Turn Your 401k Into A Bank
Two-thirds of Americans have a retirement plan. The average American changes jobs every 5 years. Why does this matter?
This means that about two-thirds of Americans have an old retirement account to rollover every 5 years. Usually, people take these account either to their financial advisor to give to Wall Street (terrible idea) or they roll them into their new employer’s plan to give to Wall Street (also a terrible idea).
Let’s quickly recap what happens when either of these two options are exercised.
First, your account goes into the hands of the enemy. Wall Street is not your friend. Their goal is to earn fees and not go to jail. That’s it. Want proof? They won’t and can’t even claim they will make you money. Their compliance departments drill home “past performance does not guarantee future results.” Trust me. I was in Wall Street for years!
Second, you will lose hundreds of thousands in fees. Even if your account doesn’t grow. The average 1% annual management fee over 30 years in the average 401k costs you 25–30% of your overall account value. Even if you lose money!
So giving your plan to your financial advisor is a bad idea. Just like rolling your plan over to your new employer is also a bad idea.
What should you do instead? Well what if I told you that you could turn your 401k into your own bank. And that I will walk you through all of the steps. Ready?
To start, you’ll need to make sure you can move your old account. If you still work there and you’re under the age of 60, you probably cannot move it. But if you’ve quit, retired, or are older than age 60, you can move the plan over.
Once we have verified your plan is eligible you need to do 1 of 2 things. You need to either setup a self directed Roth IRA LLC account (I’ll help you do that) or you need to setup a Qualified Plan Trust (I can also do that). These are steps that are very easy to mess up and can have adverse tax consequences so it is best to work with a professional. Again, I’ll help. We will call both of these types of plans an SDRP (self directed retirement plan). If you have money in a Roth IRA that came from individual retirement account contributions, and not from another qualified plan, you cannot put this money into a Qualified Plan Trust. It is illegal. You’ll need to use the Roth IRA LLC. If you have any other type of pre-tax IRA or qualified plan, you CAN use the Qualified Plan Trust.
You’ll need to establish one of the two accounts and a qualified bank account to go with it to hold the funds. You will need to work with certain banks who will support this type of transaction. Not everyone will. I also help with that.
Once the accounts are setup and you have your bank accounts established as well, you will request a transfer/rollover from your old account or plan. Here’s the deal. You are doing something that even most CPA’s don’t even know about, let alone your financial advisor or the $15/hour assistant that handles their admin work. My point? They will have no idea what you are talking about when you call. We make this phone call for our clients because we know what to say to get the job done. The other scenario is that they do know what you’re talking about, but like any company, they don’t like losing money. If this is the case, get ready for the most insane paper goose chase you’ve ever been involved in. The losing company will mislead you, forget forms, “lose forms”, and do everything in their power to prolong you transferring the money. Their strategy is to wear you down with paperwork until you just give up and leave the money with them. But they don’t know you hired us and that we will wear them down until they cooperate.
Okay the funds have been transferred! Ideally you were able to setup the Qualified Plan Trust and the rest of my article will be geared towards the fact that you did.
We are going to take 49% of your funds and invest them as a 1 time lump sum contribution into a MEC. What’s a MEC? It stands for Modified Endowment Contract. It’s a high early cash value dividend paying whole life insurance policy. We are going to purposefully overfund it to maximize the growth. Now usually with a MEC, if you overfund it, the account becomes taxable. However, your MEC will be owned by a Qualified Plan, which is tax sheltered, so the MEC cannot be taxed.
The reason we want to setup a MEC is that your MEC will pay 6–8% annual gross dividends based on historical averages. We can borrow against the MEC (while still inside the 401k), keep earning the 6–8%, and also go invest that money into real estate at the same time. Simply put, your account will earn 6–8% annually, you can pull the money out of the MEC (still in the 401k) and go invest that money and earn interest on real estate too. Essentially you are double dipping.
The other 51% will go directly into a private real estate deal. These investment options are typically going to pay a 8–12% annually and you’ll receive it in monthly cash flow.
So you’ll be earning 8–12% on the 49% from your MEC. You’ll also be earning an additional 6–8% from the 49% you put into your MEC. Lastly, you’ll also be earning 8–12% on the 51% you put directly into the real estate deal. You will have a cost to borrow from your MEC that will probably be 4–5%.
So let’s add this up. Now, I am using averages here, and these are not guarantees, but for math’s sake let’s look at some hypothetical situations. Let’s say you earn 6% on your MEC. Plus you earn 9% on your real estate deals. And it costs you 4% to borrow from your MEC. That’s an 11% annual net return, tax deferred.
So to simplify this!
- Roll your old account into your SDRP.
- Establish a MEC and put 49% of your account balance into it.
- Borrow from your MEC, within the 401k, and go invest in a real estate deal.
- Take the remaining 51% and invest in a real estate deal.
- Take all of the cash flow you receive from the real estate deal and pay back your MEC
- Repeat!
By doing this you are earning money in 6 places at once. A bank can earn money in up to 10 places at once.
You are earning a 4% minimum rate on your MEC, an additional 1–3% extra dividend on your MEC, 1–3% death benefit growth on your MEC (for your heirs), 8–12% on real estate deal #1, 8–12% on real estate deal #2, and an additional 1–2% in refunded loan interest from paying your MEC off early.
We aren’t quite at the bank’s level yet, but you’d agree this is doing more than your current plan right?
Oops! Did I mention that an SDRP, when setup correctly is allowed to use mortgage loans to acquire real estate? So remember when we took the 49% and the 51% and put it into real estate? You could use that money as a down payment on a mortgage and further leverage your funds so that you get extra leverage, turning 1 dollar into 4! That now gets us to 10 places at once just like bank!
This is how the Top 1% think and behave with their money! Sound confusing? That’s why most people don’t do it and that’s why you’d be hiring a professional (myself) to help you.
Your financial advisor learned 0% of this.
Wall Street does not even want you doing this.
Banks don’t want you doing this.
I do. Because my goal is to help everyone I meet financially fund a life of abundance and prosperity in all areas.
Banks, Wall Street, the IRS, and financial advisors don’t want that for you.
If you read this and it made the wheels start turning in your head about whether or not you can do this with your retirement accounts, I want you to reach out to get more information by clicking here.
If you’re a follower and have not read my book “The Blueprint to Financial Freedom” yet, that is the place to start. This book covers the specifics for each level in the various chapters, and you can grab the book for free as my gift.
Click here to get a copy!
The Blueprint to Financial Freedom by Jerry Fetta
To Purpose, Wealth & Freedom,
Jerry Fetta
Jerry Fetta is the CEO and Founder of Wealth DynamX. He is a nationally recognized financial expert featured in Forbes, Yahoo Finance, Fox, Chicago Weekly News, New York Finance, interviewed on over 45 podcasts with world renowned experts, earning endorsements and affiliations throughout his career with names like Kevin O’Leary, Grant Cardone, Dave Ramsey, and Pamela Yellen.
Jerry’s mission in life is to help create millions of financially educated and solvent families achieving greater financial freedom and sharing the truth about money with those around them.
Learn more at www.WealthDynamX.com
(DISCLAIMER: The information in this content should not be considered tax, financial, investment, or any kind of professional advice. Only a professional diagnosis of your specific situation can determine which strategies are appropriate for your needs. Wealth DynamX can and does not provide advice unless/until engaged by you.)
