Welcome to another episode of Passive Real Estate Investing. I’m your host Marco Santarelli. Well, today we have a returning guest. He is someone who is very intelligent when it comes to self-directed retirement accounts like IRAs and 401ks. He knows how to help you defer and eliminate taxes. So if you’re thinking about investing in buy and hold rentals, flipping property, investing in promissory notes, or just using your IRAs and 401ks to invest for the purposes of creating more wealth and additional cash in your retirement account, this is an episode you wanna listen to. It’s going to be focused primarily on real estate strategies as they relate to your self-directed IRAs and 401ks. So I hope you enjoy today’s episode. There’s probably gonna be a lot of takeaways here. And if this is an area that you want to learn more about, certainly listen to today’s episode, but also maybe pick up some books, including Mat’s book on an IRA’s specifically titled The Self-Directed IRA Handbook. And with that, let’s get to our interview.
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Well, it’s my pleasure to welcome back a returning guest to the show, Mat Sorenson. He is an attorney and he is also the CEO of directed IRA. He is a bestselling author, a national speaker, and an expert on self-directed retirement accounts. He’s also, I just found out the VIP contributor to entrepreneur magazine. He is a real estate investor, which I’m sure my audience would love to know. And he has been at the forefront of the self-directed IRA industry since 2006, a very long time. And he wrote the book, The Self Directed IRA Handbook, which is the most widely used book in the industry for self-directed IRAs. So Mat, welcome back to the show.
Yeah, Marco, thanks for having me. I love talking about self-directed IRAs. Obviously I had so much to say, I wrote a book about it and but I love talking about real estate too, cause this is what I do with my own account. Like literally that’s what my retirement account owns is real estate in my retirement, you know? So I love pairing those two things together and excited to be here, talking about that.
No, that’s great. Well, I’m glad you’re back on. We’re gonna have a very focused show today. We’re gonna talk about using IRAs and 401ks to buy rentals, do flips and invest in notes. Yeah. Which is timely because I’ve been doing a lot more work in the whole promissory note investment space and investors are calling and asking about that.
So I think this is a great topic. It’s kind of timely, but I think there’s a lot of misunderstanding out there about whether people can use an IRA or a 401k to invest in real estate. Some so-called gurus out there. Say not to, yeah. You can talk about this and why, because you know, you’re losing the tax benefits of among other reasons. So where do you wanna start with this?
Well, I wanna just start, like right now, I mean, we’re recording this, this is like summer of 2022, you know, and what’s happened in the economy is the stock market totally down. Right? And that’s what most people’s retirement accounts have been invested in. They’re buying stocks and mutual funds and they just got hammered over the last six months. I mean, this has been the largest stock market correction. Actually, t’s the second largest stock market correction in my lifetime. I mean, I’m 42. This is the second biggest one. And so a lot of people are like, well, dang, is this all I can buy with my retirement account is what’s on wall street, stocks, bonds, and mutual funds. And so you know, here at directed IRA where we handle self-directed accounts, there’s lots of companies like ours that do that. But I mean our real estate clients, they haven’t, hadn’t seen anything go down.
In fact, those clients have rentals, their cash flows gone up, their rents are going up, right? Their properties appreciated tremendously. We haven’t seen reductions in value. People like to lend on real estate is increasing right now too, cuz there’s now deal making with some of the stuff going on in the market. So there’s just lots going on. And, and real, estate’s just been a tried and true method, but for whatever reason, and I know the reasons, but people just don’t think of real estate in their retirement account. Now they are though, because everything else that their retirement account’s been in recently, it’s kind of gotten shook a little bit. So I just wanna let people know you can buy real estate and we’re not talking about like a REIT. You know, we’re talking about buying the single family rental down the street or in the best cash flow market. You can find the, the property you wanna rehab and flip the property. You want to Airbnb the property or operator you wanna lend to, if you don’t wanna own the property and you know, deal with toilets and tenants and all that stuff, you just wanna be provide money to other people do in real estate. You can be lending on that too. And so so there’s lots you can do in real estate and it just takes a self-directed IRA.
Okay. So obviously not every single type of IRA or 401k lends itself to the ability to invest. So maybe just touch on what types of self-directed retirement accounts you can use to invest in real estate and which ones you can’t.
Yeah. So generally if we’re talking IRAs, you can always, self-direct an IRA to buy real estate. The problem is not your account type. Really? The problem is who’s the custodian of your retirement account or the administrator plan provider. So clients will always call you like Mat. I got an IRA at Fidelity and I called them and told ’em I wanna buy this duplex down the street. And they said, I can’t do it. Well, that’s not because retirement accounts can’t buy real estate that’s cuz retirement accounts Fidelity can’t buy real estate. Fidelity’s a, a broker dealer, right? What do they sell? They sell stocks, bonds and mutual funds. They make money when you buy that, they built software and all this stuff where you push a button and it happens. They don’t have to do anything. Okay. When you bring a real estate deal to ’em, they’re like, wait a second paperwork.
I gotta process a wire somewhere contracts. Nah, you can’t do it. And so the broker dealers have kind of dominated the space and taken all the energy and all the money out of it. So we, we think that all you can do is buy stocks, funds mutual mutual funds. So, but you can always move. So you can move from Fidelity to directed IRA or whatever you wanna self-directed provider. And that’s just that I can count transfer. So if you got a set IRA or a traditional IRA or a Roth IRA at Fidelity, let’s say right, you can just transfer it to that same account type, no tax, no penalty to directed IRA or whatever self-directed provider lets you do real estate.
So my understanding is by law, all IRAs, regardless of how you label it are self-directed, it’s just the custodian that is tying your hands behind your back. It’s not the fact that it’s an IRA.
Yeah, exactly. And I got into this in 2006 and I remember when I had a, I had a client buy in real estate for the first time with an IRA and I was like, you can’t do this. I was like, even myself. I mean I went to law school, passed the bar exam. I’d never heard of this. So you’ve always been able to do it though. It’s real estate’s always been available to retirement accounts. Okay. So there hasn’t been a law change. It’s just that the information out there has been restrictive, cuz advisors don’t want you to do it. They don’t make money when you buy it either. And so the information has just been lacking. So yeah, you’ve always been able to do it, no penalties to get over there. The only one caveat I’ll say on that is people that have a 401k with a current employer. Those are people who might get stuck cuz they can’t move. Let’s say you’re 45. You work at Dunder Mifflin or whatever. You know, you can’t move your Dunder Mifflin 401k account while you still work there. Yeah. You’re gonna have to either quit or reach retirement plan age to, to roll the money out.
You just brought up a very interesting point. Cause I was talking to someone a couple days ago that has a 401k that’s with an old employer, a previous employer. And she didn’t realize that she can actually take control of that 401k, move it and direct it. Yeah. And I think there’s a lot of people out there that have 401ks that are still sitting there with whatever equities or investment that they were in and because of ignorance, they just don’t know what they can and can’t do they just leave it there and don’t do anything with it. But I think this is worth talking about because there’s probably a lot of money out there that could be deployed into investments.
Oh my gosh, there’s so much money. There’s tens of billions of dollars in just lost 401k money that no one’s claimed it’s insane. Let alone the people that know where it is, but just don’t take the time to go do anything about it. And so all those old employer 401ks, you can self-direct and most of those are traditional 401k dollars. Some people have some Roth 401ks, but those just get rolled over to a traditional IRA that you can self-direct with a self-directed company again like directed IRA. But so all that money’s out there. And I just wanna say this too, though. Even if you don’t have a retirement account and you’re in real estate and you don’t care about retirement accounts, this topic is so important because there’s $30 trillion in retirement accounts in the US. If you’re doing real estate, if you need funding for real estate, this is where all the money’s at. This is where all the money’s at. So you need to learn how these rules work. Just even if you want to fund your own real estate deals, let alone growing your own retirement account in real estate.
So let me throw this at you. There’s a lot of people probably listening to this saying, Hey, I have an IRA or a self-directed IRA or a 401k. I have some capital in there that I can put towards real estate, but I don’t have enough to buy a property, all cash. But I have enough to put down as a significant or large down payment. I think there’s a lot of people out there that don’t realize that they can finance real estate yeah. Within their retirement account. But nobody ever talks about financing options for people who have retirement accounts.
Yeah. That’s definitely a possibility. A lot of our clients use the banks to leverage their purchasing power with the retirement account. So you gotta know two things. So your IRA can buy real estate and the bank can provide a mortgage for a P portion of the, you know, the, the purchase price. So you have to know two things though. First, if you get a loan with a retirement account, this could be a self-directed IRA, solo, 401k doesn’t matter. The loan must be non-recourse. And what that means is if the bank forecloses, they can only foreclose and take the property back. If you default, they can’t come after you. They can’t come after the retirement account. They’re just stuck at whatever recourse they have on the collateral to the property. And, and that satisfies the retirement account rules for loans. Now they’re used to only be like two banks that did those loans.
There’s probably seven or eight. Now that of banks that specialize in these non-recourse loans to IRAs, I LLCs solo Ks. So yes, it’s certainly an option. The other thing is there is a weird little tax that can apply to IRAs in that space where the IRS wants to tax profits on the debt because the debt isn’t retirement account dollars. So your retirement account dollars, you don’t have to pay tax on, but the debt piece where you make profits, there’s this tax. I have a chapter in my book on it, not enough to get into today, but just flag that as an issue. If you’re getting an non-recourse loan with an IRA to buy real estate solo, Ks are exempt from that on leveraged real estate, by the way. But IRAs just have that little, and this might be, this is a little over your head on that, but just, there’s a lot of content on this. I’m just trying to give you the rules of the road.
Yeah. Side note, your book is really good. It’s very thorough, well written and it’s a very clean white color.
<Laugh> that’s I gotta write here on display. This is on Marco right now. If you listen to podcast, but yeah, it’s the self-directed I handbook it’s on Amazon and on my site and, and it is it’s used by the industry. The now association that certifies people in our industry uses it. State regulators use it, government officials, the government accountability office used it when they did their two reports. Wow. On self-directed IRAs. So it’s gotten out there and I, and it’s like cited. I got over a hundred legal citations. It’s not just some like, you know, some book out there. Great. It’s I took the time to lay it out.
So yeah. No, that’s great. So just to close the loop on something you just talked about, and again, we don’t need to get deep into it, but the taxation on the debt I believe is referred to as UBIT. So just so people know the acronym for it. If they ever come across it or hear it, you know, they’ll understand that’s the taxation from the profits that are realized from the debt. Did I say that correctly?
Exactly. Yep. Yep. Profits realized from the debt and we actually refer to it as UDFI unrelated debt financed income when there’s debt it’s a, the tax is UBIT. It’s a version of UBIT. So in my book, it’s called Unrelated Debt Finance Income, which is what the IRS calls it too. So there’s other ways you can have EBIT in real estate. Like if you’re doing a real estate development or you are flipping a lot of properties with your retirement account where they’re short term, and you’re more on the business of real estate, as opposed to investing the IRS tries to tax that to under this UBIT tax. But if you’re like investing in real estate, you know, you don’t need to worry about UBIT in general, you’re buying rentals, you’re flipping a property here or there even a short-term rental, you’re just doing lending on it, where you’re getting interesting common points. Those are pretty easy. You don’t need to stress about it. Now debt is just this little UDF five, but you only get taxed on profits. You made from the debt, but you’re buying a bigger asset. So there’s a lot of reasons why you shouldn’t stress about it too much, cuz you’re buying more assets than you otherwise could, which creates more return than you otherwise could with your retirement account.
So you have a lot of options. If you have capital in an IRA or 401k, you can buy and hold rentals, which are essentially your long term rentals, you could also buy short term rentals. You know, your Airbnb type, you can buy fixed and flip property, which is basically what I call creating chunks of cash. So now you’re building up the cash in your retirement account to further invest and you know, add to your wealth. And then there’s the whole area of notes. Notes can be buying and holding notes like mortgage notes or other promissory notes and receiving income. Or you could be lending money and issuing or selling that promissory note to people and making interest income. So there’s a lot of options here.
Yeah. Yeah.
What road do you want to go down? <Laugh>
I mean, each one is their own little thing. What, what I would say is we always talk about investing in what you know. Yeah. You know, and so for many people they’re like, well I know rentals cuz I’ve done rentals outside my retirement account. Okay. Maybe look at that with your retirement account. If this is like, well I’ve never, you know, done a short term rental, well maybe not the first time you do it is when you do it in your retirement account. But if you’re like, I already got five of ’em totally crushing it. Maybe you should start doing that in your retirement account. You know? And so that’s where most of our clients come to us, particularly in real estate, they’re already real estate investors. The first time they do a real estate deal is not in their IRA. And so they figure out kind of what investor they already are.
Now. Some people come to it new and some of the easier things would be notes. Of course you want to look to make sure who the borrower is, right? You gotta make sure who you’re working with is reputable. And you wanna kind of have a good feeling on that. See what types of deals they’re doing, have an understanding, but I’ve got, we’ve got clients all over that spectrum. And frankly, we have clients doing very well in long term short term notes and we have clients that can lose money in all three of those categories, you know? Right. And so, so just like find the right strategy that works for you and that you may have experience with, like I said, invest in what you know, but just figure out how to use your retirement account in it. But I’ve done a little bit of all of it except flips.
I’ve never tried to do flips in my retirement account. I’ve done that outside of my retirement account, but I’ve just done buy and hold rentals and some private money lending, but even in the private money lending, there’s so many varieties of it. You know, there’s lending to people doing fix and flips on short term notes. You know, there’s doing long term notes, there’s buying non-performing notes on real estate. There’s all these different things, you know, that you can do with the retirement account that we see. And I mean, we’re opening, like we’re doing a lot of accounts every day and there’s at least 10 to 20 investments a day going into some version of a real estate investment from someone’s IRA here. And so there’s tons of it. It’s just, what do you interested in? What do you know? And then just get analytical about it and the returns that your retirement account can get.
So here’s, don’t want to sound like a negative question, but someone’s doing flips. This is what made me think about it. I mean, this could happen if you have a rental and you have a large expense and you don’t have enough in your account to cover the repairs or the, whatever that expense is, but this is especially true. If you’re flipping and all of a sudden, you know, you’ve got a money pit of a property and what you thought was gonna be a $20,000 renovation is now a $50,000 renovation, which, you know, this has happened to me probably multiple times, right?
Yeah. <laugh>
But the thing is is you can’t just put money, you know, out of your own pocket, into that IRA or 401k. What does a person do in a situation where they are short on cash on a rental and they really can’t move forward to get that thing sold or productive or leased without putting in that extra capital to get thing fixed or operating.
Yeah. So that’s a tricky situation. And let me kind of take a step back to kind of give why it’s a problem. So one thing, when you’re using your retirement account to invest in real estate, you gotta know something called the prohibited transaction rules that restricts you from transacting with your retirement account. Also restricts your spouse, your kids, your parents, and BA on what it is is the Iris is like, all right, if your retirement account’s gonna do something, it’s gonna do something it’s taken the risk. It’s buying it. It it’s to make the money or it’s taken the loss. You can’t come in here and sell assets. You personally own your IRA or 401k nor can your IRA or 401k sell it to you. Your IRA, can’t go buy a property. Your person ain’t gonna live in. Like they don’t wanna mix you and your retirement account together.
So when your retirement account goes out to flip a property, like you’re talking about Marco and it’s like, man, I, you know, I bought this property for 150. I anticipated 20,000 repairs. I had 180 grand in my retirement account. The repairs are 50 grand. I’m short now, how do I get money in to cover this? Well, the first thing you could do is see, do I have other retirement account dollars? I can roll over here. Maybe I got other accounts I’ve been still in the stock market or mutual funds if you’ve extinguished that the next thing I tell clients to do is go get a third party loan from someone, have them loan money to your IRA or your IRA, LLL C or solo. Okay? If you got one non-recourse of course, where they’re gonna loan against the property and then, you know, you’ll pay your retirement account will pay them back over time.
But again, you can’t loan the money in personally. The third option is actually an exception to what I just said about lending money in there is a prohibited transaction exemption. It’s called 80 dash 26. That’s a rule that allows you to loan money to your own retirement account. In the event, there’s like a loss of an asset, an emergency situation. So it is possible that, and this is actually in my book, in the real estate chapter to lend money. If you’re in that situation, we have no other resources to fund it. Let’s say the property’s gonna get, you know, you got property taxes mounting up or a, you know, a property in the middle of construction that can’t get repaired. And you’ve got a real emergency where you need to provide those funds. You can actually lend money to your retirement account. It has to be booked on a note, there’s a procedure for it. It’s called print transaction exemption, 80 dash 26. So that can become a problem, but those are the three steps to work through. And eventually there’s gonna be a solution there of one of those three things.
That’s it? That, that sounds pretty simple actually. Yeah.
I know a lot of people don’t know that last one. Yeah. and, and so we try not to use it. I try to have clients go to one or two, but it is an option if you need to.
Okay. So someone listening to this has an IRA or 401k, they’ve got cash in it. Let’s just make the assumption that it’s self-directed, if it’s not, they can, you know, turn it into a self-directed account. Yeah. So now they’ve convinced themselves maybe after listening to this episode that yeah, I’m gonna buy some rental real estate, hold it, or maybe fix and flip some property or maybe get invest involved in notes. So what is the process? I know this is probably a very simplistic sounding question, but some people might be asking themselves, okay, what do I do in order to start deploying that capital from their self-directed retirement account?
So there’s kind of a three step process. You set up the account, you roll over the funds or contribute, and then you start making the investments. And so the role of the self-directed IRA custodian is just a custody of your account and do the tax point of the IRS. So directed IRA. When you come over here, really any self-directed company, we’re gonna be like, well, what do you wanna invest into? We’re not gonna go give you you investments to make, you know, or even recommendations. You’re just gonna come over here and you’re gonna have to know what you want to do. And so that’s what self directing’s all about is you’re in the driver’s seat, you’re the captain of your own ship. You’re gonna go find the deals you wanna do. And so some clients will just kind of get started so that they’re ready because real estate, a lot of deals come by and they’re gone in a few days or they’re gone next week.
You know, you need to move on. ’em Quickly. You can’t wait 30 days to open an account, get your prior 401k money rolled over. And they take forever. And they, the check comes in the mail and we gotta hold it for a week before the bank clears it on their end and all this. So sometimes it there’s a little process to it, but you wanna kind of get ready so that when a deal comes along, you can execute on it and go forward and, and invest. A lot of people use an IRA, LLC. That’s a structure basically, rather than your IRA owning real estate directly, whether it’s a rental or a flip or even notes, the IRA owns an LLC a hundred percent, which has a bank account. And you’re the manager of the LLC. And that LLC goes out and buys the assets. So XYZ investment LLC, for example, could be owned a hundred percent by Marco Santarelli’s IRA, right?
And Marco can be manager of that with a bank account at whatever he wants to bank with. It’s an LLC visit, checking out, deciding where the money goes and investing that. And so that’s something a lot of clients like when they start to get ready to invest, is they like that control. They can just do in their LLCs name, that their IRA owns. Right? Marco, isn’t gonna take money out of that. It’s all going back to his IRA. Mm-Hmm <affirmative> but so sometimes you may want to include a structure like that, depending on the types of deals you’re doing.
Is that what they refer to as a checkbook controlled IRA?
Yeah. Same thing we call it. IRA, LLC, checkbook, IRA. It’s the same thing. It requires an LLC essentially. Yeah. And the benefit of it is you do have a checkbook and you get control it to write the checks or send the wires. You receive the rent, pay the bills. It’s kind of nice actually.
Right. And it’s probably worth mentioning that someone who has that sort of setup needs a fair amount of discipline. And self-control because you don’t want to break any rules or laws. You can’t be writing checks for just anything.
Yeah. And that’s what a lot of the cases have been on recently over the last three or four years on self-directed IRAs or people using LLCs and screwing ’em up paying themselves a salary, storing precious metals at their home that their IRA LLC uses, which is restricted to under the rules. There’s all these cases about that. That people have just been violating the prived transaction rules because they’ve kind of got the keys, you know, and they could control it, make all the decisions. Whereas if it’s like, if your custodian has your money, let’s say directed IRA. And you say, send the money here. We’re gonna say, we can’t pay you a salary. You can’t get paid. We’re gonna police that a little bit. When it’s in your LLC, you, you got the button, you can push the button and just say, you can write yourself the check, literally.
Yeah. The custodian doesn’t even know what’s being invested in or, or money is spent on you don’t see that it’s a set of books that’s outside of you as the custodian.
Yeah. So that, that can be somewhat dangerous. Speaking of which, where do people get in trouble? I mean, this is not all that complicated. You know, if you have a self directed retirement account, you can invest in rentals and flips and notes. It’s not all that complicated. There’s, you know, a direction letter or some sort of process to allow you to send those, those funds out to make that investment. But are there areas where investors kind of screw it up and get themselves into a little bit of hot water with self-directed retirement accounts?
Yeah. Yeah. I’ll give you the top three screw ups people do. <Laugh>
We see ’em and I’ve been an attorney doing this for years and I’ve represented like six or seven other companies before we are now a competitor to ’em. So I’ve seen it all. But what I tell people at the outset about self-directing is it’s not rocket science. Like you said, mark, it’s not that hard, but you can’t screw it up. And I like to tell people, it’s like playing a board game. You know, it’s not hard to do, but you need to read the rule book before you play it or play with someone that knows how to do the game. Otherwise you’re gonna screw it up. And the problem is when you screw it up, you can have a prived transaction. Prived transaction. The consequence of that is you lose the retirement account. Your account’s distributed you no longer have that account. And there’s penalties and taxes on that for you is, is an outcome.
So we wanna avoid that. Of course. So the, the top three things I would say to know are, remember, the IRA is doing this investment or solo care or HSA or whatever account you’re self-directing. You knew all those types of accounts, that account, let’s just say, IRA, generically here, the IRA is investing, putting the money in and making the money period. Okay. What that means is the IRA’s on the contract to purchase the asset. The IRA gets the income on the asset. The IRA pays for the expenses on the asset. If there’s repairs on a property, the IRA pays for that. So it’s not you involved at all. You own the IRA and get a pull money out of the IRA at retirement or earlier if you want with a penalty, but, but the IRAs gets this investment and it has to do the deal.
Now we see problems with that. Cause people will pay for property taxes, their IRA owns it. And they’ll cut a check personally for the property taxes or property has an expense and they’ll pay an expense personally, but it was really a property owned by their retirement account. And so those are all prohibited things you need to avoid. The second thing is, don’t use the assets <laugh> right? So like you can’t buy a property and stay at it. And I’ll have clients with like short term rentals that are, well, you know, it’s a vacation of rental primarily and no one was staying there for a week. So I just went and stayed there myself. Or can I do that, Mat? No, you can’t do that. Like you can’t benefit. There’s a rule that’s called self dealing that says you can’t benefit from your retirement accounts assets.
That means you can’t go stay there or use it or have benefit of it nor could your spouse, kids, parents. So just hold the asset for investment purposes. Okay. Don’t have use of assets, your retirement account owns. And then probably the third thing would be people with I LLCs or solo 401ks who have a checkbook and get a little aggressive. Let’s just say, and they’re kind of like, they got the mentality. Well, it’s my money. I’ll do what I want with it. Well, and the IRS will do what they want with you too, when you do what you want with your money. Okay. Unfortunately we have that set of tax laws. So just know if you do the IRA, we’ll see your solo case structure, where you have checkbook effectively. You need to know the rules and that’s for your protection to make sure that you can keep this in a tax preferred tax qualified account. So those are the three things I just, I just keep in mind again, be careful on IRA. So IRAs and solo Ks, make sure you know, the rules. It’s an awesome tool that puts you in control. A lot of real estate investors in particular use it. I’d say at least half of our clients doing real estate use it. Don’t have personal use of assets. And remember if your retirement account’s due in the deal, your retirement account’s due in the deal period. It gets the money. It pays the expenses.
Makes sense. You made me think of something. You mentioned solo 401ks. And then you mentioned any retirement account that has its own LLC or checkbook writing capability. Yeah. Are there any formal tracking or reporting requirements when you have a self-directed account that has checkbook control? And I asked this because I have a solo 401k, and it’s very simplistic in, you know, how I’m tracking things. It’s just a spreadsheet, but is there actually a formal way to track things?
So high season solo K are a little different and what you would want to focus on. But when talk about, I season, I’ll talk about solo. K second. So on the IRA LLC you have a custodian of the IRA. They need to know what the value of the LLC is. Every year. That’s pretty much it. They gotta report the value of that asset in your account to the IRS. And they’ll put a code on it that says it’s an LLC. When it goes to the IRS in what’s called a form 5498. So like we have an annual fair market valuation form on our site for our clients to do ILCs that they gotta update and say, Hey, here’s the value of it? You know, my LLCs got a rental property worth, 150 grand, it’s got a bank account with 25 grand, the LLCs worth 175. You know, here’s a Zillow report. Here’s the bank account statement, you know, and you don’t have to go with an appraiser or someone you can self-certify that.
And so that’s what we do on annual valuations. The IRS basically has told IRA, custodians choose best efforts to get valuation updates on quote unquote, hard to value assets, right? Because what most IRA custodians doing is there reporting, what’s the closing price of XYZ stock or mutual fund on December 31st at the end of the year. And so it’s easy. So these alternative assets hard to value, they just kinda like use your best efforts. And so, so that’s what we do on annual reporting valuations for IRAs and that’s for all assets, IRA LLCs, or any assets your IRA owns on a note, for example, it’s easier because we just take what’s the balance owed on the note, the principle balance, plus any accrued and unpaid interest.
That’s the value of a note at the end of the year. And our software usually has that. If you just went it outta your IRA. So that’s easy. Now the solo K is a little unique because a lot of people who set up a solo, K they’re the trustee. So as the trustee, it’s your responsibility to report all this stuff on an IRA, you got a custodian that’s sending the stuff to the IRS and the solo K it’s up to you. Now, there is an exception on solo Ks where you don’t have to file a tax return every year. So on a solo K has less than 250,000 of assets in fair market value, total fair market value. There’s no tax return required. Once a solo K though has 250,000 or more of assets. That’s gotta file. What’s called a 5500 EZ.
It’s basically reported to the Iris that says here’s the value of my 401k, you know, and here’s how much I took in distributions and how much I contributed this year. Now let’s say, so if you’re over two 50, you’ve gotta do that. If you’re under 250 or really you’re over 250, there’s a few things you still gotta do, though, when you contribute, it’s gotta be on your tax return. So like, if you make a contribution to your solo 401k, you gotta make an employee contribution. Typically that’s on your W2. If you’re an S.Corp, your employer contributions on your 1120 S again, most, most small business owners that are, are S.Corps that are doing a solo K. But you could be a sole prop LLC, doesn’t matter. And then so there, those are just things that are on your personal and business tax return, more than they’re not really on a 401k ish tax return until you hit 250 K.
And then of course, if you take distributions or do Roth conversions, the plan has to send 1099 RS to you as the account owner and to the IRS. So sometimes we have clients that do, you know, Roth conversions of their traditional 401k contributions or the employer match. And so we’ve gotta report those conversions to the IRS. So, but the IRS just says, you have to have a written record of everything and you have to be able to track the contributions and the earnings you’ve made on it, which could be a spreadsheet. We have a custodial option at directed IRA, cause we do a lot of solo Ks there. And we basically say, do you wanna be on your own and have the checkbook and do your thing, or do you want us to handle your money? And we’ll do the reporting to the IRS and keep an accounting of it. And honestly, it’s about 50 50 between our clients, which one they pick. So some of the clients that are like, I just want the keys, man, let me do it. And I’ll be a big boy about it. I’ll do the reporting. Some clients are like, I don’t know what I’m doing, but I love the solo k. Cause I can put way more money in. Can you just handle the reporting?
Well, clearly there are a lot of options with self-directed retirement accounts. You can invest in rentals, short and long term flips and notes buying and selling notes. So this is obviously something you do virtually every day at directed IRA. You help a lot of people do that. And you guys I know are very real estate and crypto friendly. So yeah. You know, it’s just something that you do on a day to day basis. Was there anything I didn’t ask you that I should have asked you today on this topic?
Man, I kind of went fast on a lot of stuff. So I just say is there is a lot of resources out there and <laugh> I mark and I’ve talked about it quite a bit over the years. So I know he’s, he’s kind of far along in what he knows about and, and done it himself and worked with other people for years about it. So if some of this was like, man, you went over my head on that. We got a ton of resources directedira.com. We got learn section. We have our webinars. Marco was actually on our last webinar on investing in short term rentals with an IRA 401k. So you could watch that or sorry, we just didn’t know. We did finding the right rental property for your self-directed IRA, air 401k. So that was that’s on our webinar section. So we got lots of content out there. That’s free. We have our podcast, the main street business podcast and directed IRA podcast to go follow. That’s got a lot of this content. So why you say, just get, learn educated and then just like be ready. You know? So when the deal comes along, you know, you’ve got these retirement account dollars you’ve saved for years, you’ve sacrificed and now you get invested in something you actually care about and want like real estate instead of that boring mutual fund, you don’t even know what <laugh>
Right. Well, that’s cool. So I’m going to make sure that we have all the links and resources in the show notes and on our website, but people can reach out to you. They can go to directedira.com and then you didn’t mention your book either, but the book is available pretty much everywhere, Amazon and whatnot. Yep. It’s on
Resource for you, matsorensen.com
Yeah. Yeah, absolutely. And it’s a great resource. I mean, it’s chockful and it’s really one of those books. You don’t have to read the whole thing. You could literally go to a chapter about a subject and just digest that and know what you need to know about that particular area and then have a conversation with somebody at your custodian or a directed IRA or wherever it may be, and actually have an intelligent conversation about, you know, whatever it is you wanna talk about.
Exactly. Yep.
Cool. Mat, anything else you wanna add?
No, thanks so much for having me. And like I said, there’s more resources directedira.com or matsorensen.com and just stay calm and self-direct on. So like that.
You gotta trademark that.
I know <laugh> not to be used without the express written consent of Mat Sorensen Inc. Okay. <laugh>
Exactly Mat. Hey, thanks for coming back on the show. It’s been a pleasure.
Hey,thanks Marco.
Take care.
Well, just to wrap up with today’s episode, there are more intricacies when dealing with a retirement account, but you don’t need to get bogged down in the details. That’s why you have professionals and custodians like Mat, who can walk you through it and help you get set up and use your account properly to invest in real estate or whatever it may be, but just reach out to them. They’re one of our, probably a handful of vetted approved providers that we, we work with that work with investors and help them navigate the whole self-directed retirement account field.
But that is it for today. I hope you enjoyed the episode. It was short quick, and I hope you don’t mind. It was very impromptu. It was just off the cuff. There was no questions written down, no scripting, no prep. We just decided to talk about self-direction with a retirement account and how you could use that in real estate. But if you have more questions, reach out to them, or you can contact my team here of investment counselors and just go to noradarealestate.com, and fill out the form. We’ll connect you to one of my investment counselors and we can help you with all your questions. That is it for today. Remember to subscribe. We will see you all on our next episode. Thank you for listening.
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