There are $6 trillion trapped in IRAs because most people are underutilizing the funds that they have in their retirement accounts. Are you one of them? In this episode, let attorney and CEO of Directed IRA Mat Sorensen educate you on IRAs. Mat joins host Marco Santarelli and answers the top ten frequently asked questions about self-directed IRAs. Get through the confusion and jargon as they bring clarity and simplicity to understanding IRAs and how you can take advantage of it.
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Top 10 Frequently Asked Questions About Self-Directed IRAs
This is the time when a lot of people think about their retirement accounts, specifically their IRAs. With over $9 trillion out there in IRA accounts in the United States, this is a staggering amount of money. It makes IRAs one of the largest sections of investible cash in the world. What does this have to do with real estate? Contrary to popular belief, IRAs have always been able to invest in real estate and own real estate. They can own anything from single-family homes to a commercial real estate, to multiunit properties to apartments. You could even flip properties in an IRA. You can own LLCs or limited liability companies that own single-family homes or multifamily properties, even commercial real estate. In fact, they can even invest as a private lender in real estate, meaning that it becomes the bank, the lender, lending money on real estate deals to other people. There are many ways to make money from the capital you have within your retirement account.
At this point in the IRA, the real estate conversation usually goes like this, “Why have I never heard of this before?” The majority of providers out there, the IRA custodians, if you will have generally found that real estate is an administratively unfeasible asset class. It takes more work to handle and administer a real estate transaction than it does to just have publicly traded stock or a REIT. In other words, the brokerage or insurance firm who administers most IRAs simply restrict their IRAs to the stuff that they sell, like publicly traded stock or mutual funds or annuities. You’ve always been able to own real estate in an IRA, but there are few IRA custodians who allow it. As a result, it isn’t as widely known as it should be. With increased awareness, IRAs will continue to own more and more real estate. It’s an education in what you can and can’t do with a self-directed IRA, how it works, how you set one up. Hopefully, we’ll just refer to this as the top ten frequently asked questions about self-directed IRAs. Join me and my guest and we’re going to explore this topic in greater detail.
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It’s my pleasure to welcome Mat Sorensen. He is an attorney and the CEO of Directed IRA. He is a bestselling author, a national speaker and expert on self-directed retirement accounts. He has been at the forefront of the self-directed IRA industry since 2006. He wrote the book, The Self Directed IRA Handbook, which is the most widely used book in the self-directed IRA industry. Mat, welcome.
Thanks so much for having me. I don’t know what else people may want to know about me, but I do like to have long walks on the beach and hold hands.
It’s good to get personal, not just about business. I haven’t done one on self-directed IRAs in a long time and I know that a lot of people have these retirement accounts, whether they’re IRAs or self-directed IRAs. From what I understand, there’s over $6 trillion, and I like to say it’s trapped in these IRAs and most of these people are under utilizing the funds that they have in their retirement accounts. They could be doing a whole lot more and doing a lot better. That’s the whole idea of converting an IRA into a self-directed IRA. Let’s start there. Why don’t we start off by talking about the basics? What exactly is a self-directed IRA so we’re all on the same page?
An IRA lets you invest in any asset allowed by law. If your IRA’s at a broker dealer, let’s say you’re at Merrill Lynch or a Fidelity, what IRAs do they buy? Financial products, because that’s what they sell. If you have an IRA with an insurance company, what do they let your IRA buy? Annuity products, because that’s what they sell. You need to get your IRA at a custodian that lets you self-direct and those are sometimes called self-directed custodians. That’s what we are at Directed IRA, which is DirectedIRA.com. A self-directed custodian can have Roth IRAs, traditional IRA sub-buyers, all the different account types. It’s their investment options on what they allow your account to do is it could invest in real estate, buy a rental, invest in an LLC, invest in a limited partnership, buying an apartment building, buy precious metals, invest in a startup. All those things are allowed in retirement accounts. You just need to get to a self-directed custodian that lets your account do it.
It’s been my understanding for years that a self-directed IRA and an IRA are exactly the same thing. You can correct me on this but by law, all IRAs are self-directed. The problem is that wherever you have your IRA, the restriction there, the handcuffs is set as an overlay by that institution, not by the law itself.
If you called up Fidelity and you said, “I want to buy the rental property on 123 Green Street with my IRA,” because you have an account there, they’re going to say, “You can’t do that.” It’s not because IRAs can’t do that. It’s because IRAs at Fidelity can’t do that unless you’re a high net worth individual with a $50 million relationship or more. Everyone else has got to move to a self-directed custodian. You’re exactly right. It’s the institution’s self-imposing on because they don’t want to deal with it. You’re a broker dealer and you’re electronically buying and selling funds and assets. You do not want to deal with real estate contracts and real estate assets. That’s not your business. It’s a pain in your butt.
The bottom line here is the vehicle is exactly the same because the vehicle is defined by law. It’s the institution that you’re with that either liberates you or limits you to what you can and can’t do.
The law only restricts three things of what you can’t buy with an IRA, which are collectible items like art and things like that. You should be able to buy that stuff. It got restricted. People were buying wine collections, they turned it into bottle collections and such so you couldn’t count collectibles. You can’t buy S corporation stock just because IRAs don’t qualify as S corporation shareholders. IRAs can invest in LLCs and limited partnerships and C corps and all that. You can’t buy life insurance. That’s it. Those were the only three things. Everything else is fair game.
What Can I Not Invest In?
That was one of my questions is not so much what can you invest in, but what can you not invest in? I knew collectibles in art certainly didn’t qualify. Is there anything else on that list?
That’s it. Collectibles can include certain types of precious metals. We have clients that do my precious metals with IRAs, like gold and silver. There are certain rules on what types qualify, but everything’s fair game. In real estate in particular, the one caveat I’ll say for real estate is as long as it’s investment real estate. You can’t use an IRA to buy real estate you’re personally going to use. It’s not like we’re talking about buying real estate with your IRA that’s going to be your second home or something. It does need to be an investment asset, not for personal use.
Can A Self-Directed IRA Invest In A Personal Investment Deal?
Let’s talk about that. Can a self-directed IRA invest in a personal business or a personal investment deal? The operative word there is personal. How do you even define that?
It depends on who the person is investing in. If you’re like, “I’ve got this business I started. I want to raise some money and I know you’ve got an IRA. Do you want to invest your IRA into my company?” You can sell me some shares or units in your LLC or I can even lend you money from my IRA. We’d negotiate the terms on that. That’s totally a fine self-direct investment. We have no relationship. You got your business, I’m an investor. If it was Mat Sorensen’s company that I personally own and I wanted to use Mat Sorensen’s IRA to invest in it, that’s a problem. The IRS doesn’t want that. There’s something called primitive transactions where the IRS does not want the IRA account transacting with the owner of that account. They don’t trust you with your own IRA. They also don’t trust your IRA with your spouse or your kids or your parents. There’s a list of who the account can transact with. That is a problem. That’s called a prohibited transaction.
The way to look at that is you cannot have a personal stake or receive personal benefits from anything that is vested in the IRA. Is that a better way or a good way of saying it?
That’s a good general way to just approach it. If you think about it that way, you’re going to avoid 99% of problems. The whole point of the prohibited transaction rule is that people that are disqualified, like yourself or your spouse, parents, kids who shouldn’t benefit. That was the goal they were trying to reach when they wrote the laws on that.
Let’s hypothetically say that I have a rental property in my self-directed IRA that does qualify, but then I turn around and I lease it under a standard tenant lease to let’s say my daughter. Would that not qualify?
That would be a problem because your daughter’s on the naughty list, so to speak. There are certain people that are restricted and that’s going to include your children. She would be restricted from leasing that because that would be a transaction. If she’s staying there and paying rent or if she’s staying there and not, she’s transacting with your account. That would be prohibited. Let’s say it was your brother, your IRA bought a property and leased it to your brother. Brother is not on the list of who’s disqualified. That’s actually okay. You can’t give your brother a sweetheart deal or do it for free. If your brother wanted to lease from your rental that your IRA owned, that would be okay. You have to pay attention to who’s on this disqualified person list. Those are the ones you just cannot have the IRA transact with or have those people get any benefit from the account.
What Is A Checkbook IRA?
There is a type of IRA that is often referred to as a checkbook-controlled IRA or simply a checkbook IRA. I understand this, but I think for some people they get confused as to it being a completely other animal. Maybe you can explain what it is.
It still takes a self-directed IRA as step one. Let’s say your money’s at Fidelity and you want to buy real estate, you’re going to have to move that money from Fidelity to a self-directed IRA custodian. Let’s say you move to Directed IRA, for example. Now, your money’s at Direct IRA. You could say, “I want to invest it into real estate,” and you could do that right out of the IRA account or you could say, “I’d rather have the IRA own an LLC 100% and I’ll have the LLC invest in the real estate.” We call that structure an IRA LLC. The IRA invests its cash into a new LLC. That money goes into an LLC bank account. You can be the manager of the LLC. You don’t own the LLC at all. You’re just the manager of the LLC that allows you to sign for the LLC on contracts as the LLC is buying property or selling or leasing. You can sign on the LLC’s business checking account to pay bills or send wires. You can also use that LLC checking account to receive income like rent or the gain when it sells. That LLC can reinvest the money.
You can buy another property or lend the money out of there, whatever self-direct investments you want to make. Because there is a checking account associated with that LLC, a lot of people refer to it as a checkbook IRA, but it’s just an LLC. You have a self-directed IRA that owns the LLC 100%. The LLC has a bank account. It’s the IRA money that got invested in the LLC bank account and now you’ve got the checkbook because your manager of the LLC. That’s essentially what a checkbook IRA is. We call it an IRA LLC. A lot of real estate clients do that. I even use that structure myself.
In fact, my retirement account owns an LLC 100%, which I’m the manager of. The LLC in turn owns a rental property I bought in Indianapolis through someone on your team, Marco, which has been a great rental. That’s a very common structure, particularly for real estate investors. Not every self-directed investor benefits from it. A lot of self-directed investors are investing in startups and they’re buying 50 shares and the next tech thing they think is going to go big or they’re buying precious metals or they’re doing private notes sometimes on a long-term basis. They can do it right out of the IRA. They don’t need this LLC.
What Is The Risk In Setting Up A Checkbook IRA?
What’s the danger or risk in setting it up that way? I would imagine that most people have enough self-control or knowledge to know what they can and can’t do with it. To use the phrase, “A blank check,” that’s essentially like a having a blank check and you can cross the line pretty easily.
When we set them up in our law firm, because we set up the LLC structures in our law firm, we charge $800 for an IRA-owned LLC. The documents were a little unique. The key is you got to set it up right and then operate it properly. Maybe it’s like being a gun owner or something, I don’t know. This can be an important tool. Even a car, I think of it that way, but you need to know how to use it and operate it properly or you’re going to hurt yourself or others. You need to get educated on it and make sure you understand the rules and how to properly operate it. When you’re doing that, I tell a lot of clients in self-directing in general, knowing the rules and what you can and can’t do, particularly when you have an IRA LLC, is like playing a new board game.
It’s not that it’s hard, it’s just that you’ve never done it before so you need to learn the rules. Once you learn the rules by playing with someone else that knows what the heck they’re doing, consulting with someone like our lawyers who do that, reading the rule book, I have the book that you mentioned, The Self Directed IRA Handbook, has a number of chapters on LLCs on its own. Once you learn it, it’s the same thing over and over. It’s not rocket science. You just got to get it down once like a board game and then you know how to play it and what to do.
Self-Directed IRA Vs. Checkbook Controlled IRA Vs. Solo 401(k)
We’re talking about a checkbook-controlled IRA or essentially an IRA LLC. There’s another animal out there, if you will. Let’s compare that to the self-directed IRA. That’s the Solo 401(k), which I know a lot of people like. Without getting too deep into the weeds, there are people that are probably looking at these different options and saying, “What do I do? Do I get a self-directed IRA? Do I take that a step further and get a checkbook-controlled IRA? Do I go with a Solo 401(k)?” I guess it depends on what your situation is.
We help clients in all different aspects of that, doing self-directed IRAs at Directed IRA and helping with the LLCs with our law firm. We also set up Solo 401(k). Because a lot of our competitors do one or the other. Frankly, they’re not licensed around the ability to do that, but we do them all because depending on who you are, you’re going to be a different fit for a different structure. It’s not like there’s one that’s better than the other. It’s one’s better than the other for each person. It’s different. The Solo 401(k) is cool. We love it, but it only works if you’re self-employed, meaning you have a business. Owning rental properties is not a business that counts. That’s the business, but it’s not one that accounts for retirement plan establishment purposes. Maybe you flip properties, you’re a broker agent, a consultant, drive Uber or whatever. You have a business that you are the only owner of, and this could be your sole proprietorship, an LLC, an S corp, but it’s your business that has no other employees. You can have partners; it has no other employees other than yourself or your spouse.
The key there is no employees?
Exactly. Let me say there’s a lot of detail to it. You can have part-time employees working on nineteen hours a week. Also, employees under age 21. You don’t have to count them either or employees that haven’t worked for you yet for a year. Those are the employees you have to count for this rule. If you have someone over 21 working more than nineteen hours a week that’s worked for you for a year, the Solo 401(k) doesn’t work.
Why would I choose the Solo 401(k) over the self-directed IRA if I qualify for the Solo 401(k)?
Let’s say you qualify. There are probably three reasons why. First is you can put way more money into it in terms of new contributions. You can put $6,000 in an IRA no matter how much money you make. You’re not going to be able to put more than $6,000 in unless you can put an extra $1,000. There’s not a lot of money of new contributions you can put into IRAs. A lot of self-directed IRA investors are rolling over funds. They’re not working off new contributions. They’re working off a pot of money they’ve saved for 10, 20 years so they’re rolling over. If you’re looking to make new contributions, the Solo 401(k) is awesome because you can put $56,000 a year into a Solo 401(k). That’s almost ten times what I can put into an IRA per year. I can drop more money into a Solo 401(k) per year. That’s one reason. The second reason is you get checkbook control, so to speak, right out of the Solo 401(k).
In an IRA, you have to use the LLC structure and that’s an additional cost and setup. For those in California, it’s annually a $100 fee for an LLC in California. A Solo 401(k) on the other hand, you get the checking account right out of the Solo 401(k) bank account. Your Solo 401(k) can get a bank account in the Solo 401(k)’s name. You are a trustee of the Solo 401(k) which is allowed under Solo 401(k). Under IRAs, you have to have a custodian that’s a trustee, which would be us, a trust company. Under Solo 401(k), you can self-trust yourself as the business owner. That’s the second reason. You get checkbook control right out of the Solo 401(k) if that’s an important feature that you know for the investments you want to make. The third benefit, there is a tax. I’m going to say this. That’s a warning. There is a tax on IRAs when you leverage with debt. It’s called UDFI, Unrelated Debt Financed Income. It’s a part of the UBTI tax. I know, very exciting.
Essentially, it’s a tax that applies when you leverage an IRA’s investment with debt. I want to buy a property for $150,000. I’ve only got $50,000 in my IRA, so I got to go get a mortgage. I chose to be non-recourse, but I go get a mortgage for the other $100,000 and I go buy the property for $150,000. The IRS looks at that. They’re like, “Two-thirds of this money’s not IRA money. It was a loan. We’re going to tax two-thirds of the profit.” The other one-third goes back to your IRA. You don’t have to pay tax, but the two-thirds of profits coming from the debt part, they make you pay tax on it. This is called UDFI for IRAs. Solo 401(k) are exempt from this on real estate. That’s a perk if you’re using a lot of debt to leverage real estate investments. Solo 401(k)s get out of that tax, whereas IRAs get sucked into it. I’ve got a whole chapter in my book on that. I’ve got an hour of webinar on how you calculate it on the exceptions to this and work arounds to it for IRAs. It’s a big topic, but if you’re just contrasting IRA to Solo 401(k), that is a benefit to the Solo 401(k).
What Is Profit From Borrowed Funds Taxed At?
That can be a big one, especially if you’re using a lot of debt financing for your acquisitions. It isn’t all that complicated. It’s saying, “I’ve only got so much money in my retirement account and whatever I earn or make off of that money is tax deferred within the retirement account. If I’m borrowing funds from the outside, whatever I make on those profits, those funds, I’m still responsible and liable for the tax on that earned income from that debt.” The question becomes, what is that profit taxed at? In other words, what’s the rate? Is it your ordinary tax rate?
It can seem trickier. If you have net rental income year to year, which a lot of clients don’t, even when they’re cashflowing a property inside or outside their IRA, you’ve got depreciation expense and stuff. You may be cashflowing it from a tax standpoint, you’re eating a loss. Let’s say you did have net rental income after everything you could expense with the IRA, you had this non-recourse loan or that there’s leverage with debt. You pay the trust tax rates, which is a max rate of 37%. That’s pretty crappy. When you sell the property is where we see more clients. We have a lot of clients that buy real estate and just get non-recourse loans with IRAs. It’s not that bad of a deal actually, especially as you look at it as I can increase my purchasing power and buy way more properties than I could. We’ll see them get hit with the taxes when they sell the property and have a large gain, but they still have debt on the property. In that instance, you pay tax but you only pay at a capital gains rate. You pay the federal capital gains rate, which is 20% and that’s not that bad, especially because you’re only paying it on the debt part.
As you pay down your debt over time too, that debt percentage goes down. It’s lower if you’re focusing on the debt. I’ve had other clients take a long-term strategy and say, “I’ll buy it with my IRA. I’m going to rent it, but I’m going to put all my cashflow to pay off the debt.” If you do that and you pay off the debt and hold the property for twelve months with zero debt and then sell, then there’s no UDFI you calculate a sale with an IRA. Because at the time of sale, the IRS only looks back twelve months to see what debt was on the property to calculate whether you have capital gain or not from debt. If you had twelve months of zero debt, then you’re done. You don’t have to pay any UDFI at the time of sell. There are lots of strategies and things to it. I couldn’t do it justice for the limited time we have here, but it is an important detail to know as you’re self-directing and using doing real estate and looking at debt and comparing an IRA to a Solo 401(k).
What Kind Of Real Estate Can I/ Can’t I Own In A Self-Directed IRA?
I wasn’t intending to go down that road or get that deep into it. I’m sure there are people reading this that were thinking the same question and wondering how was that treated from a tax perspective. It’s good that you answered it. This is about real estate for the most part. What kind of real estate can we own in a self-directed IRA? What can’t we own as far as real estate in a self-directed IRA?
You can own pretty much anything. I have clients that they’ve done options on real estate. One of my first deals I worked on, a client bought an option on a piece of pre-development land for $10,000 in a Roth IRA and sold the option for over $1 million profit once that land went from agricultural to freeway commercial because the county put in an exit. That was over $1 million gain and a Roth IRA. He invested $10,000 from a Roth. His account’s now over $10 million. He just does real estate deals. That’s an option on real estate. You can even wholesale a contract from your IRA. The more common single-family rentals, we have a lot of clients that are private money lenders with their IRA.
They’re lending to other investors that are maybe flipping products. You can invest in an LLC with maybe 4 or 5 other people. You’re buying a little apartment building. We do a lot of that. Even if it’s you and your spouse’s account and your friend and your dad’s account, there’s a way we can all co-invest those into one LLC to maybe buy a bigger asset. We have a lot of clients that do Airbnbs, the RPOs that their IRAs or their IRA LLCs own. The only thing you can’t do is you can’t buy personal use properties, like your residence or a home you’re going to personally use or your kids or anything like that.
Can I Use My IRA Or Get A Mortgage To Purchase More Real Estate
In terms of using your IRA to invest in real estate, and there are limited funds within everybody’s IRA, there’s only so much to go around, but then you can get non-recourse financing. Talk about that in terms of buying real estate, using your IRA, but also borrowing money or in other words, getting a mortgage to purchase more real estate.
You can do that. I’ve done it myself. As I’ve said, thousands of clients over the years. The key word is, and what you said as a non-recourse loan or mortgage, when you buy property with a retirement. This is an IRA or Solo 401(k), no matter what structure you’re using. My partner, Mark Kohler, self-directs his HSA account, which owns rental properties. You can sell direct in HSA, a Coverdell. There are all these different accounts you can self-direct. The non-recourse loan is a rule because there’s a prohibited transaction that says a disqualified person, meaning you the owner of the account, your spouse or kids. Remember, a disqualified person cannot guarantee or extend credit to their retirement account.
If I signed Mat Sorenson on a loan or I guaranteed a loan from my IRA or use my personal credit or assets to qualify a loan from my IRA, that would violate this rule. It would because of prohibited transaction. If you have a prohibited transaction, you lose the account. You no longer have a retirement account. Because of that rule, there are banks that came up with non-recourse loans where you do not guarantee the loan. They’re loaning the money to the IRA itself. If there’s a default, they’re going to foreclose and take the property back. They can only go after what they’ve loaned into. They can only get paid back what is under the loan documents. That’s a non-recourse loan.
There are a number of banks that do those: First Western Federal Savings Bank, North American Savings Bank, First Bank. There are a couple others that are more local or regional, but there’s been a lot of interest in that and there’s more and more players coming in because they’re seeing this growth of IRAs, buying real estate that want to have a product that works for IRAs. The downside is you’re going to usually put 30% to 40% down. These banks aren’t going to let you put 10% to 20% down. You’re putting 30% to 40% down because it is non-recourse. They can’t chase you down if you default. They can just foreclose and take the property.
Is There A Proper Way To Get A Mortgage Loan With Your IRA?
Is there a proper way to get a mortgage loan with your IRA? In other words, is it any different than how you would qualify and process a traditional or conventional loan?
It’s similar. They’re not looking at your credit and income, I’ll say that. They may pull credit to make sure you don’t have judgements against or anything that could tie up your IRA in a bankruptcy case or things like that. They’re qualifying the loan based on the property itself. They’re doing a lot of similar things. They’re getting an appraisal of the property. They’re going to run a rental income analysis on it to make sure the rental income will cover the rent. They’re qualifying it that way. In that way, it’s similar. It’s a little different because they’re not looking at your income or your personal stuff as much.
Even if you’re able to get 60% financing, 60% loan to value and coming up with the other 40%, it’s still more than 50% leverage. It still gives you the power of leverage to build wealth faster within your IRA, so that’s not a bad thing.
I’ll have clients come to me and say, “I got enough money. I could buy one property outright with cash.” A lot of self-directed, self-tracked investors buy properties with cash, even Solo 401(k) and IRA investors. All clients ask me, “I could buy three properties and get non-recourse loans or I could just buy one with cash. What should I do?” My answer is always, “If they’re good deals, buy three. Get the non-recourse loans, particularly the money’s real rates are pretty good still. Even if you have UDFI because you have an IRA, you’re only paying on the money you’re making. If you’re making more money and paying a little bit of tax on it because you leverage with debt, you’re only paying on the debt piece, which you wouldn’t have invested anyways. You’re ahead of the game every time.” I try to tell my clients, “Don’t get too discouraged by UDFI. It is increasing your purchasing power and many times it’s allowing you to buy more properties, which again is going to get more total return.”
That’s exactly the way I look at it. Maximize the number of properties you can invest in with your funds in your IRA and take advantage of the debt, especially the non-recourse that’s available. I see no reason not to use outside debt for your acquisitions.
I tell clients, “Don’t be scared of the tax. It’s a sign of success in many ways. It’s a sign that your investments are making money because you’re only paying it when you’re making money.”
The UBIT, Unrelated Business Income Tax, would kick in at this point. Some people like to say that it is a tax trap. In reality, it’s not a trap. You’re paying tax on money or profit that you’re making and so you’re still further ahead, like you just said.
You supercharged your account by getting more money into the investments by getting debt. It has increased your purchasing power significantly. Sometimes it’s a trap because people just don’t know about it. The self-directed industry has gotten a lot of bad players in it, I hate to say. They don’t talk about this or let clients know. People find this out 3, 4 years later when we run into clients that have worked with other people that are finally reading my book or our website. They’re like, “I didn’t know about this.” To them, it feels like a trap because they didn’t know. The right people that care about educating and let people go in eyes wide open, like us, you’re going to see that and know that. You see it in our education. It’s a whole chapter in my book. It’s on our websites, on our forums. We’re trying to make people know about it, so they make an informed decision. If you take the time to analyze it and look at your total return, you’re getting good real estate deals. It’s a no brainer. You’re going to have more total return at the end of the day despite having to send the IRS a little bit of money.
How Do I Transfer Existing Retirement Account Moneys Into A Self-Directed IRA?
My last question is based upon all the people reading this who have some form of retirement account, a traditional IRA. There’s over $6 trillion out there trapped, if you will, in these retirement accounts. Someone reading this is thinking, “I should put my funds, my savings into better use.” How do they roll over or transfer existing retirement account monies into a self-directed IRA?
It’s a two-step process. Step one is you open an account with a self-directed custodian, like Directed IRA. You can go to DirectedIRA.com. Our accounts, you can e-sign online. You set it up or whatever custodian you’re using. Step two is you request the transfer of funds, which goes from institution. You’d fill out our form or whatever stuff for the custodian you’re using. Let’s say your money’s at Schwab or TD Ameritrade and then they would send the money to us in a wire or check. It’s not a distribution, it’s a trustee to trustee transfer. It’s like you went from Merrill Lynch to Morgan Stanley, Fidelity to TD Ameritrade. You’re moving the account custodian. If you had a Roth IRA that you want to self-direct and it comes over to us, it’s still a Roth IRA. You just have a different custodian. If you had a SEP IRA, it’s a SEP IRA with us, but a different custodian. There’s no penalties or tax ramifications to it. You’re choosing to change the custodian because you want different investment options.
The one hang up on moving an account is if you have a 401(k) where it’s somewhere you work. Let’s say you’re 45 and you’ve got a 401(k) you’ve been working at. You put a few hundred thousand dollars away in it and you’re like, “I want to invest this in real estate.” You call your 401(k) administrator, they’re going to say, “I’m sorry, your company plan restricts your money while you’re still employed. As long as you’re still employed here, we will not let you roll over your money to an IRA, whether it’s a directed IRA or whether it’s a TD Ameritrade. You’re locked-in to the company’s plan. If you’ve left that employer, you can always move it to wherever you want or if you’ve hit 59.5, your retirement plan age, you can always move it even if you’re still working there.” Sometimes there’s some people that are under 59.5 and still working in a company 401(k) or even 403(b). You’re stuck until you leave.
I’ve heard that there are exceptions to that. Some companies will allow you to self-direct if you request it through HR and they get an approval. Have you ever heard of that?
Yes and no. There are a couple of ways to get around that. There’s something called an in-service rollover. Some companies will allow you to send out a portion of your 401(k) even while you’re still employed, even before your retirement plan age, under what’s called an in-service rollover. You’re generally not going to get more than half of it out, but I’ve had lots of clients over the years. They’ve been able to do what this in-service rollover. About 30% to 40% of employer plans have this option. I will say this is not the thing you’re going to get figured out. The first line of defense when you call HR or the company that administers your 401(k), they do not train their people to know about this because they don’t want you to move. It does take some diligence and such to figure that out. It’s called an in-service rollover. If you’re looking to do this and you got some money stuck, ask about that and chase that down. Be persistent.
The other would be many companies have a self-directed brokerage option or self-directed option, but it’s a self-directed brokerage option where they’re based like, “We’ll let your money go to a TD Ameritrade brokerage account, so you can day trade it if you want.” That’s what they consider self-directed. Sometimes that’s confusing. However, our law firm for 401(k) has a self-directed option and it’s not a self-directed brokerage occupancy option. It’s an option where you can roll it over to direct a trust company. We set up a custodial account and you’re effectively investing your 401(k) dollars into real estate or private companies or whenever you want.
I self-directed Roth IRA but also self-direct my 401(k) in the law firm that way. I have lots of clients that do that are business owners with employees who want to self-direct or we’ve set up that structure. It’s a little tricky to pull off. It’s not easy. There are ways to do it. Generally, you have to be the business owner because you got to drive that decision making. Try to in-service rollover if you’re maybe at a larger company, you’re not an owner of that. You can always ask for the in-service rollover. Some plans do have it where they let a portion go out even while you’re still employed.
For people reading this that don’t have liquid capital sitting there ready to invest in real estate but they have funds in their IRA, they should take a serious look at creating a self-directed IRA. They can take advantage of the opportunities with residential real estate investing. You may not have the liquid cash or the savings now, but you do have the money to invest. It’s essentially trapped in your IRA. Working with someone like you, Mat, can free that capital so that they can get invested into income-producing real estate.
Everybody starts somewhere. My largest client has a Roth IRA over $300 million. I have a few other clients over $100 million. I have a ton of clients over $10 million. A lot of people are like, “They were just rich.” No. Every IRA started at zero. I guess there’s inherited IRAs, but none of these people have inherited accounts. Everybody starts at zero. The trick is in the power of a self-directed account that’s different than just by a mutual funds or invest in the stock market. The power of a self-directed IRA is it lets you to invest in what you know. You get some money in there. If you know real estate and you spend time educating, learning about real estate, why are you investing money in mutual funds and stocks that you probably don’t know crap about?
What we’re saying and what we think the power of a self-directed IRA is it lets you invest in what you know. If you know real estate and you know I’m always talking to real estate investors and even real estate professionals, why are you guys buying? You got all this investible money over here and retirement accounts and you’re buying mutual funds because you just gave up. That’s the most lazy money out there in my mind. Let’s be more proactive about it and thinking about how we can put it to use in the real estate and the assets. Let’s have a better comfort level for that or hard assets, especially if there’s recession or things like that. Rental property values could go down, but your cashflow in your rental income doesn’t. There’s a lot of stability to it. I’m not a financial advisor. I like people to be able to invest in what they know. That’s the message we’re trying to preach, I guess.
I don’t think people should be lazy with the savings that they have in their IRA because putting money in mutual funds is minimizing your return, maximizing your risk and relinquishing virtually all control. You can do exactly the opposite by investing in real estate that you vet, choose and control. It gives you far more upside potential than anything like a mutual fund. Is there anything that you’d like to share that I haven’t asked you that you think our readers might want to know?
No. I know we were hitting some of the top ten stuff, but I do have a top ten frequently asked questions that you can get at DirectedIRA.com. Many of them have videos with them. A lot of my diagrams and charts has the main topics we think people need to know about as they get into this. If you go to learn more, you’ll get the top ten FAQs. The other thing I’ll throw out is a promo code you can use: IRADA100. That’ll save anybody $100 off setting up a new self-directed account with us. It’s off your first year fee. Our annual fee is $295. It’ll knock $100 off your first year. I appreciate you letting me come on. If someone wants to geek out on this, I got more. You can get my book, The Self Directed IRA Handbook. It’s on Amazon. It’s five stars on Amazon, so you can find it there. It’s also in Kindle version. I have a full-on self-directed IRA summit too. It’s a day and a half now. That’s all self-directed topics for a whole day and a half. Depending on how deep you want to go, those are the options. Get the ten FAQs for free. Get the book for $20 or the summit, which is a day and a half thing. That’s more of an investment of time than anything else.
I picked up your book many years ago and I do recommend it. If you want to get deeper, maybe not too deep but deeper, then pick-up The Self Directed IRA Handbook. Mat, I appreciate you taking the time to come on. If people want to learn more, they can go to DirectedIRA.com and contact you through your website.
Thanks Marco.
Thanks for coming on. We’ll have you back and we can continue this conversation.
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