses the financial crisis from 2008-09, the lessons we’ve learned from it, and how to apply it to your Self-Directed IRA in today’s world.

Lessons from the 2008 Financial Crisis for Self-Directed IRA Investors Today

Hey everyone, Adam Bergman here, tax attorney and founder of IRA Financial, and on today’s episode, I wanted to talk about some of the lessons I learned from the 2008/2009 financial crisis, as it applied to my Self-Directed IRA investors, and what we can learn from those occurrences today. Right, today, we are in a bit of a different place, although kind of starting to feel somewhat similar to 2008; second quarter 2022 is the worst quarter for the S & P since the 1970’s. So, markets been bad. It’s not just stocks, right? Cryptos have been down significantly. Even gold, silver is down. Real estate is really the only asset that still has maintained its level of stability, although the higher interest rates, with the fear of inflation, will certainly put pressure on real estate and ultimately will come down.

So, we know what happened in ’08, right? There was a mortgage meltdown. Lehman Brothers, Bear Stearns, many mortgage companies went bust. Real estate prices dropped 30, 40, 50%. Some prices just rebounded in 2020 and 2021 from 2008-2009. So, it took 10, 11 years for some of those prices to come back. So what do we learn? Well, at that point, banks were not very well capitalized. So, one thing that’s different today is banks are a lot healthier than they were in ’08. We’re not going to see another Lehman Brothers – Bear Stearns. That’s not to say, in the crypto world, the decentralized banking type of companies, like Blockfi, Celsius; they are in a whole lot of trouble. Why? They’re not regulated and they don’t have nearly the necessary reserves to cover losses from the declining prices of crypto based off their lending portfolio. So, there’s going to be a big shake up in that space and you’re seeing it now. Will that translate and impact the rest of the economy? Probably not. It was pretty much secluded and relegated to crypto investors. It will have an impact potentially on other exchanges or the price of cryptos because there will be forced liquidations at some point, maybe to help raise capital. But, I don’t see it have an impact on the overall economy.

So, what can we do today, based on what we know that happened 10-12 years ago? So, I put a list together, some of the items I think we should all be thinking about to take advantage of what could be a really good opportunity at some point, maybe not today, but, in the coming months of really good asset prices.

So, number one is Roth conversions, right? Roth conversions, and the Roth IRA, is the best legal tax shelter out there. What’s a Roth IRA? It’s essentially an after-tax IRA that, so long as you’re over 59 and a half and the Roth’s been open at least five years, all Roth IRA distributions will be tax free. Okay, so that’s a huge opportunity. Whereas, if you had a traditional IRA, you’d pay tax on what you pull out after 59 and a half. And of course, if you own the asset personally, you either pay ordinary income or short-term capital gains equals ordinary income tax, or if you hold the assets greater than twelve months, long-term capital gains, which taxed at either 15% or 20% approximately. So, being able to legally shelter your gains into a tax-free account is obviously a huge advantage. And as a tax lawyer, one of the first things you’re taught is either you want to defer paying taxes because your money grows faster without tax, or in the perfect world, you want to eliminate tax and the Roth IRA or the Roth 401(k) could eliminate tax.

Now, when you convert your pretax IRA assets to Roth, you do have to pay ordinary income tax on what you convert. But, and here’s the big but, If the assets have been depressed, if Netflix stock is down 60%, if Bitcoin is down 60% or Ethereum is down 70%, if Polygon is down 60%, if real estate maybe down 10%, but maybe it will be down 30% to 40% in the next three, four months; now, hey, now you have a really, really great opportunity because you can pay tax at a depressed value, assuming you believe that underlying asset, whether it’s Netflix, Bitcoin or real estate will go up, and this even applies to private placement or hedge fund and private equity investments, which in some cases mark to market. And what that means is each quarter they’ll mark to market the value of that asset. Well, guess what? You’re going to get your valuation if you’re in one of those funds, and your second quarter value of that asset is going to be down considerably. Guaranteed. I’ve heard cases could be upwards of 60% or 70% depending on the type of fund. So, that’s your chance to react quickly and elect to do a conversion. If you have an IRA at IRA Financial, you let us know. You can go on our app, indicate you want to do a Roth conversion. We’ll take care of that. There’s no additional fees and we’ll simply issue a 1099-R to the IRS based off the value you provide us. And then of course, on April 15 next year, you have to pay the tax on the amount you convert.

But, if you have losses – NOL or other losses, that could potentially offset business losses, for example, the tax on the conversion, then, hey, it’s a huge, huge win. Now you pay ordinary income tax on the conversion, not capital gains, and the amount you converted  is added to all the other income for that year and then you pay tax based off the tax rate that’s related to that aggregate amounts of taxable income. So, Roth conversion is the first strategy you want to do.

I’ll never forget, I think it was like early 2010, I had a client in Alabama and he had 18 or 20 homes and he did Roth conversions on all of them. And these homes were low valued, at that point, I think some of them were like $30 or $40 grand. But, he was getting like $600-$700 a month in rent, which was shocking; these were $40,000 homes. And I remember he was able to get a discounted valuation based off the value of those properties down to like $25,000 or $30,000, in some cases, like 30, 40% discount. And he did a massive conversion. He paid the taxes and now, I spoke to him, what was it, maybe in April or May, I can’t remember, anyways, he told me that those homes have tripled in value and he’s still getting the cash flow. He’s older now, obviously, and he’s living off the income. Yes, I think now he said 30 homes all in a Roth IRA, and he was able to convert half them because that’s what he owned at that point in 2010. And he converted, obviously at a low value, and now he owns them all in a Roth. He’s over 59 and a half, so he’s literally living off the income and he’s like, Adam, I have so much income, I don’t know what to do with it. So, I’m just leaving it on the Roth and when I go, like, my wife or my kids will have it tax free, but it’s the best thing I ever did, was do a conversion in 2010. And I just knew, it was real estate, like, the prices have to go up, right? They were rental income, low-income. He’s like, the people in this community, they aren’t going to have to live somewhere. So, I have good homes, they’re clean, decent location, cheap, relatively. So I’m not super worried about value; eventually it’s going to go up, inflation will kick in, and over the next five, ten, 15 years, I’ll still have the cash flow. It’ll be tax-free now and I’ll have an appreciated asset. And he was a genius. And I said he was a genius. He is a genius and there’s a lot more folks like that that took advantage of that conversion strategy.

So, with every kind of negative light, there’s always a glimmer of positive light, glimmer of sunshine, and I think you’re going to see that today, whether it’s stocks that now look even; stocks now look cheap, right? If you look at Netflix or Apple or Amazon, they look pretty affordable. They look like their bargains. The PE ratio, the price to equity ratio, price earning ratio is pretty much historically below average. So, it was higher, obviously, at the peak of COVID, and now it’s come down and there’s good opportunities. Same will be said, potentially, of cryptos; who knows when the bottom will occur? It could be still some pain, but ultimately cryptos will potentially go back up.

Real estate is still the one asset class where it hasn’t dropped to the extent people think it will. So, that leads me to my next point, and that is cash is king. So if you have money in a retirement account, you want to start preparing for the opportunity, especially if you’re a real estate investor, and I always tell people, listen, set up an account with IRA Financial; you don’t pay us anything if you don’t fund it, you don’t have to pay us a penny. Set it up. Why? Because as prices start to fall in real estate, which ultimately they will, if you have the ability to hop on an investment quick, and can offer cash to maybe a desperate seller who says, hey, I’ll close in ten days, no questions asked; 15 days or 20 days. Once your IRA account is set up and you ultimately fund it, which can take three to four days, you’re good to go. You’re going to have tons of ammo.

And that’s what Warren Buffett has done, right? If you look at what Warren Buffett did in COVID, he didn’t invest in anything. Berkshire sitting with billions and billions of dollars in cash. Why? He’s waiting for today; and he started buying business assets over the last few months, and you’re going to see a huge amount of deals he’s going to be doing shortly, because as assets drop, he’s just waiting for opportunities. And any smart investor will tell you, whether it’s real estate, equities: you make money when you buy, not when you sell. Any idiot can sell an asset. Smart investors make money when they buy it at good prices.

So, this is a good opportunity, even though it’s going to be painful, for a lot of us and it’s been a horrible month for me, and I’m sure most of you guys, whether you invest in equity, in cryptos; real estate has been my only asset that has been, okay. I have cash flow in a couple of my properties, but I’m expecting those properties to drop. And guess what? I’m going to be shifting some of my equity/cash into my Self-Directed IRA to buy more real estate, because ultimately, when real estate prices start dropping, I’m going to jump on opportunities and get cash flow and hopefully buy at a really good time. So, it may be a little bit early, I don’t know. It may not be early for equities or cryptos, but for real estate, maybe we’re starting to see opportunities; interest rates going up. The Fed indicated that rates will go up even further, and they’ve said that their biggest challenge is inflation, not a recession. They said clearly that we’ll deal with the recession, but we don’t want to deal with inflation. So, that tells me that interest rates will continue to rise, and that will put more pressure on real estate buyers, and we’re seeing it today.

So, as prices drop in real estate, most of us have our savings in retirement accounts, which makes sense, right? It makes sense to save in a tax-deferred or tax-free retirement account; that’s the smart way to do it. So, this is a great chance, just like ’08, ’09, 2010, to jump on opportunities when prices drop. We’ve seen it in equities and cryptos; real estate will follow suit. We’ve seen it with startups, a lot of startups that have to go and invest in down rounds, meaning they have to raise capital at lower valuations; I’ve seen clients jumping on those opportunities. Hey, I like that company. I would have bought it at X Value. Now I can buy in at a depressed Y value. I’m in.

We’ll see that in other assets, whether it’s loan funds or other types of alternative asset opportunities. They presented themselves in 2009, 2010, and they will do so again in ’22 and ’23. So, this is a really good time to start preparing. Yeah, obviously, it’s kind of a plug, but again, I don’t make any money; set up an account, it’s free. You can do it on our app. You only pay us when you fund it. So, if you never fund it, if the investment ever materializes, you wasted ten minutes of time on our app. Big deal. But, trust me, if you can have your account set up and fund it, and then be able to jump on an opportunity and close in a week, two weeks, three weeks, you’ll have the advantage over other buyers who may not be able to accumulate the cash or get the cash so quick. If you can see, I’ll close in two weeks, three weeks, or, the investment fund, the window is closing next week, and you have a chance to get in a discounted opportunity. Hey, if you have cash in the account and it’s a good investment, something you believe in, why not, right?

So, that’s kind of what I wanted to address on today’s podcast. The big strategy is Roth conversions. We all should be looking at that. If you’ve not converted your assets and they’ve been significantly depressed, which most assets today have been, if you own assets that are flatter or up, well, let me know what you’re invested in, because I’ll probably hire you to do my investments. Even the best money managers are down 6% to 10%. Even the best hedge funds, private equity investors, are down, especially when they mark to market. So, this is a great chance to essentially get in a good opportunity.

Cash is king. That’s number two. And number three, be ready for an opportunity. That’s what Warren Buffett is; he’s sitting up all his cash, and him and Berkshire will jump in to be able to buy up assets at 20, 30, 40, 50 cents on the dollar. We can all do that too. It’s different, obviously, at a lower spectrum, but we can all get in and make money by buying at good prices, which is how smart investors make money.

So, that’s what I want to share with you. That’s the lessons I learned from the ’08 financial crisis. I’ve seen it from clients. It’s not BS. I literally have seen clients’ accounts. I know, because we run the trust company. I’ve seen their assets, I’ve seen the asset valuations, and I see that they have a Roth, and I see where they started and I see where it is today and these people didn’t go to Harvard or Ivy League schools; they’re just like us. They just understood the power of the Roth conversion and they believed and had confidence that the real estate assets or the other assets they converted, whether they were Apple stock or private investment into a company, was at a super depressed value, and the chances are that the asset would go back up to its previous value, if not even surpass it within the next few years, and since they were patient, the money was in an IRA anyways, it’s not like they were able to spend it – why not do the conversion?

So, if you wait on conversions, you can do it piece by piece. Say you have 100 shares of Tesla, you can convert 20 at a time each year, or however you want to do it. Or if you have four homes and you can’t pay the tax on all four, maybe you want to do two of them. Think about if it’s a real estate asset. Try to get the depressed value right? If Trulia you think is too high, use the tax records. If the tax records and  Trulia are too high, go to a realtor and ask for an opinion on what the property maybe, at least he or she, thinks it’s valued.

With a falling economy/marketplace, there’s opportunities to go out and get discounted values. Harder on cash, right? Cash is cash. You can only convert cash and pay what cash is worth. But on other assets, most other assets, there is room for some discount, and that’s something you can potentially look at. Obviously, Tesla or Apple is traded; Bitcoin, gold – they’re traded on public market, so it’s very difficult to get discounts on that. But, private placements, loan funds, investment funds, real estate funds, real estate, you can potentially even get a further discount, which will lower the amount of tax you have to pay on the conversion.

So, a silver lining will permeate and this could be ultimately an unbelievable opportunity to make money. We saw it with COVID. Anytime there’s a turbulent market condition, we saw it with COVID, now we’re seeing the rocket ship come back to Earth pretty quickly; it’s actually slamming into Earth, and that’s going to cause vibrations, which will create opportunities for all of us.

So, number one, have your cash ready; have it in a Roth IRA if you can, and wait for those prices to drop because when they do, that’s when you’re going to be making money. I saw it in ’08, and I know it’s going to happen again because it’s just basic math. Buy cheap, sell high. Okay, we learned that all pretty early, and the same principles apply; Warren Buffett applies it. Any smart investor does and we should as well. And, ’08’s the lesson to show that Self-Directed IRA investors can do that. Plus, if you add the Roth conversion wrinkle, you’ll be even better off than Buffett or some of these other brilliant hedge fund guys, because you’ll have it in a Roth, meaning it will all be tax free.

So, thanks for spending some time with me today. I appreciate it. I know it’s summer, probably have more exciting things to do, but I think today’s podcast hopefully gave you some really good insight and information on some of the lessons I learned from smarter investors than me, and just want to share it with you. So, hopefully when we look back at what happened in ’22 and maybe in ’23, we can say, wow, yeah, it sucked, but it was actually a great opportunity to get in and buy really good assets at a discount and hopefully even do it in a Roth IRA.

So, thanks again. Have a wonderful day and take care of yourself.  Be well.

Learn More: Recession Investing and Your Retirement Account


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