Hello and welcome to another episode of Passive Real Estate Investing. I’m your host, Marco Santarelli. So I’m recording this episode Intro on the road as I’m traveling around. And I am recording this off my iPhone because I don’t have my professional studio grade microphone that I usually use to record these podcast episodes. However, you’re only going to hear that for about two minutes because I’m recording the intro and outro for yesterday’s live webinar that I did with John Bowens from Equity Trust. John is their lead educator. He does a lot of workshops and bootcamps and webinars and YouTube videos and all kinds of good stuff to educate people about retirement accounts, self-directing retirement accounts from IRAs to 401Ks to Roths, you name it.
And super, super smart guy, great guy. We do a lot of work with him both with Norada Real Estate investments as well as Norada Capital. And we have a few other ventures that we are working on in partnership with them. So, you know, they are one of the largest custodians in the country. In fact, they are the largest by a factor of 10. So we did a one hour webinar yesterday. It was chock full of great information. We covered everything from basics to advanced tax strategies on how you could use any type of self-directed account and the different situations you would use those in and what the rules and regulations are, the caps involved with funding and growing those accounts when the distributions have to take place. And the audience was actually well engaged. We had a number of questions from the listening audience, from some basic questions all the way to some pretty advanced stuff.
And even John was surprised, pleasantly surprised, but taken back a little bit saying, wow, you got a pretty sophisticated audience here. So there was some really good information and there’s gonna be a lot of good takeaways from this interview. Even if you only hear one or two golden nuggets from it, it’ll be definitely well worth your time and it’s about a one hour episode, but if you don’t have the time to listen to it in one sitting, you could of course break it up into two or three different episodes and just consume it over the course of several drives or maybe, you know, a couple of days. In other case, I was recording this webinar yesterday and I thought, wow, this will make a great podcast episode for you guys. And so here we are. I’m recording this intro. We’re gonna attach this to the webinar and let you consume, you know, the information that was presented and, and discuss yesterday in our live webinar.
So I hope you enjoy it. I hope you have a few takeaways and of course if you have any questions, you could reach out to Equity trust and their team as well as my team here of investment counselors, both on Norada Real Estate Investment side for the turnkey rental real estate, as well as on the Norada Capital side with our promissory notes that pay 12 and 15% per year, paid monthly direct deposits right into your bank account. Very simple passive investment that offers a high yield, lousy to beat inflation and is just the right fit for many people, not everybody, but for a lot of people, and especially if you have a self-directed retirement account, of course you can invest real estate in those retirement accounts as an asset class. But keep in mind that promissory notes make a great investment choice for self-directed accounts because they are simple and easy to set up and it’s kind of like a set it and forget it for the term of the note.
So something to keep in mind. But without any further ado, let’s get to that webinar interview with John Bowens from Equity Trust and Nate from my office here and myself. Enjoy it and if you have any questions we hope to hear from you and we will catch you on the other side.
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Alright, well let’s get started here. John Bowens actually is with Equity Trust. I’m not gonna steal his thunder, it’s someone who is extremely knowledgeable about self-directed retirement accounts. It’s someone who we work with extensively. In fact, our two companies are Norada Brands, Norada Capital and Norada Real Estate. We work with Equity Trust a lot. We get a lot of clients with them through them for them. And we’ve been working with them for years. I know the CEO of the company and I know their VP team. They are the largest custodian in the country by far. And we wanted to do a webinar today about self-directed retirement accounts, the different kinds, how you could use ’em, the tax benefits, how you could leverage it if you already have one, and what you should be considering if you don’t have one. So John, first of all, welcome to this short Webinar.
Yeah, thanks Marco. Happy to be here. Excited to answer some of the questions of the viewers and I’m yours for the next 45 minutes to an hour, so feel free to ask any and all questions and I’ll try to rapid fire answer as many as I can. Cool,
Well let’s start with you giving a relatively brief intro about who you are, who you’re with, and a little bit of your background. And then Nate and I will just kind of take 30 seconds to introduce ourselves and then we can just start talking about self-directed accounts and everything related to it.
Yeah, absolutely.
So I’ll be brief. John Bowens director of education and Investor success with Equity Trust. I’ve been here for 15 years. I started when we had under a hundred employees. We now have well over 500 over 40 billion in assets under custody and administration. And we’re a direct to custodian. And so what that means is we allow investors, in fact, we empower investors to use their IRAs, 401K rollovers, Roth IRAs, solo 401Ks HSAs covered education savings accounts to invest in what we call the private markets. So most investors are only accustomed to using their retirement accounts to invest in traditional stocks, bonds, mutual funds, most brokerage houses, most financial institutions are only geared and tooled to allow investors to invest in those public assets. What we do is we focus on the systems, the technology, the education, the training, all of the support around private market investments.
So when I say private market investments, I’m talking about investments like real estate investments, like private equity investments like land investments, like private money lending. As a real estate investor myself, I’ve owned real estate in myself, directed accounts, rental properties, I’ve flipped houses, I do private money lending with my self-directed IRAs. And before I came to Equity Trust Company 15 years ago, I was on this trajectory of becoming a financial advisor. Academically all I knew about was using retirement accounts to invest in stocks, bonds, and mutual funds. In fact, I was working for a real estate company, a commercial real estate company, and the company founders, I went to them and I said, Hey, why don’t you have IRAs or 401Kss? So I was learning about IRAs and all these interesting accounts and all these tax advantages and I said, why don’t you have IRAs or retirement plans?
And they said, well John, we don’t believe in those accounts because we don’t believe in the stock market. And I can’t tell you how many people I speak to, especially in the real estate space that say that. They say, well I don’t really believe in those accounts ’cause I don’t believe in real estate. What a lot of people don’t know is that you can hold real estate in an i a now there are rules and there are guidelines, there’s things you have to be aware of, but by and large you can own real estate in a self-directed ira. And there’s some really interesting tax advantages with that. And so long story short, 15 years ago I met our company founder, Dick Desi, and he’s widely known as the pioneer of the self-directed IRA industry. And he became my mentor. And so I learned from him that you could flip a house in an ira, you could do a real estate option, you could do private money lending, you could invest in a real estate syndication.
And so I started gaining exposure to a lot of very interesting people like yourself, Marco, and like a lot of the other folks that we’ve met at different conferences and seminars that were using IRAs and 401Ks to invest in privately held companies venture capital funds, investing in promissory notes, investing in private money loans secured by real estate, investing in real estate directly. And so I really started to learn the business and get involved. And so fast forward, you know, 15 years later and this is what I do, I educate on the topic. I routinely join conferences and seminars. I’ve trained over 60,000 investors over the last 15 years and just really excited to continue to spread the word about how folks can take advantage and control of their own retirement account.
Yeah, that’s awesome. Thanks John. Yeah, there’s a lot of power there. That was a great intro and it covered a lot of ground. The one question I’m gonna ask you here in a minute is, with all the things you can do with a self-directed account, what are the things you can’t do? I know it’s a simple answer for you, but hold that thought, Nate. Take 20 to 30 seconds. Just introduce yourself and I’ll do the same. We’ve got a lot of people on the webinar and some of these people are new so they don’t know, really know who you are. I think most people know who I am, but go ahead.
Yeah, yeah. So for those of you on the webinar that have talked to me or have met me, usually Mark when I do these once a week, so I’m a familiar face if you don’t know who I am. I’ve been working with Marco for over three years now on, on the Norada Real Estate side and now the Norada Capital side. So I help investors invest in rental properties. Our brokerage, you know, I mean, gosh, we probably do six to 800 transactions a year, if not more with investors. And a good chunk of those come inside of self directed IRAs or solo 401Ks, right? So this is a good pertinent topic to talk about today as well. I also work on the neurotic capital side and this is what we’ll discuss this quite a bit today ’cause that’s what this is. This is for, you know, we’re a promissory note fund, a 5 0 6 Reg D offering, which is another type of investment that you can use inside of your self record IRA or solo 401K. It is a, you know, it’s a, it’s an alternative investment. So I’ve worked with investors on off for decade. I’m an investor myself. I’m doing a half acre land development project here in San Diego. I’ve invested outta state, I’ve lent private money, I’ve borrowed private money. So I have a pretty extensive background in this world and I’ve also helped probably over a thousand investors either invest in promise or notes or real estate that have self-directed IRAs. So I’m get quite quite the background there.
Good stuff. Thanks Nate. So for me, just keep it brief. I’m the founder, CEO of NORADA or Real Estate Investments nationwide brokerage of turnkey rental properties and also the founder and CEO of Norada Capital. Two related companies under the same brand, but both have offerings. One is real estate based. One is essentially a private equity firm that offers investments through promissory notes, which is essentially a loan from you, the investor. And you will receive like a 12% rate of return or a 15% rate of return fixed per year. And it, it’s paid monthly through direct deposit. So very simple. We can touch on that again later. John, with everything you talked about that you can invest in using self-directed retirement accounts, it sounds like you pretty much covered everything and excluded nothing, but there are a few exceptions to that. So just briefly talk about what you can’t use self-directed accounts for or any kind of, you know, IRA or 401K.
Yeah, so there are certain assets that an IRA or solo 401K or other tax advantage retirement account, I call these tax advantage retirement accounts or tax advantaged accounts because there’s actually other accounts that don’t fall under the retirement account umbrella, like a health savings account or covered education savings account that could also be used and are tax advantage. So that’s why I use that term tax advantaged account quite a bit, just so everybody’s on the same page. And so as far as what you can’t do, it’s interesting when the law was created, and this goes back to 1974, the Employee Retirement Income Securities Act. So is this marvelous piece of legislation back in 1974. I know all of your viewers are gonna go out and google this and start reading every page of the ERISA Act of 1974. I will tell you, I’ll save you time and say you can go to 49 75 of the Internal Revenue Code and you’ll see that it specifically says what you can’t do in your IRA, but what they don’t say is what you can do.
So they’re exclusive rather than being inclusive. And that’s good. That’s good that the law was created that way. And they’re not telling us, Hey, here are only the types of things that you can do. They tell us here are the things that you can’t do. So what can’t you do with your ira? You can’t use your IRA to invest in collectibles. So no artwork, no beanie babies, no pogs if anybody remembers that, no collector’s cards, things of that nature. There are certain coins that you can hold in your IRA if they meet the certain fineness requirements under section 4 0 8 M. That’s another section of the tax code. I know a lot of people are gonna run out and read. You also cannot use your IRA to invest in alcoholic beverages and life insurance policies. And your IRA can’t be a member of an S corporation and your IRA can make a loan to an S corporation.
So I’ve made loans to s-Corp, for example, a real estate flipper. They’re structured as an s-corp. My IRA makes a loan to them and I receive interest in principle payments back or interest in principle upon the sale of the property. That’s okay. But my IRA can’t be a member of an S corporation. My IRA can be the member of an LLC. My IRA could be a shareholder in a privately held corporation. My IRA could make a loan via a promissory note instrument to a company. We see those types of transactions very routinely. And last but not least, to conclude Marco and and Nate and for all the viewers out there, your IRA cannot engage in certain transactions which are defined as prohibited transactions, prohibited transactions. And really what this is saying is that your IRA cannot transact with a disqualified person who are disqualified persons to your IRA yourself, your spouse, your children, your grandchildren, your parents, your grandparents, any businesses that you own and operate.
So the best way to think of it is these are really common sense principles. The IRS gives you these very powerful tax advantages, these IRAs and retirement accounts. You can create wealth and if you do it the right way, you can eliminate the burden of taxation and eliminate the burden of taxation even when you take the money out or leave it to your children or grandchildren. And so with those very strong benefits comes, you can’t self deal. Now what I can do, and you’ll hear this talked about routinely, you can partner your IRAs together with your non IRA funds. For example, I bought a piece of real estate, it was a a two family home back in 2020. And I partnered my traditional IRA, my Roth IRA and then some non IRA money. And it was 55, 35, 10%. And then I sold the property two years later after we put about $15,000 worth of work into the property, had it tenanted, it was cash flowing.
We actually sold it to an out-of-state turnkey investor buyer. And I understand you’re in the turnkey space as well, Marco and Nate. And so I’m in Cleveland, Ohio. We have pretty strong cash flowing property opportunities. And so we saw it as an opportunity to buy it, add value, sell it, make a profit, and then all our profits flowed back in 55, 35 and 10%. Now what was really interesting about this transaction is 90% of all of our profits went back to our tax-free accounts, our tax advantage accounts, it was about $35,000 in capital gains and we paid 0% tax long-term capital gains, which was really great because we saved $5,000 in taxes that gave us another $5,000 that we could go out and do more investments with. And so to, to conclude that, that question Marco there are those assets that you can’t invest in, which for the most part people aren’t interested in using their IRAs to invest in those assets anyways. And then there are certain people that you can’t transact with, can’t buy, sell, lease from lend money. And for the most part you wanna stay away from those transactions anyways. You wanna do new investments, new opportunities with your tax advantaged accounts, that way you can preserve the tax tax-free treatment.
Cool. Very thorough. So I forgot to mention early on that we’re gonna take some questions towards the end. There’s already a couple people who have dropped some questions in there. They’re both really good questions. We’ll address those here in about, I don’t know, 25 minutes or so. I wanna cover some more stuff with you. So just as a reminder, if you have a question, you can just drop it into the q and a box, not the chat box, but the q and a box on Zoom. So let’s get back to a question that piggybacks off what you just said. It is my understanding, first of all, there’s a lot of new people on here and there’s a lot of sophisticated people on this webinar. So we’re gonna cover like both sides of the knowledge spectrum. It’s my understanding that by law IRAs or retirement accounts are all self-directed by law in nature. The restrictions don’t come from the laws, the restrictions come from the trust company or the custodian or the the the investment company or brokerage that you’re working with. Is that true? And maybe just touch upon that.
You are absolutely correct Marco. So what I like to say is self-directed is just an industry term. It just indicates to the investor that they have the ability through the right financial institution. So for example, equity trust, we’re a custodian that refers to our IRAs as a self-directed IRA because we want the public to understand that they can open up an IRA and they can truly self-direct into what they wanna self-direct into. Whether it’s publicly traded stocks, bonds, and mutual funds, which we still allow people to do or invest in real estate promissory notes, privately held companies, so on and so forth. So just remember that self-directed is an industry term. In fact for those that might be concerned or maybe they’re working with a financial advisor or ACPA or a spouse or other loved one that says, you know, that doesn’t sound right. I mean, I’ll tell you, when I came into the business 15 years ago, I was highly skeptical back then 15 years ago this was not as popular it is as it is today.
And I remember being very skeptical because I never learned about it academically. I thought in my mind, hey, I spent thousands of dollars. I was talking to some of these elite professors that were teaching me about managing stocks and mutual funds. I mean if this was legal, if this was okay, they would’ve told me about it. Well unfortunately a lot of people don’t know about it because there’s no financial incentive for the traditional financial institutions to tell their customers about this. Why? Because that would be selling away from their firm. So the everyday advisor that helps their customers invest in traditional assets, they’re likely not gonna bring this up to their clients. And that doesn’t mean that they’re doing something wrong or they’re a bad person. I work with lots of financial advisors across the country and so we wanna respect that. It’s just that’s not what they’re focused on.
That’s not their core competency. Yeah. And that’s where an individual can take control and really become their own advisor, right? And use a custodian like equity trust for example. And there are others out there too. Let me be respectful to everybody on today’s call. And it’s important to know that if you have anybody that is skeptical, you can actually go to the IRS website irs.gov. It’s a great website. I encourage everybody to go there. I tell these dry jokes to create some sort of humor around taxes and sometimes I get laughs, sometimes I don’t. And so you go to irs.gov and you search real estate IRA FAQ and you’ll actually see in black and white where it specifically says that real estate is a permissible investment in an IRA. But due to the administrative burden, financial institutions are not required to allow you to hold those types of investments. So it’s not a matter of legality but rather a matter of choice. Mm-Hmm <affirmative>. Now could you go to a traditional financial institution, open a self-directed IRA, sometimes you can, sometimes you can open up a self-directed brokerage account, which means you can invest in mutual funds and publicly traded assets, but you can’t invest in real estate and other types of private securities.
Yeah. Yeah. And John, just to piggyback on that real quick Mark if you don’t mind, a lot of clients I work with say, oh, I have a self re I have a self directed account. It’s with Schwab or it’s with you know, a bigger institution. So can I get my, can I get my promise or start now or can I invest in this property now? And I have to say, well let’s pause for a second. Typically, even if you have that self-directed brokerage account, you still need to do that in-service rollover, right? The industry term is in-service rollover to a self-directed IRA or a solo 401K like you with you guys, right? It’s this all all wrapping it all around and saying, Hey, if you have a self-directed IRA out there and you’re on this webinar, you wanna go to your custodian first and ask, can I do alternative investments? If you can’t, you can still do an in-service rollover, which is a non-taxable event to a company like John’s, like equity trust. Now you’re with a custodian allows those types of transactions. So it’s a really important point. Good, good topic.
Yeah, that’s a great point Nate. And and quickly, Marco, I should mention for everybody that if you’re going to self-direct your retirement account, you may not wanna move all your money over into a self-directed ira. Now maybe you do, maybe you wanna move it all into a self-directed IRA and you wanna invest your monies into real estate and other private assets and you don’t want publicly traded assets anymore. And that absolutely makes sense if that’s what you wanna do here at Equity Trust, we don’t give financial advice, tax advice, legal advice. We don’t tell you what your portfolio should look like. Should you have 60% private, 40% public, should you have 90 10, that’s entirely up to you. And that’s really the beauty of it is you get to make that decision and over your lifetime you can alter that and change the balance based on your situation.
Really important to know that when you move from one retirement account custodian or administrator to another custodian, you’re not creating any type of taxable event or any penalties, you’re just doing a dollar per dollar. We call it a trustee to trustee transfer. And when you’re working with a custodian, they will help you with that process. So for example here we have what are called our private client group onboarding specialists. And so these onboarding specialists will actually take a customer by the hand and sort of walk them through their transfer rollover from their existing custodian. And it’s all based on what that individual wants. If they wanna move all of it, they move all of it. If they wanna move just a portion of it, that’s fine. If they wanna move some over for their first deal and then move more money over to later date, they can absolutely do that.
Love it.
Just to conclude that topic, I like to just say this, that Wall Street wants your money as much as it as they can get and they wanna hold onto it. So that’s why, you know, these large institutional brokerages don’t want you to leave. They wanna hold onto your money and they give you what I call a menu. You can invest in all these things but nothing else. And if you wanna invest in anything else, they don’t make it easy for you essentially. But they’re basically saying, look, if you don’t wanna invest in our menu of investments, you have to go with equity trust or someone else. And then you can self direct it at that point. So believe me, they don’t tell you about it ’cause they don’t want to lose you as a customer or a client and they wanna hold onto your funds because that’s how they make their profit.
They arbitrage your capital or they, you know, profit from their fees, whatever it may be. So just keep that in mind. The, the takeaway here is that you can self-direct your retirement account in almost every case. It’s just a matter of who your trustee or custodian is. So just keep that in mind. Alright, sometimes we have to go back to basics. Can you just take two minutes if, if you can do it in two minutes, but a few minutes, talk about the different types of accounts. ’cause Some of these questions that are coming in touch on different types of accounts such as IRAs, 401Kss, solo accounts, Roth accounts. Can you just kind of break down the world of self-directed types of accounts so we know what the landscape looks like and then we’re, we can drill it into some of them.
Absolutely. And I can see the questions too Marco. So I’ve been sort of reading through those so I can try to answer them as I speak. So the different types of self-directed accounts, I’m just gonna give you a list for everybody and then I’ll kind of compare and contrast. So you have a traditional IRA and a Roth IRA, those are your two most popular self-directed accounts. And remember self-directed is an industry term. So when you open an account, we, we sort of joke in the industry when I talk to other competitors in the industry, we all get together at times and and we chat and we all tell the same stories, which is people look at our account applications and they’ll say, Hey, I wanna open a self-directed ira, not a traditional ira. Self-Directed again is just an industry term. So you’re gonna see traditional IRA and Roth IRA, those are your two most popular.
And then from there, if you’re a solopreneur, a business owner, you can actually look at a business retirement account and there are three business retirement accounts that you’re here of a SEP IRA, simple IRA or solo 401K. Now the industry really spends a lot of time talking about the SOLO 401K, especially around real estate because there’s actually some interesting elements of a solo 401K that you don’t get with an IRA that can be really attractive to a real estate investor. Number one, if you have enough earned income as a solopreneur, you can put a lot more money into a solo 401K compared to an IRA. In fact, if you’re making enough money, that is you’re paying yourself an actual salary or owner draws and you’re paying Medicare and social security tax. So it has to be legitimate earned income. But if you have enough of it, you can actually get up to 66,000 in a solo 401K when you’re under 50, 73,500 when you’re 50 and over. That’s for tax year 20 23, 20 24. Those numbers are gonna go up a little bit. Those
Interesting, so huge number compared to the other accounts.
Correct? With an IRA Roth or traditional right now you can put up to 6,500 when you’re under the age of 50 and 7,500 when you’re 50 and over. Now if you have 401Ks, 4 0 3 bss, thrift savings plans, other employer plans and you’re eligible, you can roll those monies over into a self-directed IRA or if you qualify into a self-directed solo 401K. And then last but not least, there are two non-retirement accounts. I referenced them before but I’ll mention them here for everybody as I go down my list. The health savings account and the Coverdell education savings account, which are really interesting. I with the Coverdell education savings account for example, I had a client last year put $2,000 in for his daughter. She was 17 at the time in college now and he went out and he got a hard money loan from an investor and the cover Dell education savings account bought a property purchasing rehab was 190,000.
The cover Dell account borrowed nearly 100% of the financing for the purchase and rehab. He sold the property, he ended up making over $44,000 in profit on the deal. Now you will learn with a cover de account, there’s this interesting tax or IRA, there’s this interesting tax when you take on debt called unrelated business income tax. He did have to pay some tax, but when it was all said and done, he still ended up making over $25,000 tax free. And that’s $25,000 tax free that he’ll be able to use for his daughter’s college tuition. He’s using it right now. His goal is to flip a house every year and ultimately he’s gonna have tax free profits that are gonna pay for his daughter’s college tuition. All the, all the tuition, all the room and board, all the transportation, everything. Now with a solo 401K back to that quickly is solo 401Ks have an interesting exemption around unrelated business income tax as it relates to debt finance, real estate acquisitions.
And so that’s, that is a, a reason why some real estate investors really like the solo 401K compared to the IRA. So from the top down traditional IRA Roth IRA, those are the two most popular. Then you have your business retirement accounts sep, simple solo 401K and then your HSA and your covered education savings account. Now the last thing I’ll conclude with is IRA versus solo 401K. These are all self-directed. So you can come to go to a custodian, not all, but you know, I’ll speak on behalf of the firm. I represent equity trust. You can come to Equity Trust and you can open IRA or you can open a solo 401K. Now how are you gonna determine which account? Well, it’s gonna depend on what you wanna do and it’s also gonna depend on whether you’re eligible or not.
Not everybody qualifies for a solo 401K, whereas an IRA almost everybody qualifies for an IRA it’s very easy. But a solo 401K, you have to have a business that’s actually producing active earned income. If you don’t have active earned income, meaning income that you’re paying self-employment tax on or Medicare and Social Security, then you can’t open a solo 401K and it may just make more sense for you to have an IRA at that point anyways. And keep in mind that if you have existing IRAs or 401Ks or other retirement plans, you can move those over into a self-directed IRA in most cases. And then at that point, if it’s a solo 401K that makes more sense, you can always move the money into a solo 401K or you keep it in an IRA and you invest directly out of your IRA, which is what most people do.
And I, and I think, correct me if I’m wrong with a solo 401K, you can only have a maximum of one employee other than yourself in your business in order to set up a solo 401K.
Yeah, with a solo 401K you cannot have any W two employees, 10 99 contractors or 10 99 contractors. You don’t have to worry about that. But if you have any W two employees other than yourself or your spouse, then you can’t have a solo 401K. You have to look at a SEP simple or maybe set up a multi participant 401K. But keep in mind that that spouse exception, which is interesting. So let’s say I’m a a real estate agent. That’s a great example. I’m a real estate agent. I’m a solopreneur, let’s say, and maybe I have an LLC, maybe I don’t, doesn’t make a difference. I’m a real estate agent, independent contractor, I’m going out selling real estate. Now assuming I don’t have any employees, then I can open up a solo 401K and start making contributions into that plan. And I can even put money into a Roth bucket, which is after tax and it grows 100% tax free, which we love tax free savings of course in a Roth. And then let’s say my spouse comes and works for the business, that’s fine. Spouse can come work for the business and they can have their own 401K participant account and be maxing out contributions there. But the moment I hire AW two employee into the business, that’s where things change. And I no longer can take advantage of the solo 401K.
Quick question. I know Nate, you wanted to say something, but what if you already have a solo 401K set up within your company, called it an s-Corp or whatever it may be, and then after the fact, a year down the road you hire your first W two employee. Does that change anything with your existing solo 401K
Materially change it? I I’d say no. What you would do at that time, you do one of two things. Either A, you would terminate the plan, no taxes or penalties. You just close the plan and you roll everything over to an IRA. But if you have real estate and other assets in there, that might get a little complicated. So the second option is you would convert that plan, they call it a plan conversion. You would convert that plan into a plan, which most likely is gonna offer what they call Safe Harbor provision. And now you can actually allow those employees that are eligible to participate in the 401K. So in other words, what you’re doing is you’re growing as a business and you’re gonna take that solo 401K plan and then graduate up to a multi participant 401K in order to comply with the ERISA laws.
All right, thanks Nate. You had something to say a minute ago.
Yeah. great education by the way, John. I love, I love listening ’cause I, you know, I’m constantly learning as well, so thank you. A couple things to reiterate. So for the investors out there that are considering a rollover or contribution, I wanna make sure we delineate between rollover and contribution, right? John mentioned some really big numbers of the solo 401K 77 or 66,000 at the top end, you know, less with an ira, that’s a contribution, right? So there’s a difference between a contribution and a rollover. If you guys have a, an account that has $200,000 in, in an IRA and you wanna roll that entire 200 over, you certainly can. There’s no quote limit. I think there’s might, there might be yearly limits in how many rollovers overs you can do. And John, you can help me with that. But there’s no necessarily limit amount on the amount you can roll over.
There’s only a limit to the amount of contribution you can make in a yearly basis, right? So you could roll over $200,000, but there’s only gonna be a certain amount of limit of contribution in 2024 first per se. So just to make sure we’re clear, when we delineate that there’s no amount there and going, going back to the tax piece, the, the UBIT and the UDFI, you know, those, those types of taxes inside of the IRAs and, and obviously solo 401K being exempt from that, if you’re for our investor, if you’re doing a promissory note with us, you are not subject to ubit to any type of taxation inside of your self-directed IRAI just wanna make that clear so there’s no taxation with a promissory note. What John is really referring to is if you’re using debt in any way to invest in something like a, like a hard asset in a self-directed IRA, the, the debt that you create when you’re buying that asset with debt, the income that that asset creates is subject to an income tax. In this case, when you’re doing a promissory note, there’s nothing more than a loan agreement directly between you and neuro on capital management. There is no really tax hit to you. So
That, that’s a great point, Nate is for example, I, I’ll give you a real example for everybody. So, and to, to reiterate to make sure everybody’s on the same page, that unrelated business income tax only comes into play when you buy property with a loan. So if I go out and buy a hundred thousand dollars property and I put $30,000 down with my IRA and then borrow the 70,000 for the, for the purchase, that’s where I have unrelated business income tax. But if I go out and buy a property as a cash buyer, I don’t have to worry about it. If I make a private money loan, I don’t have to worry about it. If I invest in a privately held company, as long as it’s structured the right way, I don’t have to worry about it. Yeah,
A a good example is I made a, an $80,000 loan to a house flipper. So one of the ways that I, I keep my money working for me is I’m a private lender. So I find people that flip houses, I make loans to them, I charge them interest. And usually these loans pay back anywhere between six to 12 months, maybe 18 months top. But these are short-term In-N-Out transactions. And so about four months ago I made an $80,000 loan for a house flipper to acquire and flip a house. And in three months, just last week, I had my $80,000 in principle plus $5,600 in interest profit interest income. So I got a check, I loaned $80,000, I had a promissory note in a mortgage first lien position on the property, and I got my $80,000 principle back plus 5,600 in profit. And that 5,600 in profit went into my Roth account because I have a, that deal was done with my Roth account.
And so my Roth account made the 5,600 in profit. And how much do I have to report of that on my income tax return? Zero. I don’t even have to report it. It’s in my IRA, it’s just like owning a stock mutual fund bond, any other traditional investment, which what most Americans are familiar with. So that profit goes back into my Roth. Now if I pass away, my wife gets my Roth tax free, she doesn’t have to worry about it, it avoids probate. If we both pass away, it’s gonna be left to our heirs. So it’s left to our niece and nephew. They pay 0% tax. So it, it, it gets really interesting once you even get into the legacy planning and estate planning components of these Roth accounts and how powerful they can be from a tax-free perspective.
Yeah, I love it. Thanks for clarifying.
Let’s jump into some of these questions, but before we do that, I’m gonna throw a quick one at you here. There’s obviously a lot of benefits and advantages to all these different types of self-directed accounts. Why do some or a lot of people not actually take advantage of self directing either an IRA or 401K? Is it a matter of fear or are there just common misunderstandings? Wh why aren’t more people taking advantage of self-directed accounts?
Yeah, fear and misconception, I would say it’s something that they’ve never heard of. They are more familiar with going to a financial advisor and being advised to invest in stocks, mutual funds, other traditional investments. Mm-Hmm, <affirmative> some financial advisors are open to their customers wanting to do this. And then there are other financial advisors that might be very, very guarded and you just have to be careful about that. I have a video I created, it’s a simple YouTube video that folks can use to learn more about this and then even provide to their CPA or financial advisor so they can learn more about this. So over time, we’ve provided some tools and resources for new folks so they can learn more about this. And ultimately if they have people in their sphere of influence, advisors, CPAs, other family members, they can share that content with them as well.
So fear and misconception, not understanding the process, it’s a fairly straightforward process, but it’s different than, you know, clicking a mouse and buying a stock or mutual fund. And so that’s why you work with a custodian and the custodian will help you through the process and the paperwork and the items necessary to transact. And then last but not least, I’d, I’d also say that that there’s, although there’s more people than there were 15 years ago, and Nate, I’m sure well, and as well as Marco, you, you’ve seen the evolution over time. But I will tell you that statistically and, and some of this is coming from the IRS, there’s only about 150 billion in true alternative assets. Like we’re talking about in retirement accounts, 150 billion, yet there’s 13.2 trillion in IRAs. And if we account for 401Kss and profit sharing plans and defined benefit plans, pension plans, state pension plans, so on and so forth, it’s like over 40 trillion.
And so it’s, it’s still a very small percentage of, of people about 500,000 people. And another statistic, which I find really interesting, there was a government accountability office study that was done back in 2016 into 17 ish. And this study talked about how the IRS examined IRAs that have over $5 million. There’s only 9,000 IRAs that have over $5 million. And and I truly believe that that’s gonna change, that number’s only gonna increase. And I’ve seen that number increase over time as people are investing in, in unique investments that create unique profitability beyond what maybe they can make now in the traditional stock market. I mean, after all, that’s why people do this because they feel they can secure a better retirement by investing in private assets compared to public assets. And so when they looked at these, these IRAs, these large IRAs, they found that 25% of the reported value wasn’t hard to value assets.
And you know what hard to value assets are, they’re private assets, they’re alternative investments, real estate, private equity, hedge funds, promissory notes, right? Potentially gold and silver, even digital assets like cryptocurrency that those are private assets. And, and they went on, and I’m paraphrasing here, but they went on to say that, you know, they, they suspect that the value of these accounts is over 5 million because these people are investing in private assets. Mm-Hmm, <affirmative>. So the high net worth individuals, family offices, ultra high net worth individuals have had allocations, pensions, sovereign wealth funds have had allocations to private assets for lot of, a lot, lots and lots of years. Yet the everyday investor hasn’t really had access to this. But that’s why I, I really appreciate what you’re doing Marco and Nate in that you know, you’re helping people gain exposure to private assets, private assets that they otherwise wouldn’t be able to gain exposure to through their traditional financial resources that they have. So I, I think that’s an interesting statistic and sort of proof point and really tells the story on, you know, hey you, yeah you can do this. There are people out there that are doing this, but it’s not every man, woman and child in America and it just is not mainstream.
Yeah, exactly. Yeah, yeah, yeah. We want to help as many people as we can invest in income producing residential real estate through the Norada Real Estate investment side and of course through promissory notes, high yield promissory notes on the Norada Capital side, you know, these are just part of that list you mentioned that you would call alternative assets or alternative investments. So, but a lot of that is gonna come through education, like what we’re doing here today with this webinar through our podcast and everything else. So we’ll just keep plugging away. But it’s gonna take a lot of time and effort by a lot of people to get more and more people on board with that 13 point something trillion dollars that’s sitting out there <laugh>. We’ll try and tap into it as best as we can. <Laugh>. All right, let’s take some questions. First one for Mark, I think you more or less answered just through several of the things you said, but what’s the difference between a self-directed IRE and a solo 401K? I don’t know if you want to add anything more to that, you’ve more or less addressed it, but if you wanna to touch on it.
Yeah, so I, I think we did address that, but the one question that was, and I think a couple other people asked this question too that I should mention is what is the difference between a traditional IRA or tax deferred IRA and Roth IRA? So a traditional IRA is tax deferred, meaning when you put money in, you get deductions, it grows tax deferred and then when you take the money out you gotta pay taxes. And that’s after the qualified retirement age of 59 and a half. When you take money out after 59 and a half with a traditional IRA at that point you pay taxes, I always use the analogy, have pay taxes on the seed or on the crop. You then have a Roth IRA Roth IRA is the opposite. When you put money in no deduction, it grows tax free and when you take the money out, you pay 0% tax. So we love the Roth IRA and you can imagine compounding interest in the absence of taxation when you’re generating returns that are significantly higher than what maybe you could make in the public sector. Why wouldn’t you wanna pay the taxes on the smaller seed than the larger crop?
Now there’s no guarantees, right, that you’re gonna make those outsize returns. That’s your job as an investor to seek out those opportunities and take advantage of that. Yeah, but that’s the difference between a traditional and Roth solo 401Ks. If you set it up with the right firm, you have both buckets. You get both a traditional and a Roth bucket and you can make the decision on which bucket you wanna put your money into. And let me make sure I mention that when I say take money out at 59 and a half, I’m talking about when you wanna harvest the income, when you wanna harvest the money in there. But if you wanna roll your money over to a self-directed ira, let’s say you’re 30 years old and you got $200,000 in a 401K, you leave your job, you wanna roll that $200,000 over into a self-directed IRA and then you wanna make a private money loan or you wanna buy a property, that’s an investment.
You’re not taking money out premature, you’re not being taxed or penalized, you’re actually making an investment. And that’s really important to understand. It’s no different than buying a stock or mutual fund compared to real estate. If you buy a stock or mutual fund, cash leaves the account in return is a stock certificate in the public arena it’s all electronic. Now if you buy real estate, it’s the same concept. Cash leaves the account in return for that. Cash is a deed to a property, it’s an investment. As long as you do it the right way, you’re working with the right custodian, you’re not creating any type of taxable event. So that’s due between traditional and Roth. One of the other questions I see in there, Marco is about a Roth conversion. So I’ll touch on that. If you have traditional IRA money now and you say, you know what?
I feel strongly that I’m gonna drive the performance of this account in a very meaningful way and I would rather pay taxes on the smaller seed than the larger crop. You can do what’s called a Roth conversion where you can convert money from your traditional into your Roth, pay the taxes based on the amount you convert and now you’re tax free going forward. Now there’s no penalties to do this. You just have to pay the taxes of course. ’cause You never pay taxes before. It’s called a Roth conversion. Give you a quick example. I have two clients, husband and wife. They had about 117,000 back in 2010, 2011 from their old 401Kss and they rolled their money over in, over two years. They converted that money into Roth IRAs. They’ve since done a number of real estate transactions. They still have 14 cash flowing properties in their Roth IRAs.
They’ve grown their Roth IRAs to over $2 million in assets in cash. They also do private money lending, real estate and private money lending. And they have $200,000 in cash flow coming in every single year into their Roth IRAs. They own free and clear properties, you know how much they pay in taxes every year on that $200,000 0% and they’re over 59 and a half. So they can take money out every year and they pay 0% tax, they sell their properties, no long-term capital gains tax, no recapture depreciation. It’s all tax-free in their Roth IRAs. So that’s, you know, tho those are sort of grand slam transactions. Some people might be looking at that and saying, well, that that seems 10 to 11 years. That might be a little bit lofty for me and that’s okay. You know, your goal might be a little bit longer term.
But that’s one example of the Roth conversion. The the other thing I’ll mention is think about we’re at the end of the year right now. So let’s say you have a hundred thousand dollars in a traditional IRA and you want to convert this to the Roth so you can be in a tax-free environment. Well, let’s say you convert 50,000 now and then you wait about two months from now, right? We’re getting close to the end of the year. So you wait about two months from now, you convert the other 50,000. What you’ve effectively done is spread your tax burden out over two years. I like to call this converting in stages or phases. And lastly, and then we can get to the next question is also think about small dollar investment strategies. Now this would be more for if you’re somebody that’s out there finding opportunities, right?
This is, this is a strategy for you. If you’re somebody that wants to take a more passive approach, may not work for you. But, but just bear with me for a moment. Think, think about this as a, as an example, I have a client, his, his name is Doug. And Doug has a, had a Roth IRA. This is about three, four years ago and you only had about 13,000 in some change in the account. Doug’s an active investor. So he goes out and finds opportunities, he negotiates the opportunities. This is all real estate. He flips houses, he has rental properties, he is very active in the real estate space. So he was a little bit late to the game and setting up a Roth ira. He’s got about 13,000 some change in it at that time. And he finds an opportunity in Dayton, Ohio. It was a three bedroom, one bathhouse, fix and flip opportunity.
He needed about $106,000 purchased in rehab. He didn’t have 106,000 in his Roth, he only had 13,000 in some change. So he finds a financial friend, can’t be a disqualified person, can’t be those persons that I talked about before. Can’t be your own money. So Doug finds a financial friend, financial’s friend name is Ron. So Doug and Ron get together and they put this deal together. Doug brings his 13,000 and some change Roth into the deal. Ron finances a majority of the purchase and rehab, it was $106,000 deal. They sell the property, they make a $68,000 profit and Doug negotiates 50% of the net profit. So Doug investing only 13,000 in some change, ends up making about $34,000 tax free in his Roth IRA. And that was because he leveraged the capital of a financial friend. He found a deal, brought it to the table, brought it to a financial friend, put it together, commanded a 50% profit split and made $34,000 tax free. So I know I just gave people maybe a little bit too much there, but just wanted to get the seed planted on that concept of conversions and the concept of potentially being able to go out and find opportunities and do some smaller dollar transactions for those out there that maybe are working with a smaller amount of money to get started with.
Yeah, that was a great example and it it’s probably got a lot of people’s minds, you know, churning with different ideas. ’cause There’s so many different strategies in how you can take advantage of the capital you have in your self-directed accounts or leverage it or partner with other people to create larger returns than you would just in the stock market or with just traditional stocks, bonds and mutual funds as you would say, you know, before. So there’s a lot of power there. But there’s two things I was thinking of as you were talking that I want to mention, which I think is important to know. One, I don’t remember the exact numbers, John, you’re gonna have to correct me on this, but if you were employed with an employer from years past and you had an employee-based 401K plan and you still hold that today, but you’re not employed with that company, you have the ability to roll that into a self-directed retirement account and take advantage of that, a stash of cash, if you will, from the other plan and put it into a new plan that you own and control as a self-directed account.
So what do people need to know about that in order to do that? ’cause I’m sure there’s people listening to this today or tomorrow that have one of those plans and didn’t know that they can roll it into a self-directed account.
You’re absolutely correct. So if you have a 401K, 4 0 3 B 4 57 thrift savings plan, th these are essentially all employer-based accounts. So if you work for the government, you don’t get a 401K that is federal government. You get ATSP plan for all intents and purposes. These are all employer based retirement accounts and when you leave that employer you can roll that money over into a self-directed IRA, no taxes or penalties. You’re just moving from dollar per dollar from one account to another. I am routinely asked, well what if I’m still working for my employer? What if I’m still working for the company that gives me this benefit of a 401K? Well, seldom can you roll the money over into an IRA while you’re still working. There are some exceptions to that rule. And here’s what you could do. You could call your plan administrator and ask them if you can take what’s called an in-service withdrawal.
That basically means while you’re still working you can roll the money over into an IRA or wherever you wanna roll it into. When you’re 59 and a half or older and you’re still working for the employer, chances are really good that you can roll the money over. ’cause The 59 and a half age is the qualified retirement age in the us Most plans offer that capability for you to roll money over while you’re still working. But once you leave that employer, there’s nothing holding you back. You can immediately roll the money over into an IRA And I see Paul mentioned what about a backdoor Roth IRA. So what Paul’s referring to this is really important. Paul, I’m really glad that you asked this question ’cause a lot of people fall into this category. If you make too much money, you’re not allowed to contribute to a Roth IRA.
Now how much is too much? Well, we’d have to go through a little bit lengthier conversation around these numbers. But let me give you the quick high level. If you’re married filing jointly and you make over about $218,000 modified adjusted gross income, you’re not gonna qualify to contribute directly to a Roth IRA the entire amount You can now. That’s okay. Don’t worry about it. ’cause Here’s what you can do. You can do what Paul’s talking about a backdoor Roth IRA. All you have to do is contribute first to a traditional IRA which doesn’t have those restrictions. And then you immediately do a conversion to a Roth IRA. Your net effect is after tax dollars. Now you’re not being double taxed, you’re just going into the traditional IRA, which is a tax deductible account first. Then you convert it over to a Roth. And so that means every year, no matter how much money you’re making, you can get money into a Roth IRA. Now this did not exist prior to 2010. Couldn’t do it prior to 2010. ’cause If you made over a hundred thousand you couldn’t convert to a Roth IRA. So that’s why they called the backdoor Roth IRA because the law changed in 2010 and allows anyone to convert money from a traditional to a Roth. Now you can convert all of your traditional IRA money to your Roth, you gotta pay the taxes or you can convert just a portion. It’s entirely up to you. So again, great, great point there Paul. Thanks for bringing that up.
The other thing I wanted to quickly mention then we will jump on these questions here, is that you shouldn’t be thinking that you can only have one type of self-directed retirement account. You could literally have two, three or more different accounts. If you’ve got a small business you can set up a solo 401K. If you have a spouse with an employer as AW two, they’ll you’ll have a certain type of of retirement account there. You could set up another self-directed IRA. If you all are a 10 99 employee or AW two employee, you could set up your own self-directed retirement account or a Roth. You can have multiple accounts is the point. You know, I don’t want people to think that you can only have one or the other. It’s not this or that. It could be this and that and that. John is that true or did I miss something?
You’re correct. So you could have a 401K and an IRA. You could max out your 401K every year and max out your IRA. You could have an IRA with another financial institution and then the IRA with equity trust. You could have 20 IRAs if you wanted to. You can’t exceed the contribution limits across all the accounts. But it’s okay to have multiple IRAs with multiple financial institutions. Someone had a question with respect to inherited IRAs. So if you have an inherited IRAA nons spousal inherited ira, by all means you can self-direct an inherited IRA as well. You have to be cognizant of the required minimum of distribution rules and things of that nature. But by and large, if you have an inherited IRA, there’s nothing that’s gonna stop you from self-directing and continuing to invest that money in a tax advantage manner.
Marcus asked the question, how are the fees structured for transferring an IRA over to equity trust? For example, how much we’re transferring over a hundred thousand dollars Roth IRA? Is that something you can address?
Yeah, so our fees, I can speak to our fees pretty straightforward. $50 one-time setup fee, and then an annual maintenance fee depending on the portfolio value of the account. So for example, if you have an account between 50 to a hundred thousand in that range, your maintenance fee would be $450. If you’re a hundred to 200,000, which is the range that he had mentioned, that would be a maintenance fee of $500. So you’re looking at anywhere between sometimes as low as 0.1 0.2% to a half a percent as far as your fee is concerned. So compared to manage money generally could because it’s self-directed, it’s going to be, you know, much more cost effective for you. A good example, I just had a client that moved over about $618,000 and he was informing me through some documentation that he’s paying about $7,000 in advisor fees on an annual basis. Wow. So he is paying $7,000 for his money to be invested in mutual funds and some stocks and you know, that’s really the extent of what’s happening there. And so he is, he’s moving his account into arrangement where he is only paying about a thousand dollars in fees and he’s able to take control and invest in in private securities.
Yeah, that’s crazy money. Well that’s good. I’m glad he’s switching over. Rolling over. So Mark asked the question here, I currently have a self-directed traditional IRA tax-wise, would I be better off to roll it into a Roth self-directed IRA in order to better take advantage of the real estate tax deductions allowed by the IRS? Before you answer this, I just wanna make sure everybody’s clear right from the beginning, nothing we’re talking about today is, is financial or tax advice. This is just all information for your knowledge and education and and benefit. So you can contact equity trust for our team here at NORADA Real Estate or Norada Capital if you have more specific questions related to you and your specific situation. But having said that, what do you think of Mark’s question here?
Yeah, so as far as should I convert or should I not convert? And of course I hate to say the cliche, it depends, but it sort of depends. It does depend on your situation and circumstances. And I would encourage to your point Marco, is you know, make sure that you talk to your CPA or or Tax Pro about this because when converting from a traditional to a Roth, whatever amount you convert is added to your ordinary income, so on and so forth. The first question is, do you feel you’re going to make a return on investment that is going to warrant paying the taxes now? So would you rather pay taxes on the seed or the crop? Just think of that analogy. Are you gonna pay more taxes in taxes now or more in taxes later? So you wanna run that analysis based on your return on investment.
The second thing that you want to consider as it relates to your question about real estate, maybe it’s talking about depreciation. So when you own real estate, not in an IRA, you have depreciation, well the depreciation offsets your income to lower your passive income. However that depreciation eventually is recaptured. When you sell the property, it’s called recapture depreciation. So you have to factor that in. Now that’s not a bad thing ’cause there’s strategies 10 31 exchange, maybe you leave it to your heirs and you take advantage of step-up basis. There are incredible advantages to owning real estate in a non IRA environment. Personally I own real estate, I’m closing on a house tomorrow, in fact on a property and I’m not gonna own it in my IRA, I’m gonna own it with my non IRA funds. So my wife and I, we do deals outside of our IRA and inside of our i a and sometimes a real estate deal just makes more sense outside of our ira.
And then sometimes deals make more sense inside of our ira or when we do private money lending, we do all of all of our private money lending out of our self-directed accounts because that income would be subject to a much higher tax rate and there’s no deductions that we’re gonna get for those activities. So long story short, tough question to answer. What I’ll tell you is think about it through the lens of should I do this investment, this specific investment with my IRA or my non IRA funds, depending on the circumstances. And then as far as the IRA is concerned, don’t feel like you’re losing depreciation. That’s one of the most common questions or misconceptions is, oh, I’m gonna lose depreciation if I do this deal with my IRA. Well, your IRA is tax exempt, so there’s no income to offset. That’s why you don’t get depreciation, you don’t lose it.
You really wanna compare that opportunity and the potential return to what you’re making now in the traditional markets. So a lot of my clients, the reason why they buy income producing real estate and they’re not worried about depreciation is ’cause they, they feel strongly that they’re gonna do way better than what they’re doing now in the traditional financial markets. Now, I can’t say that as an absolute right, you might be able to do better in the traditional markets compared to real estate, but if you’re from the school of thought that you can do better in real estate than the traditional markets, I wouldn’t worry about depreciation because again, with an IRA, the IRA is tax exempt to begin with. Now there is a argument that a Roth IRA because it grows tax-free and you have tax-free withdrawals, that it’s more powerful than a traditional IRA when owning income producing real estate. And I would agree with that statement.
Good stuff. Great. Let’s take a few more just for the sake of time here to squeeze ’em in if we can. I don’t know if any are popping out to you, John. There’s one from David there that I was thinking of maybe addressing. I could read it.
Yeah, go ahead.
Okay. David’s saying, can you talk about converting the solo 401K contributions to a Roth through a backdoor Roth option. I know this is gonna apply to a lot of people. Is there a limit to how much you can how much can be converted and what is the tax rate paid during that conversion?
Yeah, I can tell from the questions a lot of folks with some experience, this is great to see some knowledgeable folks here. So David, the answer to your question with a solo 401K, you have your traditional bucket and your Roth bucket and with your solo, because you have both of those buckets, you can actually convert, call it, call it a backdoor, call it a side door call, whatever you out want. It’s, it’s all the same thing. You’re just converting from traditional money into your Roth and you can do all of it or a portion of it. It’s entirely up to you. You can do it over multiple years. And so if you put in your contribution into that tax deductible bucket and then you wanna convert it over to a Roth, you could do that. If you have traditional tax deferred money that you roll into your solo 401K, you could then convert that into the Roth bucket of your solo 401K. You just have to account for whatever amount you convert is added to your ordinary income and then you pay, you’re gonna pay taxes. So team up with your CPA to look at what that tax liability is gonna look like. But what you’re suggesting there, you can absolutely do, I
Don’t know what is jumping out at you. I I’m not sure I understand Randy’s question here. He says, what if I don’t have anything but my savings of approximately $300,000? So I assume what Randy’s saying he is, he’s got cash outside of a self-directed retirement account. You know, what can I do with it? I, I think you’re up against the limitations of what you can contribute to these different types of accounts. So you can just max out any and every type of account, self-directed account that you have. But beyond that, I mean, is there anything else that someone like Randy can do?
You’re right, Marco IRAs right now, it it’s 6,500 when you’re under 57,500 when you’re 50 and over, they call that a $1,000 catch up contribution once you get to 50 and over. And then next year it’s gonna go up by 500. So it’s gonna be 7,000 and 8,000. So what I would say, Randy, is, you know, you could look at as long as you have earned income, make a contribution now turn of the year, make another contribution, get some money in there in the IRA. And then outside of that, if you have a lot of savings, you know, even though I’m in the IRA space and I promote IRAs and I’m passionate about it and I use them, the, the reality is is for some people it’s, it’s a marathon. You know, over the years making contributions every year and then nothing’s gonna hold you back from investing that money if it makes sense for you. I can’t tell you whether it does or doesn’t, but nothing’s gonna hold you back from doing taxable investments. I mean, we gotta pay taxes on it, but you know, that hurts a little bit, but it’s not gonna stop me from making investments. Just like I said, my wife and I, we invest inside and outside of our IRA, this
Is a quick one, how can I direct 401K funds in these alternative investments? I’ll take a stab at that. Basically you just fill out ADOI direction of investment form or letter with your self-directed trustee or custodian to tell them how much to invest or place for your benefit into whatever the investment is. What did I miss there, John?
You got it right Marco. You open an account, you fund an account and then you tell your custodian, here’s where I need you to send the money. You provide us the documentation associated with it, and then we send the money out the door. So it’s, it’s really that simple. We have a technology platform that allows folks to digitally process this. We have the ability to team you up with a single point of contact so they can walk you through your first transaction. And going back to your question before Marco about sort of fear a lot of folks because they’ve never done it before, they’re worried about making a mistake. And so that’s why you wanna make sure you just team up with the right people and so they walk you through the process. All
Right, maybe we can throw one more quick one in there. These are, there’s actually one or two quick ones. Raymond, again, I understand borrowed money from real estate creates UDFI or, or basically a tax event. What if the borrowed money is he said make a loan. I’m not sure if he’s saying making a loan or from a loan.
I’m thinking and, and Raymond feel free to bounce back or apply on this, but I’m thinking Raymond is asking if I make a loan to someone. Yeah, if you make a loan to someone, there’s no unrelated business income tax. The UBIT or UDFI only comes into play if you buy a property with your IRA and you borrow money, so your IRA is actually borrowing money to acquire property. But if you’re doing private money lending or buying notes, which is what I do a lot, there’s no UBIT or or unrelated debt finance income tax because I’m not acquiring encumbered real estate or debt finance real estate.
Okay, last one real quick. And then I want you to give out all your contact information or, or just help people they can get in touch with you and or equity trust. Scott said, can you convert ATSP to a Roth IRA and is there a max amount you can convert?
You can certainly roll over ATSP providing you’ve left that employer, you’ve left the government or you’re 59 and a half. And if you wanna roll it over and then convert it to a Roth IRA by all means you can do that. You can convert all of it or just a portion of it. That’s absolutely up to you.
Cool. I don’t know if there’s anything else you want to mention, John. I think for the sake of time here, you should give out your contact information or just tell people how they can get in touch with equity trust.
Yeah, absolutely. And quickly, Raymond did write back, he said he wants to borrow money and then lend it out. That’s gonna be challenging. Raymond gr great question. I like the creativity and, and that thinking, but if your IRA is gonna borrow money, it really needs to be borrowed for the purpose of investing in real estate. There’s really no good mechanism in order to do that. I’m, I’m not gonna say no, you can’t do it, but I’ll I’ll tell you that. It, it can be incredibly complex and and may not be, may not be worth it. And then David mentioned about sort of checkbook control. You can do that with a self-directed IRA equity trust. We have the capability of if you wanted to form an L-L-C-I-R-A type structure, you could do that. Or a lot of investments can be done directly out of your IRA.
You don’t have to create that structure. So that’s really a preference for you as the investor and what you prefer. And then as far as contact information Marco, I appreciate that and obviously the time and, and everything that you do. And Nate as well, you can find us through trustetc.com is our website or just Google Search Equity Trust Company and you’ll see our phone number is there. You can call in, talk to one of our IRA counselors. They can you know, they’re happy to talk with you about your individual situation. If you wanna establish an account, they can help you with that. And if you wanna just learn more to get started before you speak with someone. Obviously our website is a great resource, but I’d also encourage you to go to YouTube and just search Equity Trust Company and you’ll find we have a ton of video content on a lot of different categories, a lot of the things that we talked about, some of which you didn’t.
So you’re more than welcome to go there and and consume information and content and then you can reach out to us directly through our website. You can call us directly and one of our irate counselors can have a discussion with you, set up a one-on-one consult and ultimately answer all the questions that you have. This is what we do day in and day out is field a lot of questions and really try to understand an individual specific situation and be as accustomed as we can around the questions we answer and the information we provide. We can’t give advice, but we could certainly provide information and education and answer your questions.
Yeah, that’s great. Thanks John. Appreciate that. Okay, and then just speaking for Nate and myself, if you’re listening to this and you’re thinking, well, how can I take advantage of self-directed retirement accounts as they might apply to investment real estate with us through Norada Real Estate Investments or through our promissory notes that pay 12 or 15% fixed rates of return per year, paid monthly, which is very common and popular. Just talk to my team that includes Nate as well as some of our other investment counselors and you can just reach us through noradacapital.com or noradarealestate.com. But we’ll put all that in the the notes, the emails that go out for this particular webinar so you can contact John and his team at Equity Trust for specific information about self-directed accounts. And as far as investment opportunities with the alternative investments that we talk about here, Nate and myself are available as well as the rest of our team.
So we’ll put all that in the emails, in the show notes that are going out. So with that, Nate, thanks for taking the time to come on and John, as always, great having you on. We’ll see you again soon and thank you for your time. Yeah, thank you John. Thank you Marco. Be well guys, guys. Bye-Bye. Have a great week. Thank you. Bye. I hope you enjoyed that interview with John Bowens from Equity Trust. I think there was a lot of great content covered there. If you have any questions, again as a reminder, just contact their team or my team of investment counselors here on the Norada Real Estate or the Norada Capital side. And we’re happy to talk to you about what we talked about today, answer any questions and help you move forward if it’s the thing that is you know, in your investment strategy.
But in either case, it was a great episode. I hope that this has been helpful for you. As always, subscribe to the show. Just take three seconds to click that subscribe button regardless of where you’re listening to the show, we’d love to have you on a week to week basis so we can provide you the content that we put out from markets spotlights to tax information and education, to asset protection to you. Name it, anything related to the housing market investing strategies. We’d love to cover it all. If you have suggestions about future episodes on the show or guest suggestions, by all means, let us know. Just email us or go to the website at passiverealestateinvesting.com and just let me know who you’re thinking about or the topic you’d like me to cover. And that is it for today. Thank you for listening. We will see you on our next episode.
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