Billionaires

[Dr. Jones]

Does this still work well with much smaller numbers? say $500 and $5000

Yes, exactly the same.

 

[Chris-L]

I don't want to throw something out that gets anyone in trouble (meaning not having the required savvy/experience to benefit), but a great way to create wealth and particularly for retirement (59.5 years old), is using call options within a ROTH IRA.

I will give the very basic components in how I utilize them.

I will buy an option to purchase a property (most use call options in the stock market) through my ROTH IRA. Let's say I pay $5,500 for the option.
Then, I purchase that option from my IRA for, say, $500,000 and exercise the option outside of my ROTH.
The entire profit from the sale of the option is tax deferred. I can continue to do this, tax free, until either a) I take money out of the IRA and pay the appropriate tax (whether it be ordinary income or long-term capital gains), or b) at 59.5 years old can take it out tax free.

There are VERY creative ways to amass wealth quickly and this is the vehicle Mitt Romney uses (among many others) to do the same.

So is this something you started doing right when you turned 59, or did you wait a few years?

 

[The Pearl]

Not physical cash. Weather or not the system could support liquidating all the actual money the ultra wealthy have in their bank accounts. Not their property, not their stocks, not their collection of priceless paintings. What happens to the system if they all want to transfer their account into a cashier's check, or something like that.

I believe the answer is still yes. All of the banks assets and liabilities have to match. The Fed is the bank to the banks and would provide the liquidity.

 

[The Pearl]

I don't want to throw something out that gets anyone in trouble (meaning not having the required savvy/experience to benefit), but a great way to create wealth and particularly for retirement (59.5 years old), is using call options within a ROTH IRA.

I will give the very basic components in how I utilize them.

I will buy an option to purchase a property (most use call options in the stock market) through my ROTH IRA. Let's say I pay $5,500 for the option.
Then, I purchase that option from my IRA for, say, $500,000 and exercise the option outside of my ROTH.
The entire profit from the sale of the option is tax deferred. I can continue to do this, tax free, until either a) I take money out of the IRA and pay the appropriate tax (whether it be ordinary income or long-term capital gains), or b) at 59.5 years old can take it out tax free.

There are VERY creative ways to amass wealth quickly and this is the vehicle Mitt Romney uses (among many others) to do the same.

As explained, this makes little conceptual sense and probably might skirt the IRS rules on a prohibited transaction.

 

[Dr. Jones]

Does this still work well with much smaller numbers? say $500 and $5000

However, the reason for using the call option is the limits placed on how much money can be added to the ROTH IRA in each year. I believe the number is $5,500 per year.
So, in order to have greater gains within the IRA at non-taxable earnings is through an option.

Bottom line is you are quite limited as to the amount you can put into the IRA, but not limited as to how much it earns. Use the example of flipping a house. You could buy an option to purchase the home with your IRA for $2,000 - example) and, let's say, you think you will earn $50,000 on the flip. You could personally (or using another entity) buy the position (the option) your IRA has in the house for, say, $40,000. The entire profit ($38,000 in this example) is earned tax free. You can now use the money to do similar transactions and amass retirement wealth pretty quickly.

An example I am doing right now. I have located a ranch that I estimate is worth about $6M. I have negotiated a deal to buy it for $2M. I used my ROTH IRA to buy an option on the property for $5,000. I already have a buyer lined up that wants to take my position to purchase it for $2M. However, I am selling my option for $1.5M. (The buyer is okay paying $3.5M for the ranch.)

So I invest $5,000, earn $1.5M from that investment, and pay no taxes on the earnings. Rinse/repeat.

EDIT: You can't personally buy the option from yourself, you have to sell the option to an unrelated party.

 

[Dr. Jones]

As explained, this makes little conceptual sense and probably might skirt the IRS rules on a prohibited transaction.

It does. I meant to say that someone else is buying that option for me. The way I wrote it, you are correct.

As far as it making little conceptual sense, you lose me. I've been doing it for more than 10 years.

 

[Dr. Jones]

So is this something you started doing right when you turned 59, or did you wait a few years?

I threw that softball out there for ya. YW.

 

[Jamezz]

However, the reason for using the call option is the limits placed on how much money can be added to the ROTH IRA in each year. I believe the number is $5,500 per year.
So, in order to have greater gains within the IRA at non-taxable earnings is through an option.

Bottom line is you are quite limited as to the amount you can put into the IRA, but not limited as to how much it earns. Use the example of flipping a house. You could buy an option to purchase the home with your IRA for $2,000 - example) and, let's say, you think you will earn $50,000 on the flip. You could personally (or using another entity) buy the position (the option) your IRA has in the house for, say, $40,000. The entire profit ($38,000 in this example) is earned tax free. You can now use the money to do similar transactions and amass retirement wealth pretty quickly.

An example I am doing right now. I have located a ranch that I estimate is worth about $6M. I have negotiated a deal to buy it for $2M. I used my ROTH IRA to buy an option on the property for $5,000. I already have a buyer lined up that wants to take my position to purchase it for $2M. However, I am selling my option for $1.5M. (The buyer is okay paying $3.5M for the ranch.)

So I invest $5,000, earn $1.5M from that investment, and pay no taxes on the earnings. Rinse/repeat.

EDIT: You can't personally buy the option from yourself, you have to sell the option to an unrelated party.

Mind blown.

 

[The Pearl]

However, the reason for using the call option is the limits placed on how much money can be added to the ROTH IRA in each year. I believe the number is $5,500 per year.
So, in order to have greater gains within the IRA at non-taxable earnings is through an option.

Bottom line is you are quite limited as to the amount you can put into the IRA, but not limited as to how much it earns. Use the example of flipping a house. You could buy an option to purchase the home with your IRA for $2,000 - example) and, let's say, you think you will earn $50,000 on the flip. You could personally (or using another entity) buy the position (the option) your IRA has in the house for, say, $40,000. The entire profit ($38,000 in this example) is earned tax free. You can now use the money to do similar transactions and amass retirement wealth pretty quickly.

An example I am doing right now. I have located a ranch that I estimate is worth about $6M. I have negotiated a deal to buy it for $2M. I used my ROTH IRA to buy an option on the property for $5,000. I already have a buyer lined up that wants to take my position to purchase it for $2M. However, I am selling my option for $1.5M. (The buyer is okay paying $3.5M for the ranch.)

So I invest $5,000, earn $1.5M from that investment, and pay no taxes on the earnings. Rinse/repeat.

EDIT: You can't personally buy the option from yourself, you have to sell the option to an unrelated party.

I think the confusion lays in your description, definition, and vehicle used in the "buying the option."

 

[Dr. Jones]

I think the confusion lays in your description, definition, and vehicle used in the "buying the option."

Okay, call it whatever you like. It's a call option.
My accountant handles all my 1031's and IRA transactions, so I may not be using the correct verbiage, but the gist is there.

 

[♪alt13]

However, the reason for using the call option is the limits placed on how much money can be added to the ROTH IRA in each year. I believe the number is $5,500 per year.
So, in order to have greater gains within the IRA at non-taxable earnings is through an option.

Bottom line is you are quite limited as to the amount you can put into the IRA, but not limited as to how much it earns. Use the example of flipping a house. You could buy an option to purchase the home with your IRA for $2,000 - example) and, let's say, you think you will earn $50,000 on the flip. You could personally (or using another entity) buy the position (the option) your IRA has in the house for, say, $40,000. The entire profit ($38,000 in this example) is earned tax free. You can now use the money to do similar transactions and amass retirement wealth pretty quickly.

An example I am doing right now. I have located a ranch that I estimate is worth about $6M. I have negotiated a deal to buy it for $2M. I used my ROTH IRA to buy an option on the property for $5,000. I already have a buyer lined up that wants to take my position to purchase it for $2M. However, I am selling my option for $1.5M. (The buyer is okay paying $3.5M for the ranch.)

So I invest $5,000, earn $1.5M from that investment, and pay no taxes on the earnings. Rinse/repeat.

EDIT: You can't personally buy the option from yourself, you have to sell the option to an unrelated party.

Totally interested in real estate. I have been since I was a dirt poor kid. I used to comb through the classified papers looking for deals. My problem has always been how to secure capital. Completely oblivious of this real estate call option. Thank you. Quick question. I imagine that you need a significant term so that the 3rd party doesn't just wait out your option and then deal with the property owner directly. How long is a typical term?

 

[Dr. Jones]

Totally interested in real estate. I have been since I was a dirt poor kid. I used to comb through the classified papers looking for deals. My problem has always been how to secure capital. Completely oblivious of this real estate call option. Thank you. Quick question. I imagine that you need a significant term so that the 3rd party doesn't just wait out your option and then deal with the property owner directly. How long is a typical term?

Someone (Pearl) will maybe weigh in and say this isn't kosher. I get it.
Everyone raise your hands if you think most wealthy people play straight out of the playbook.
No one?
Okay.
Normally these deals are done with an already pretty good understanding of who all the players are in advance.
To answer your question more directly, I normally only take a 90 day option and then have an NCND with anyone I show the deal to. I have only ever had one guy go around me. I sued him based on the NCND and won easily.