Host: [00:00:00] Are you ready to take charge of your financial future and avoid the middle-class trap? Today, we’re going to discuss the secret weapon for real estate investors, the Self-Directed IRA. If you are looking to keep more of what you earn, build a real estate portfolio, and surpass your retirement goals, self-directed IRAs could be your key to success.
Host: [00:21:40] Hello, hello, hello and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen and with me, as always, is my self-directed co-host, Scott Trench.
Host: [00:28:90] That was a [00:30:00] 40, 401 okay intro Mindy. It didn’t quite work out. We’ll try it again next time. Bigger Pockets is a goal of creating 1 million millionaires. You are in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting, or how much of your wealth is trapped in your retirement accounts in that classic middle-class trap.
Host: [00:52:90] We are so excited to be joined by Karren Halliday. [00:55:00] She is the new author of Self-Directed IRA Investing. I’m not sure exactly what that book will be about. But, um… And we are really looking forward to getting into this. Karren, thank you so much for joining us.
Guest: [01:06:50] Thank you so much. I’ve been looking forward to this.
Host: [01:08:26] I am gonna just ooze excitement when we’re talking about IRAs. Wahoo! But wait, this is a really, really, really fun episode. I promise you because we are talking about ways that you can make more money, and who doesn’t want that, right? So, Karren, let’s jump off the deep end and start with what is a self-directed IRA and how does it differ from a regular IRA?
Guest: [01:32:89] Right, that’s such a good question. A lot of people just get confused about that. But IRAs were created in 1975. So you figure 50 years, okay, of the IRA. And when it was created, there wasn’t a difference between a self-directed IRA and a typical IRA. It’s one thing. It’s always been one thing in a way. Like all the rules are the same. When you go to the IRS’s website, irs.gov, you look, you look traditional IRA, it’s the same thing. The difference between a typical IRA and a self-directed IRA is the asset class that you can put into that account. So the typical IRA is in the stock market, right? Like mutual funds and stocks and all that and, and all that fun stuff. But the self-directed IRA is alternative assets, which Bigger Pockets is all about, you know, notes, real estate, syndications, all these beautiful things. So, uh, you know, passive income. And so, uh, an IRA is an IRA is the answer. What makes it self-directed IRA is the asset you put in it. But not every custodian will allow alternative assets. Like if you go to Charles Schwab and you say, hey, I want to take my Charles Schwab IRA and I want to invest in a property, can you help me? And they might even tell you, oh, you can’t do that. But we know you can. I know, right? We know that you can. It’s just that you need a different kind of custodian. You need a self-directed custodian.
Host: [02:57:33] You just used a key phrase that I want to highlight. You said passive income. So when I’m putting assets into my self-directed IRA, I can’t have anything to do with them, right? Like I can’t manage them, I can’t be involved.
Guest: [03:11:15] You can a little bit, but what you can’t do is what’s called offer services to the plan. But let’s talk about that. So your IRA buys a property. You got, you got a house. We got a little SFR right here, a single family house going on. So your IRA just invested in this. Now, what can you do? What you can do is you can screen tenants, right? You can pick up and collect the rent check, made payable to the IRA and then send it into your account to be deposited. So you can go to your tenant and pick that up if you want. And you can hire third-party vendors to do the work. So in a way, you can kind of property manage, but what you really can’t do is take a fee as a property manager. That’s called a prohibited transaction and we could go deep on that later if you want. But you stay away from uh actually offering services to the plan, but you can do those three things like screen tenants, pick up the rent check, you know, and hire third-party vendors.
Host: [04:03:83] Okay, as long as I’m not taking money for any of that action.
Guest: [04:07:93] No personal acceptance of money, right, exactly. Yeah.
Host: [04:10:83] So, many people may have a balanced portfolio, some wealth in their home, some after-tax cash, and something in a 401K. In that situation, I would not be encouraging that person to use their their their 401k wealth, their IRA wealth, take it out of Schwab, which does not mechanically allow them an easy route to purchase a property and to buy a rental property with it because I’d use my after-tax portfolio for that. There are great tax advantages for that and if I want a balanced portfolio with stocks and real estate, I might get the growth in the um in the stock market inside of my IRA and my real estate outside of the IRA. However, if I was thinking about buying a private note, for example, I would do that in my IRA all day and I’d put the uh wealth outside of the IRA into the stock market, for example, because I’m going to get a clear tax advantage. I’m not going to pay tax on what will be simple interest. Similarly, if I’m thinking about syndications and I want to be in a preferred equity, um, tranche or I’m going to be in an income fund or something like that. That’s where I want to use the IRA instead of the after tax brokerage condition. We use the real estate example to illustrate what are the shortcomings um of traditional uh IRA custodians like a Schwab, for example. By the way, I love Schwab. I use Schwab. Um I have an account with them. I have nothing against, it’s just the mechanics of facilitating an investment in a note or rental property are not readily available through my Schwab account. Um how am I doing in articulating the problem here in some use cases at the strategy, the strategic level? Do you agree with those?
Guest: [05:45:20] I- I do. I mean, you’re straight up, right, 100%. And I’m going to add something to that too. Everything you said is 100% correct. But there’s another thing to think about, like just like take a step out and say, uh, okay, you’ve got, maybe you just left this job and you’ve got maybe 100K that you saved in your employer’s retirement account. Now you get to move that money. So your question is, what am I going to do with that money? It’s not, you know, maybe you don’t have 100,000 personal to invest in real estate. But you have 100,000 from this old retirement account. So what are you going to do with that money? So you could take that money, put it in a self-directed IRA and invest in real estate in some form or invest in the asset class that you know best. I think that’s where real estate makes a lot of sense. You’re right. Real estate has just awesome tax benefits. I mean, just ask our friend Amanda Han, right? She, she’d go on for days. I love her. And that’s the best thing, you know, about real estate is the tax benefits. But if the question is, hey, I just found this awesome deal, this, this piece of property I really want to take down, I’ve got this old retirement plan and I don’t have the cash. How am I going to do this? Well, maybe you can take your IRA. Maybe in that case, it makes a lot of sense.
Host: [06:53:93] Okay. Going off of this, $100,000 myth, mythical $100,000 we just discussed, I had it in my 401K. I separated from my company and now I’ve rolled it over into an IRA, a self-directed IRA. But in my area of the world, houses don’t cost $100,000. How do I cover the, let’s say it’s a $500,000 house. Where can I get that other $400,000? Can I get a loan with my $100,000 down payment?
Guest: [07:22:9] Yeah, excellent question. You can get a loan and I think one of the biggest misunderstandings about what you just asked is people think that they can go to their bank and get a home loan just like when they bought their primary residence. It’s different. You can get a loan, but your IRA isn’t a down payment on a Freddie, Fannie, FHA, VA kind of loan. Uh, your IRA would have to take on a non-recourse loan, which is a special kind of a loan. Uh, so your IRA can do that and then when your IRA does that, I mean, so here’s what happens. Um, say your IRA has, it’s a $100,000 property, okay? So your IRA has 70 grand and your IRA borrows 30 grand of non-recourse debt, okay? So beautiful. So now you have 30% leveraged, 70% IRA. So here comes your first rent check for $1,000, right? It comes back to to your IRA. Well, you know, 70% you earned because of savings, 30% you earned because of leverage, and then that 30% is subject to this wacky tax, which you may have heard of, called UDFI. Unrelated debt-financed income tax. Okay, so yes, your IRA can borrow money. We all know the power of leverage. It’s awesome. But in a self-directed IRA, even a Roth, it could be subject to this, um, special tax. Not not an income tax, right? It’s it’s a it’s a special tax.
Host: [08:47:34] What is this tax rate that we’re talking about this UDFI approximately?
Guest: [08:52:1] Yeah, it’s, it’s not nice. It’s like 37%. It’s the same rate usually as a trust rate. Yeah, it’s nuts. But it’s not on the 100% of the proceeds. Like in this case, it would be on 30% of the proceeds would be subject to that tax. Now, I it blows your mind. I get it. I see your mouth you’re agape here. But, uh, but you can take deductions. So your tax professional is going to complete a document called a 990-T. Like when you and I when we do our taxes, it’s a 1040. When your IRA does its taxes, it’s a 990-T because an IRA is tax-exempt. So say for example, there were expenses, your IRA can, you know, deduct those expenses from the amount of tax owed. And your tax professional will dig into the weeds on that one because I I don’t really offer tax advice. Uh but that’s, you know, so you can take deductions. And another time that this UDFI comes into play is when you invest in private equity syndication. Say it’s a big multifamily building, and that asset sponsor is got a capital stack and some of it includes leverage, right? Borrowed money, obviously. Well, same thing, your IRA is going to owe the UDFI tax on a syndication investment too. But say that syndicator did a cost segregation, that can pass through to your IRA on the 990-T.
Host: [10:06:55] All right, it’s time for a break. As you know, Karren’s new book, Self-Directed IRA Investing, is a brand new book to the Bigger Pockets bookstore and we’re offering BP Money listeners 10% off. Go to biggerpockets.com/SDIRA and use the code SDIRA10 to score your copy today.
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Host: [13:16:1] Welcome back to the show with Karren Hall.
Host: [13:17:28] Let’s say that, um, you know, I’ll use a specific example here. This is not something I’m investing in, but you know, we we had a contributor Matt Faircloth do a little pitch for his income fund, a debt fund that he did at BP Con. It was um, a pretty fun little segment. They actually had three different funds presented. And let’s say I want to put 50 grand into that fund through my IRA. But I have an IRA of a hundred and fourteen thousand or whatever it is from my previous employer. Can I do this with a specific amount for a single purpose like that and create an IRA, a self-directed IRA for each one of these investments? Do I have to fund it like what are the mechanics of of of setting this up? Does it have to be a rollover from another one or can I just do this for a single investment at any time with any part of my my IRA holdings?
Guest: [14:03:19] Like I have three different answers in my head for what you just said. One of them is, if you want to have a different IRA for every asset, you can because the IRS does not limit how many IRAs you can have. They only limit the contribution amount that you can contribute. You could have a million IRAs, but you can only contribute X, you know, of course you have to pay the account fees, which with us aren’t that bad, but there you go. So that’s one thing. Number two is you got a hundred and forty thousand, you want to invest in Matt’s 50K investment. So you can move all the money over, you can do a rollover from your previous employer in a self-directed IRA, do the 50K investment. Then you’ve got the Delta sitting there and you’ve got that going on. So an IRA can house also an unlimited number of assets inside of it. So your IRA could have, you know, just, yes, there’s no stop to how many assets can be in an IRA. We charge a flat fee regardless of the number of assets. So it’s not going to cost you extra to have extra assets in there. Uh, so the mechanics of it is you open the account, you fund it by contributing from your own pocket. And every account is different, you know, it has its own contribution limit. It has different little teeny variations of rules. Um, you can do an IRA to IRA transfer or you can roll over a previous employer account. So those are three ways of getting the money in and that’s that’s how that’s done.
Host: [15:19:93] Awesome. So the mechanics are are are much easier than I think most people uh, imagined them to be in this world of real estate investing. And again, like I’m I’m using the the case of an income fund uh a debt fund because that is exactly the type of thing that I would be thinking about using an IRA for first, right? I mean, I if I all of my wealth is in an IRA and I only know want to be in real estate, okay, maybe I buy a rental property with it and think about these things. But to your even in your example, you’re like, oh, you’re going to have to use a non-recourse loan. Well, that sounds great in theory, except for those are going to be much lower LTV. They’re going to be much higher interest. They’re going to have a balloon payment typically that are associated with them. They’re just not as good as the 30-year fixed-rate mortgages you can buy as a regular uh, you know, what we’re used to uh being called a real estate investor in single-family. These other assets, I would say even specifically syndications are what I would imagine are a primary use case for a lot of IRA investors, and you don’t have to roll over your entire fund, you know, your entire your entire stock portfolio, you can do it in chunks here. And that is going to be what I think, um, a big chunk of the capital that invests in syndications will be coming from is is these IRAs out there. Maybe as much as 40 to 50% of that capital.
Guest: [16:31:85] Yeah. You know, syndication is the number one asset class for our industry.
Host: [16:36:1] So, let’s talk about uh, we often talk about this concept called the middle-class trap. And we we define the middle-class trap as, you know, this this uh, let’s let’s create a family of uh a million five in net worth with 500K in their primary residence, uh, uh 500K in three rental properties that are kind of break-even cash flow and 500K in a 401K. So they’re producing essentially no cash flow from their portfolio and they can’t actually harvest any of that money. Um, the the the the playbook here has to be about their real estate and their home. We talked about those at length on bigger pockets money. But how can I use this tool, this notion of the self-directed IRA to give me some creative options that I might not be thinking about? Um, if I’m in this position, how can I use that to actually begin thinking about creative ways to generate income I can spend after tax today?
Guest: [17:26:95] Yeah, I I think, uh, well first off, I love the the term middle-class trap because isn’t that true? You know, a trap is something that you don’t know you walked into it until you’re there. And it’s like, oh, wait, it’s a trap. I would, you wouldn’t have walked into it if you didn’t already know, you know, if you knew it was a trap. So if you find yourself there and you’re following the rules, right? You’re playing by the book. You know, you’ve got this nice little, sweet little portfolio going on and and that’s beautiful. But what you want is real wealth and you want to be truly wealthy. Um, and so, so, so what do you, so what do you do? I think that’s what you’re asking. And I think with the self-directed IRA, it, it’s not going to give you cash today. It isn’t. An IRA, a retirement account is all about later. Any retirement account is about saving for the future. And that’s why the IRS gives us tax benefits because I think we know social security, it’s always iffy. My whole life I’ve heard, well, it may not be there when you reach that age. So you know, like in 75 they came up, they came up with IRAs so that we could prepare for our own retirement. So we could be responsible for ourselves and our own future. So a self-directed IRA can do is help you, you know, prepare for that long-term eventuality of being retired and doing it in style. Um, you don’t want to be, you know, that that old person at the grocery store buying a banana for 15 cents because that’s all you can afford, you know. But that’s, that’s kind of, I know, I saw, I’ve seen that. I know it’s, I, I literally saw that I, I this is something I don’t want to be like a cautionary tale, right? So what we have to do is, is, is help ourselves by investing today in in all different kinds of asset classes, um, that that come with risk. But a self-directed IRA lets you choose uh different asset classes, not market-correlated assets. And a self-directed IRA also helps you have more of what you’ve earned. Like you get to keep more of it because when you invest, you know, we’re not going to beat up on Charles Schwab. Let’s beat up on TD Ameritrade for a second. I have an I have an account with them. So TD Ameritrade, and I mean the same thing, they’re going to take, I like whether I make money or not, they’re going to get a percentage of my assets under management, aren’t they? W- whether whether I make a profit or not and they’re going to make a little fee on every trade and every deal. With the self-directed IRA, we’re not doing that. We’re when you make a when you make a deal, we might charge a like a $35 transaction fee, but we’re not taking a percentage, you know, we’re not, we’re not taking your earnings uh away in to a great extent. And and by the way, if you want to go deep on this, there’s a great, um, you know, John Oliver, the comedian, he has a great segment. So look up John Oliver and teacup pigs and he breaks it down how market-correlated, you know, advisors, how they’re taking money off the back end and you put in all this money, you know, again the middle-class trap, you’re following the rules, you’re putting money in your 401K, but John Oliver brilliantly lays out how that it’s a trap, how much are they taking and how much are you keeping. Well with a self-directed IRA, you’re keeping more of it. So I’d say that’s the advantage to self-directed.
Host: [20:21:65] Okay, Scott just shared a scenario where real estate investments might not actually be so great for your self-directed IRA with the non-recourse loans, the higher interest, the balloon payments and all of that. Are there any other investments that aren’t so suited for uh self-directed in- an IRA investing?
Guest: [20:39:69] I don’t think there’s any asset class that offers as many personal tax benefits as real estate. So I would say no. I would say real estate is is the one.
Host: [20:48:47] I think that I want to push back a little bit on that because aren’t there a lot of big rules with related to IRA investing and your direct ability to make changes to the business? So, for example, in real estate, I don’t think you can manage the property directly um if you buy a property inside of your IRA, right? Like you have to hire outsource management. You cannot be a self, you know, it certainly can’t be an owner occupant and you probably I don’t believe also can can be the property manager.
Guest: [21:17:66] Well, you can be though if if I could, you know, jump in there, um like I mentioned, you can pick up and collect the rent checks, you can hire third-party vendors and you can, you know, um just, you know, hire third party vendors to do the work. So, so everything that you would do as a property manager, you can do with a self-directed IRA. What you can’t do is do the work yourself.
Host: [21:35:88] Got it. Yeah. I I think the more the broader umbrella here is that the the investments inside of your self-directed IRA can’t benefit you. Like you can’t, like you can’t be your home, it can’t be a second home, you can’t manage the property and charge your IRA a fee for that. There has to be a distance that’s crea- the intent is to create a distance between you, your your wealth today and the benefit of the investment. Is is broadly how I’m interpreting that. And that’s where I’m going with this is is those rules can be constraining or you will have to educate yourself on those because there are deep intricacies that you have to follow if you’re going to invest with your IRA. So for example, you buying me a business that you are hoping to generate income from and spend it in any way or or benefit you in any way, credit card points, right? Those would all be problems to have your IRA, your self-directed IRA participating in. Does that is that, is that a better way to phrase it?
Guest: [22:33:4] You got it. It’s straight up, right. Yep. Yep.
Host: [22:34:87] And that’s that’s a big piece of this that I think folks need to to consider is like, hey, this this is not a way to this is not something you can, you know, yeah, mesh your life and your business and all this stuff with. This has to be a separate set of investments and and that’s another pain point with with with real estate.
Guest: [22:49:50] Yeah, we’re the an IRA keep it arms length. I mean I always say that, you know, when I do a presentation, I it’s like that’s the number one rule, keep it arms length. Now there are these tiny they’re not really exceptions, but it’s it’s insight into how you can manage your property, but you still keep it arms length. Like what if your tenant doesn’t pay their rent? Then you have to have a third party go in and do the, the loan servicing part of it, you know, the the uh, you know, what- whatever it may be.
Host: [23:13:95] And on the flip side of that, Karren, you mentioned that syndications are the most common investment in IRAs. So what are some other investment vehicles that are great within the IRA?
Guest: [23:24:97] Yeah, I think one thing that may be overlooked is performing and non-performing debt. When you can buy um you know debt pennies on the dollar and turn a non-performing loan for example into a performing loan and this may take some, you know, like a loan servicer. You may have to keep it arms length and all this, but there are companies that do this and you can invest with them. Um, but your IRA can also be the bank and lend money to people. And I’ve seen a lot of people do this in real estate investment groups. They’ll say, somebody will come up and say, hey, I’ve got this rehab I’m doing. I’m looking for somebody with a self-directed IRA. I need another, you know, 20K to finish the kitchen. Your IRA can come in and be that lender with, you know, points and fees and all this and then say for example, they sell the property and at closing, here comes your your your money back or and hopefully with monthly monthly payments in the interim or it could be interest only. You can set the terms as long as they’re legal.
Host: [24:18:27] Yeah, I do that. We have to take our final break, but more with Karren after this.
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Host: [27:16:11] Thanks for sticking with us. Back to Karren.
Host: [27:18:13] I love the idea of hard money lending within the 401K, right? That’s a great, that’s a great option for somebody. I think that’s maybe getting closer to retirement age um and wants to have, you know, get that practice of generating that income there. It I mean, you know that it’s going to be fairly safe and you’re going to foreclose on an asset if in the worst case that’s your bread and butter in real estate around there. I I’ve done a few hard money loans outside of the 401K and the issue is it’s all simple interest. So it’s just there’s no tax advantage whatsoever. But inside the IRA, that problem goes away and it becomes a really powerful wealth builder. You can compound wealth at somewhere close to 10 to 12 to 14 percent depending on what you’re charging for these loans. That’s really interesting and a way to use that real estate skill set um in there. And and that’s before we even talk about performing versus non-performing. That’s just a straight vanilla hard money loan that is used every day by clippers around the country. Um and if you start talking about getting non-performing ones performing, I mean you can make serious money inside this thing um in a way that’s really tax-efficient.
Guest: [28:18:88] See that point. I have to say I, uh, I know somebody here in the in Southern California real estate investment community. I was talking with them. He built up a million dollar Roth portfolio, of course he worked his buns off by making these micro loans to um people for um mobile homes. And he just, you know, kept going and churning and churning uh this money over and over uh and and built up a million dollar Roth, long story short. So you what you said is, I mean, is I’ve seen examples of that all the time.
Host: [28:46:17] Yeah, that’s how I use some of my uh IRA money is to make uh to make micro loans, to make hard money loans to flippers that I know very well and I know are going to pay me back. I think that’s really important to to note that you want to be paid back. So don’t just randomly make these loans, but you can make a really, really great return if you do it right. Um, Scott, you just said 401K and IRA, you were kind of flipping back and forth. I am under the impression that the rules are essentially the same with regards to a 401K and an IRA. Karren, can you clarify? Um, you can do all of these things in your your your fo- your well, I’m talking about a self-directed 401K.
Guest: [29:34:72] Yeah, so a 401K may if it’s, if it’s with your current employer, no, because then it’s going to be tied to the market, market correlated assets. But you could absolutely have a self-directed 401K and I think that’s what Scott’s talking about, you know, like a solo 401K.
Host: [29:49:12] I’m incorrectly incorrectly using the term 401K to describe the vehicle.
Guest: [29:53:77] Well, no, I mean that’s what it’s called. It is a four on cases just for an individual. But I mean, yeah, there’s there’s a delineation there, but I’m absolutely you guys got it right. I mean, you’re you’re on the right track.
Host: [30:02:84] There’s a lot of, of, of uh, phrases that we’re throwing out here. Um, I want to throw another one out there called RMDs, required minimum distributions. And for somebody like Scott, that’s not really so close to his horizon, but for somebody like me, a little closer or a lot closer. I think Scott’s 50 years away from RMDs, whereas I am only 25 years away from RMDs. How do I like is there anything I could do to reduce my RMDs or like now that I can do that will help reduce my RMDs down the road? I mean RMDs are a great problem to have, don’t get me wrong, but I’d rather not pay it if I don’t have to.
Guest: [30:42:55] All right, I, all right. Because, well, a required minimum distribution, right? This is an RMD. One piece of good news is is that in, uh, right now the age is 73, your RMD age is 73. It used to be 70 and a half, now it’s 73. Uh, it’s going to shoot up in in the year 2033 to 75. So one way you can do it is just live longer, you know, and, and so you won’t even have to start taking it until you’re, you know, till you’re uh, 75 in the future. So that’s, that’s cool. Um, but the purpose of the RMD is kind of like the IRS is making a little deal with you. Hey, take this money, contribute it to your IRA and assuming your income isn’t too high, like you’re not a super high net worth, you know, wage earner, uh, we’ll give you a tax break. All right? So we’ll give you this now while you’re young and you’re building your retirement. But later on, at it’s a pre-tax account, like a traditional or maybe a step or something, or a 401K like with your employer. But later on, when you’re older, you’re going to be required to take the money out. So we’re not going to hit you for the tax now, we’re going to hit you for the tax later. And that’s what an RMD is about. So they really want to tax you. So getting away from an RMD, that’s not the way it’s set up. The game isn’t set up to be played that way, but it doesn’t mean that there’s nothing you can do, you know?
Host: [31:59:74] And the RMD does not apply to the Roth IRA, right? So this is only for the 401K other vote in favor of the Roth for all those listening. Um uh, if you’re unsure if it’s close, you know, there there’s certainly scenarios where it’s 401K all day. We discussed it length in future on previous episodes. Um, but the the the goal, I think that the goal here is I have a bunch of money in a 401K. I move it into an IRA. In at 73, I’m going to be forced to withdraw to some degree and the strategy that we should be thinking about whether we’re talking about a self-directed or a traditional 401K is, how do I move that money into the Roth way in advance of that point? That’s a 50-year problem. One of those years, you’re going to have a loss as an entrepreneur, right? And that $500,000 loss year is the year, yeah, roll it all over into the IRA um in there.
Guest: [32:54:67] Yeah, and then one offsets the other. Like yeah, right, because because the Roth when you do a Roth conversion, it’s taxable to you. You’re going to get a 1099. But like you said, if you have a like a loss one year and then you’ve got this extra gain of a Roth conversion, they may equal each other out. This is when you work with your competent tax professional to kind of time that for you.
Host: [33:12:96] So my quest my question though is like, let’s say let’s say I I am not willing to ever bet on a loss. It’s going to be so super rich the whole way, never have a loss, never have a bad year of income, whatever, never have a chance to roll this over because my career is so stable and so high income earning around there. Um, we’ve talked in the past about a number of strategies to withdraw early from a 401K to fund early retirement, which include things like substantially equal periodic payments or a Roth conversion ladder. Are those concepts all still applicable, at least in theory, to the self-directed IRA world?
Guest: [33:52:16] They are. The first one you describe, we call it it’s a 72t. And just know that once you uh commit to a 72t, you’re committed to the 72t. You have to see it through. So that’s the equal periodic payments where you get to take them out. That’s absolutely true. Another thing you can do is, um, I will make a a a qualified charitable distribution, a QCD. So if you are in your RMD phase and you don’t want to pay tax but you have to take a distribution, what you can do is take that money from, you know, the pre-tax account, contribute it to a charity, and it’s a charitable contribution that you don’t ever pay tax on. It just goes straight from your IRA to the charity and you you don’t pay the income tax on it. I mean, you didn’t get the personal benefit of it either, but you did get to make a charitable contribution.
Host: [34:40:43] We have some use cases that pop up here that I I haven’t explored. We would love if you’re listening and you have explored one of these for you to come on and share these stories. But in theory, for example, we could play out the the debt fund concept, right? Or hard money like let’s say you go you say, I’m gonna take this, I’m gonna take some few hundred thousand dollars out of my 401k and I’m going to start substantially equal periodic payments. This is using the 72t, right? And I’m going to take out, you know, 20 grand a year and I have to commit to that forever, right? In in perpetuity, essentially. But I want to make sure that that that pool of assets is going to clear way more than that. So I put it into a debt fund that’s conservative and it’s generating 8% crap or something like that. And hopefully that’ll go well or I’m in several that will give me that on average or whatever it is. Um, that would be one way to use the money in a 401k to provide current income and then the rest could be, um the rest would stay in the IRA and continue to get reinvested and compound or invest with them. But those are, those are things that are more that are accessible to someone with a self-directed IRA that might make them feel more comfortable harvesting a portion of their 401k millionaire wealth, um middle-class trap wealth uh to to fund early retirement. How how am I doing? Are these the types types of options that begin to present themselves and they start going down the deep rabbit hole of SDIRA?
Guest: [36:02:44] No, you’re right. Yeah, yes, it is. And and another thing to know is that with an IRA, you can’t take take a loan from it, but you can have it personally for 60 days, but then it has to go back in another retirement account. So you can have personal use of it for 60 days. I did that one time when I was buying a primary residence. I was waiting for some money to come, like a commission to come in. And so I used, I, I took my uh IRA and I took a I took it out. I withdrew it, used it to for the down payment on the house, but then here comes the commission and I took the same exact amount and put it back into a retirement account and it was not taxable to me. So I did that a long ago.
Host: [36:35:50] Hold on. Is there a cap on this? 60-day usage. I can take the 100% of my IRA and borrow it for 60 days? Do I have to pay interest back? Do I have to?
Guest: [36:48:47] It’s not alone. You just have to you just have to return the entire amount to a retirement account within 60 days. And mind you, you can only do that once in a 12 month period for all your IRAs combined, once in a 12 month period. So that’s that’s a cap. But you can have that money for 60 days. I could take 100%, let’s say, back to this $100,000. I have $100,000 in my IRA. I can for two months borrow that, pay it back and have not, that’s not a taxable event. That’s correct and leave a couple bucks in the account so you don’t close the other account if you want to move it back, you know, just sad, but yes, what you said is correct. You can move it out, have it for 60 days. As long as it gets back into the account within the 60th day, um, you’re fine.
Host: [37:31:97] Mindy, what possible application? You know, besides like a one-off short like like I need to I need a 30-day bridge in terms of like getting bridging a commission. But that’s fair.
Host: [37:40:99] I need a short-term loan. I’ve got an IRA. My husband has an IRA. Since they’re two separate accounts for two separate people, I could take my money out, put it back in, then he could take his money out and put it back in. This is just, it’s, Scott, it’s just another idea. Remember what we were talking about, talking to Tony Robinson and he said, oh yeah, I took a loan against my stocks and I was like, wait, what? Essentially, he takes out a HELOC, but it’s against his stocks and he can use that for things. I bought a whole house with that, Scott. I had never even heard of that.
Host: [38:12:12] Yeah, right there’s, uh there’s probably an application for this. Now, you have to take the money out of the account. So if you have, if you’ve put this into a, you know, Vanguard fund or whatever, you will sell the ETF, put it into cash, pull it out of the account, and give it to somebody. Whereas in a four, is that same mechanic happened actually in a 401K loan or am I borrowing against the value of the portfolio?
Guest: [38:39:69] Yeah, if you’re going to take cash out, you have to liquidate it. Sorry to interrupt, but yeah, yes, the answer’s yes. You have to liquidate to take the cash out. Correct.
Host: [38:45:71] So yeah, I I don’t have any cash sitting in my four my 401K. Uh and I don’t know if I would in a self-directed IRA except for as various private loans or funds liquidated. So, yeah, but yes, I think there’s some application there. That that’d be interesting.
Host: [39:00:83] There’s an application there. I think it’s, I think it’s interesting just to have more information. There was at one point, Scott, I don’t know if you remember this, Carl and I borrowed against our stock portfolio and we had a margin. And then, you know, it was reduced a little bit because we borrowed the money and then we watched it get smaller and smaller and smaller. And we’re like, oh no, what are we going to do? So we actually took out a HELOC against our primary residence and threw that into there and grew a little bit of margin. It actually, if we wouldn’t have done that, we would have been called out of some of our stocks and we would prefer to sell them on our terms, not have somebody else choose which stocks they’re going to sell for us. Um and because the, the margin was going down because the stock market was going down. I think this was the end of 2022 when the market was down a whole lot. So just having another option, now all of a sudden, I have a whole lot more money at my disposal to throw into a short-term solution if I need to. So I just like having lots of options, Scott, and knowing about the options.
Host: [40:05:49] Karren, can we can how does this work with a health savings account? Is there a self-directed health savings account option?
Guest: [40:13:92] Yeah, I mean if if you if you play the game correctly, you can really win the prize here. Okay. So an HSA, you either got an individual contribution, a family contribution, and we’ve got all the contribution limits on our website so you can go look them up. So you make the contribution and that is like, well, that’s like, that’s you get a tax deduction for making that contribution, okay? So that’s pre-tax. Then you invest that money, it grows tax-free and it comes out tax-free as long as you’re using the money for medical expenses, qualified medical expenses, which are on the IRS’s website. There’s a giant list. They even include things like band-aids. You just have to have the, it may might even include if your doctor says you have to have a Jacuzzi, you know, for your for your health, you know, if you’re going to a prescription. It has to be health-related expenses, okay? So then you take, you save your receipts because you’re going to probably get audited. So you save your receipts and you can tell the IRS, I took all this money out, here are the receipts to substantiate the money I took out. Right. That that happens. But what are you going to invest your HSA in? And then that’s when we get to things like loans and and uh usually smaller things because with an HSA, it’s got a smaller contribution limit.
Host: [41:28:44] You can make loans in your HSA account?
Guest: [41:30:16] Yes.
Host: [41:30:86] What’s it called? Is it called a self-directed HSA? Is that?
Guest: [41:33:63] Straight up. Yeah.
Host: [41:34:65] Okay. Okay.
Host: [41:35:46] How do I get this account?
Guest: [41:36:78] Well, there is a there is a caveat. You have to and when you okay, if you work somewhere and you’ve got um you know health insurance, you have to have a high-deductible health plan, the HDHP. High-deductible health plan. That’s the first barrier to entry. So if you have the HDHP, then you can have the uh, you know, this this special special kind of HSA savings account for medical.
Host: [41:59:75] Is this fair to say that you know, if if I’m 23 and listening to this podcast, I have probably next to nothing in my HSA, my 401K, or a Roth IRA. I’m just getting started on all that front and those are probably offered through my employer, um and most of this discussion doesn’t really apply except in this kind of abstract sense that 20 years down the road, there’ll be some options available to me. But if I’m 45 and have a million and a 401K millionaire and this middle-class trap thing, that all of these options apply, but really they begin to apply the moment I leave my job, right? And I and I can begin making other moves with these. And that’s when I got to think about moving the IRA, the HSA, and or a Roth, whatever is provided by that employer into these new categories. And that can be at the change of my current employment, um, or or if I started a new business or have several of these accounts. But am I really kind of locked into my employer’s fund until that event takes place?
Guest: [43:01:97] You can always have an individual retirement account at the same time that you have a an employer account. So you can still, uh like have a Roth account, say for uh if your income doesn’t exceed the cap, which is like around about 140K as an individual, something around there. Um, so yeah, you can contribute to these, the individual retirement accounts and contribute and contribute. And I recommend if you want to get out of the middle-class trap, that’s what you have to do. You have to be disciplined, you have to save and and squirrel this money away, um in every tax-advantage way that you can. So yeah, so you can at the same time you’re building a 401K at your company, you could be building an individual retirement account, your cell phone.
Host: [43:40:4] And does this but but but for the for the material portion of the the retirement wealth will likely in this hypothetical scenario, be in the employer-bound, which for all practical intents and purposes, can’t be rolled over into and and begin exploring these things until that job is terminated.
Guest: [43:56:88] Yes, you have to leave the service of the employer before you can roll over uh plan typically. Now there’s an exception to that. So you’re working for company A, company B buys them. So company B just bought company A. But you want to take the the 401K money you used to have under company A, you can move that into a an IRA. All right? So that that money you can you can roll over. But you wouldn’t call your plan administrator from company B and say, hey, this is what I want to do and make sure that their plan document allows it.
Host: [44:26:5] Okay, so when I’m preparing to fire, right, which is what most people listening to Bigger Pockets Money are trying to do in some form. I got a million bucks across a sprawling set of 401Ks. two of them are from my employer I had for two years, they swelled to like 70K, but really I got 800 grand in this 401K from this employer I’ve been with for a while. Um, that and I got 100K or 50K in the HSA because I’ve been listening to Mindy for five years on that front. At that moment that I fire, that’s when I call up someone like you and I say, okay, let’s let’s think about these options because I have a material balance here. I have options. I can self-direct it in the HSA. I can self-direct it in the 401K or and or the Roth. And I should really thinking about what I want to do there. I can leave whatever I want to keep investing in the stock market in Schwab or whatever my brokerage of choice is that I want to roll over to, but the other stuff is where is where I really begin to have these options and that’s the trigger point. And so the planning and knowledge needs to be built now, but the action can really only be taken once we have a uh a job change, unless your company is purchased um or some other kind of weirdo uh event happens.
Guest: [45:36:90] Yeah, that’s exactly right. And I think that you bring up the point that you really do need a plan in advance these things because you don’t just, okay, well guess what? I’m I’m leaving my company today. Now I’m going to start thinking about it. You really have to, you have to start planning now because with self-directed IRA assets, you don’t just pull the trigger on these, you do your due diligence and that’s where open, you you open fund invest to self-direct. That’s easy, but the the challenge is the due diligence, learning about the asset class and what are the underlying rules and exceptions. Like one of the things that that that I’ve done in my life that gave me such a a leg up is getting a real estate license, you know, and working in the real estate field, getting a license health license, learning about those options and so studying the the the skeleton of of of the creature, you know, and so when as you’re as you’re young and you’re building your wealth and you want to be wealthy, get as much education as you can so when you’re ready to pull the trigger, you’ve done your due diligence, you’ve done your homework. You get it. You, you know the ins and outs of the asset you’re getting into, um, because that that that money is very precious. You can’t just replace it, you know, when when a when a, you know, when an IRA loses money, it just it’s lost. You don’t get to deduct that on your income tax. So, uh you really want to make sure you’re making a smart deal going in.
Host: [46:48:47] Karren, are there any gotchas for 403B or thrift savings plan, military, like for, you know, government employees, military, anything like that that we should be thinking about?
Guest: [46:57:33] Not that I’m aware of. I mean same thing, you’ve got to leave the service of the plan to move it over.
Host: [47:01:2] So you can just do a self-directed IRA with those funds as well.
Guest: [47:04:19] Sure. You can roll them right over.
Host: [47:05:43] Is that something that’s recommended? Like if I am separating from service from the military, do I want to keep it in the TSP or do I want to roll it over?
Guest: [47:15:93] Well, you’re going to have to make that decision independently. I mean again, it’s what’s your risk tolerance? Are you ready to invest in alternative assets? And that’s a whole, that’s a whole, you know, separate question, but you can. I think that the point is that you have the freedom to do that if that’s what you want to do.
Host: [47:29:91] I don’t know about the military, but most employers have fairly high fee funds inside of the typical corporate 401K. So, you know, first thing I did when I left my my my Fortune 500 company job is I rolled it over to a Fidelity account with much lower fees around there, right? And then I was, so I would definitely, I would I would encourage most people when they leave their job, if they have a 401K balance to just like look at the fees. And if you’re a believer in index funds, go with the low-c- a lower-cost index fund. Like that 1% a year adds up huge over the next 30 years inside a retirement account. But then after that, if you want to put it into alternatives, you have to use the SDIRA option. I was just making sure there wasn’t any any other like kind of weirdo rules um associated with the military stuff in there.
Guest: [48:17:41] Yeah, no, it’s treated basically the same as a 401k when it comes to rolling it over.
Host: [48:21:73] All right, Karren, we’ve covered a number of different things here related to self-directed IRAs. Um, tell us what’s going on, what’s new? What else should we know before we adjourn here?
Guest: [48:32:13] Yeah, for most of my 17 years in the industry, there’s been, well, there’s not much new, you know, but this year, there’s a lot. And uh, just hitting on a couple of highlights. One is, and this doesn’t apply to everybody, but if you happen to be between the ages of 60 and 63, not everybody, but you get this wacky new, giant catch-up contribution. So in other words, it’s not just being able to contribute to an account, but you get to contribute even more, ten thousand dollars more starting uh January 1st, 2025. So that’s one thing. Um, but another thing that’s really exciting applies to everyone across the board is tada! Thanks to Secure Act 2.0, which by the way went into effect December 31st, 2022. It’s taken the IRS away, you know, a long time to actually implement this, but you can make a Roth contribution to a SEP or SIMPLE IRA. Well, what does that mean? Like this means you don’t have to do a back-door Roth. So if you are self-employed and you have a SIMPLE IRA, that stands for savings incentive match plan for employers, okay, so you have to be an employer. Or a simplified employee pension, a SEP account, both of those you’re you’re self-employed with either one of those accounts, you can contribute the lesser of 25% of the income you’re earning up to say 70k and it can be a Roth contribution for a SEP, you know? SIMPLE, the contribution is an as much. So that is a tremendous big door opening to tax-free savings. Um and so, yay for us, you know, we can have more tax-free dollars, more tax-free gain from our IRA savings. So those are two of the biggest highlights I think in this space.
Host: [50:12:12] Yeah, so here’s what you do if you’re the 401K millionaire and look using this this nugget. You retire at 45 or whatever it is and it’s all in the 401K. You go get your real estate license, you become an agent, you make uh what is that? $280,000 in commissions. Go you. Um and you put $70,000 of that into the Roth, you buy two rental properties outside of your 401K and cost seg them, you have a loss, you’re able to put of a nice big loss overall because you’re depreciating 4 or 500,000, you roll over $200,000 from your 401K. Now you put $270,000 into your Roth, uh and it can be in a a debt fund or a hard money note or whatever it is that’s related to what you’re you’re uh you’re doing there. And now you have uh an income stream where you can start taking your substantially equal periodic payments. And that’s the Holy Grail of retirement planning uh right there, I think, right? Mindy, how we do it?
Host: [51:03:97] My attorneys make me say the contents of this podcast are informational in nature and are not legal or tax advice. And if you’d like to follow Scott’s plan, you should really, really, really speak with an actual tax planner to make sure that what he said is true. However, it sounds really good. I just have to make sure that people are like, Scott said.
Host: [51:22:98] You know that combines everything. That’s rep status and that’s the yeah, that we got the whole, we got the whole jargon name uh out there. So yeah, that’s not, that’s not, that’s not feasible for maybe anyone, probably most uh on there. But these are the, these are the theories that you begin to think about when you start putting together all of these things about real estate and then the retirement accounts and the self-employment and the advantages you get across all these things and the different asset classes. Like there’s lots of fun ways to do this and there’s, the tools are out there and they’re starting to get a little bit more accessible with each passing year.
Host: [51:54:83] Yes, and the money that you’re paying your tax planner to confirm that this is actually correct, or to correct anything that Scott who is not a tax planner has said perhaps mistakenly is well above or well below what you’re going to save in taxes. I mean, even if Scott is slightly off, that’s the difference between what you’re paying and you still have this giant amount of tax-free cash. And what kind of cash do we like best? Tax-free cash. That’s the best kind.
Host: [52:23:14] There’s tax-deferred and there’s tax-free and there’s a whole bunch in what I just kind of threw out there. But options that should be floating out there for folks to begin thinking about that are really interesting and and really, really cool.
Host: [52:35:19] Karren, I am so excited about this episode and all the stuff that I just learned. I like to think that I’m fairly knowledgeable about this whole money thing, but you just threw a bunch of stuff out at me that I am going to now have to go and dive deep. Like you said, do your due diligence. I need to get a lot more information about this, but I’m really excited because there’s a lot of opportunity uh that I wasn’t aware of. So the whole point of having you on the show is to plant some seeds so people could be like, oh, I didn’t know about that. Let me go get some more information. I didn’t know about that. Let me go get some more information. And I think you just gave people a a lot of people a lot of homework. So thank you, thank you, thank you. This was super awesome fun. I really appreciate your time today. Where can people find you if they want to chat more?
Host: [53:24:23] And where can people find like, is there like a body of work that digests all of this research, maybe in one text that they can go and and kind of study it and look up if they’re looking to learn more that that would distill your knowledge into, I don’t know, like 250 pages?
Guest: [53:38:59] That book, man, it only took me 10 years to write it, you know? But uh, but you know, Bigger Pockets, I was talking to Katie at a at a conference back in uh, I don’t know, a few years ago in San Diego. It’s like, hey, let’s do this. Oh, yeah, let’s do it and we started working on it and and it’s had iterations and since then, we’ve had Secure Act 1.0 come out, Secure Act 2.0 come out. So then there have been rewrites and until finally we have everything digested into a nice, you know, how to kind of a handbook, a self-directed IRA handbook about the rules and a lot of things that we’ve covered um on this podcast, the basics, you know, about self-directed investing.
Host: [54:13:83] Karren, what is that book called?
Guest: [54:14:87] It’s called Self-Directed IRA Investing and it covers wow, soup to nuts about what self-directed IRAs are, how they get started, how you use them. Um a lot of the things we’ve talked about today here on this podcast. So it’s it’s going to be a great read and a great resource to look back on like, oh, I forgot how do you do that? You can pull it out and and look it up.
Host: [54:35:25] I cannot wait to get my copy. I’m super excited about this book. Thank you so much for your time today. I really appreciate it and we will talk to you soon.
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