Unlocking Wealth: Mastering Self-Directed IRAs for Real Estate Success with Kaaren Hall - REIA 464

Welcome to Real Estate Investing Abundance, the show for busy, fulfilled professionals like you to learn how to develop financial independence built on solid passive real estate investments. Now, here is your host, Dr. Allen Lomax.

Hello, enlightened investors. Welcome back to Real Estate Investing Abundance. I'm your host, Dr. Allen. It's such a delight to be back with you again today. And thank you for Thank you for taking your time to be with us. We always appreciate your presence. Today we are talking about a topic that we talk about casually all the time, and that is about self-directed retirement accounts. And I'm so glad we have with us today an expert who is thoroughly versed in this particular part of the industry. So Corinne Hall is The owner and founder of UDirect IRA Services, and her company has guided tens of thousands of Americans through the process of diversifying their investment portfolios using this aspect of self-directed IRAs. UDirect has over $1 billion under management, so they certainly know how to help you manage your self-directed IRAs. So Karin is a veteran of the show. She was with us in 2020 when we were broadcasting under our previous label of Creekside Chats with Successful Real Estate Investors. So it's long overdue, and we're so glad that you are back with us again today, Karin. And please, let's just start off with busting one of the myths, and that is a lot of people have never heard of self-directed IRAs, and so they think it's some newfangled thing that is going to get them into trouble with the IRS and they could lose their entire hard-earned retirement funds. So set us straight on that. Take us through the history of the self-directed IRAs.

Yeah. Well, first, Alan, thanks for having me back. It's nice to be back. So I appreciate that.

And you're right.

I mean, IRAs have been— self-directed IRAs have been around about 50 years. And so it's always astonishing to find with haven't heard about it. And I'm really not surprised in a way. I am in a way, in a way I'm not. And I'm not because self-directed IRA companies don't have these massive budgets like some of the big brokerage houses that can put an ad on the Super Bowl, for example. You know, if you took all of the self-directed IRA companies together, you know, we wouldn't probably have the marketing budget for one Super Bowl commercial because Most of the proceeds from the assets go right back to the account holder and not into our pockets. You know what I mean? Our fees are not that large and our industry isn't that large. So, it's a niche, but it's a very much needed niche. I think you agree as somebody who is a huge advocate of alternative asset investing.

Absolutely, yes. And thank you for explaining one of the reasons for the obscurity of self-directed accounts. Not only do these other firms have these enormous budgets, but they are training all of their agents to funnel those self-directed funds through the stock market. And if you are satisfied with low returns on your retirement funds in a very volatile, fluctuating market, then yeah, that's fine. But that just has never been okay with me. And so I have been an advocate of self-directed retirement accounts for a very long time. So just give us an overview, Corinne, about essentially how does an IRA self-directed plan actually— just the basics of how it works.

Right. So it's very, very simple. An IRA is a bucket that holds assets. All right. Think of this as a retirement bucket that holds assets, whether it is with a financial firm, a large brokerage house, or whether it's self-directed. An IRA is an IRA. The rules are the same. The money comes in through contribution, through maybe IRA-to-IRA transfer or rollover. Same whether it's, you know, whether you're investing in stocks, bonds, or alternative assets, it's just an IRA. What makes it self-directed is that you can put alternative assets in this bucket. Now, you mentioned, um, if the brokerage house is like, maybe your financial advisor puts you in stocks, but the reason is because They can't recommend alternative assets because of their licensing.

Right.

So they can't do it. So we can, we can help you, but we're not advisory. It's self-directed in that you are choosing, you as the account holder, you're choosing the asset. And then you're saying, hey, you know, UDirect, please put my money, this much money into this account and send it in this manner, you know, entitled in this way. And so we do that. And then your IRA has an asset and then all the proceeds of that asset come back into the IRA. And any expenses of that asset are paid for by the IRA.

Right. Okay. Well, one question I get, one example was this. Well, I purchase a home through my IRA, and let's just be clear, you can't purchase your primary residence, but you can invest, you can purchase investment properties with your IRA. So I purchase an investment property, it's a single-family home, and 2 years later I sell that home. with a significant profit from the appreciation and the equity from that home, I can now take that money out and spend it, right?

Well, uh, you know, in the IRA, within the IRA?

No, you can, you can, with— you can take it out of the IRA and spend it however you want to.

Well, I mean, okay, yes and no. Yes, you can take the money out of the IRA at any time. You'll suffer, uh, taxes and penalties if you're under 59 and a half. It's always your money. But what happens is when the proceeds come back, they stay in there tax-free and tax-deferred. And I think it might be wise then to save the money in the account and use it to invest in another alternative asset, because when you receive proceeds and they stay in the IRA, those proceeds aren't diminished by tax, right? And so you could compound faster by going through asset after asset and the investment cycle of various assets. Continuing to build that snowball with the proceeds until you've got a much larger account and are investing in larger things or multiple assets.

Yeah. And when you say that it's taxed and there are fees on top of it, those are substantial fees.

The penalties can be, yeah.

Yeah. They're not minor little fees because the whole point in a retirement account is to keep it there. And that's how the IRS rules are written and that's how the self-directed rules are written. is to help people preserve those funds.

You're right. And the thing of it is, is that the reason for an IRA is to give you a tax break in exchange for encouraging you to save for your retirement so it doesn't land on the government. Social Security, we never know how long it's going to be around. So, save for yourself. I love self-directed IRAs. It's so American, the rugged individualist. Save for yourself and don't depend on others to take care of you. You've got to take care of yourself, and that's what a self-directed IRA is.

Well, so we addressed the aspect of actually withdrawing from it. You can, but there's serious and severe penalties if you do. What about borrowing against your self-directed account?

You don't borrow against an IRA. Now, you can once in 12 months take it, take the money out for 60 days. If you don't put it back within 60 days, Uh, there are penalties and tax.

Uh-huh.

So you can— it's not a loan though. It's not a proper loan. It's just taking the money out. You've got 60 days to put it back in once in a 12-month period. If you want to take an actual loan from a retirement plan, it would need to be a 401, like a solo 401, or it would need to be like a, uh, a 401 from where you work, or perhaps even your TSP or 457 or 403. Those are other kinds of employment. So it would need to be that sort of—

So there is flexibility determining on really what kind of account they are. Can you just give us a breakdown? You just mentioned several different kinds of accounts. What are the differences between those?

There's almost 2 different worlds when it comes to individual plans and employer plans. So once you start to have employees in a plan, for the most part, It becomes— it goes into the ERISA world, we call it. And that is where there are just different rules. And there are numerous, too numerous to mention here. But an individual plan has typically fewer rules and is more lenient. For example, you don't have to do a safe harbor testing or something like that in an individual plan because it's just you typically. Now, a SEP IRA would be the exception. A SEP IRA is a simplified employee pension. It's an IRA that you can use for your small business and as an employer make contributions for your employees. And it has higher contribution limits, and it does let you do that. But, but, you know, that just kind of gives you an idea that every different retirement plan has its own tweak, its own difference. But employer plans and individual plans are typically living in 2 worlds. Yeah.

Yeah, 2 very different things. And of course, a lot of investors, particularly in real estate, could actually be employers. And so, and just like you can self-direct your individual plans, there are the various different employer plans that can also be self-directed. And most people aren't aware of that.

I can mention some of them, by the way, if you like.

Sure.

Because when we're talking about IRAs, we're talking about the traditional and Roth, and they're the 2 most common. The traditional IRA is the number one most common. It's a pre-tax account. So the money comes in, you haven't paid tax on it, and you might get a tax break for making a contribution. Uh, the money grows tax-deferred, but when you take it out, the money's taxed.

Yeah.

A Roth IRA is different because a Roth IRA, the money comes in, it's already been taxed, grows tax-free for life. And as long as you meet 2 qualifying conditions of having a Roth for 5 years and being at least 59 and a half, you can take that money out tax-free. So, Roths are very, very attractive. Now, there are conditions upon which you can have a Roth and contribute to it. So, there's that. Then there's a SEP I mentioned. If you're an employer, you don't have to have employees, but with a SEP IRA, the Simplified Employee Pension, you can— you have higher contribution limits and your company, even if it's a sole proprietorship, could sponsor that. And then there is also the solo 401. It's a hybrid between the ERISA world and the IRA world. It's a 401 for individuals. And that has so many bells and whistles. You can borrow from that plan, high contribution limits. Some is pre-tax, some is Roth, just lots of special considerations for a solo 401. And it's great for a solopreneur, as long as you don't have any employees, full-time employees in your company. So again, each different sort of account has its own set of of rules, many common rules, but also many exceptions. Yeah.

So lots to learn, lots to find out about, and, and many, many advantages to it. Enlightened Investors, if you haven't done so already, be sure and click that like button and also click that share so others can take advantage of the content. And finally, be sure to subscribe so you don't miss a single one of our upcoming episodes. Well, let's talk a little bit about— let's just be a little bit more specific about what kind of assets that we can hold in our self-directed accounts.

Sure. The number one most common asset in the self-directed IRA is private equity. It's also called private placement, syndication. There are different words for it, but It could also be like a Reg A, B, Reg C, Reg D offering. It's the same thing. It just has different names. So that is the private equity, I think, or private stock is, I think, the number one most common asset class. The second most common asset class is notes, the IRA making secured and unsecured notes out to investors, and then the IRA collecting that money. So those are the two most common, but some other— asset classes could be even buying performing and non-performing debt, investing in tax liens where you buy the tax lien at a discount and have the— your IRA could have the right to then collect the amount that's due to the taxing authority, but you bought it at such a discount that you'll make that delta as profit. You could also invest in precious metals as long as they have a very high level of purity, not Numismatics, you know, coin collecting, but very, very pure metals. And also cryptocurrency. It's crypto spring, I think, right now. And so cryptocurrency is something— it's still the Wild West now, don't be mistaken. I wouldn't consider that in any way a highly secure asset. It's highly volatile, but it's a very popular asset, and you can invest in that with your self-directed IRA.

Yeah, it is amazing how popular it has become given the volatility of it. But I guess some people are more into risk than I am. And maybe it's my age. If I were younger, it might, might be different. How do you do due diligence on a self-directed asset?

It's probably my favorite topic because self-directing is easy. You open an account, you fund it, but picking the investment, choosing that asset, and doing the due diligence is where the work comes in. You know, you This is your precious money, it's IRA money, it's not easily replaced. You wanna make sure that you're investing in a good asset, you want a return, right? So each asset class has its own kind of due diligence. For example, if it's an asset related to the SEC, which means like private equity, or it's maybe a large note that you have to register with the SEC, there's something called FINRA, F like Frank, F-I-N-R-A, FINRA. And FINRA is the enforcement arm of the Securities and Exchange Commission. So basically, FINRA has this website called BrokerCheck. So if you're investing with somebody who is licensed and registered with the SEC, you can type their name into the BrokerCheck and find out if there are any grievances against them. I think that's a good place to start. If you're investing with anyone else and it's not just you doing it personally, straight, you know, if you're going through a third person, Google them and the word fraud after their name. Have they ever been, or maybe lawsuit, have they ever had a lawsuit? Because that is really, really the easiest place to start with due diligence. When you're investing in real estate, you can obtain a preliminary title report. Do they have the right to sell the property? Do they own the property? I think that's— we've seen some of that. It's the number one thing. Do they actually own the property and can they sell it?

Mm-hmm.

So, that's a big thing. And due diligence isn't just a set-it-and-forget-it thing like you do it once. You do it during the relationship as well. I've seen somebody pull it, pull a quick one, like they're in the middle of selling a property. But then they'll maybe sell it to it, like to sell it to someone else. And this one, because it's not registered, you know, it hasn't closed and recorded. So while they're in the middle of selling it to Person A, which may not be, you know, in the public knowledge, in the public eye, they'll sell it to a second person. So they've sold it technically to 2 people. And collected money from 2 people, but only one person receives title. Hopefully at least someone does, or maybe no one.

Yes, it just— the criminal mind just astounds me with the schemes that they come up with. And, and there has been a considerable amount of selling properties without title in these last couple of years. It's just become a thing that, that people are doing. I don't know how they can manage it, at least in North Carolina, uh, all of our sales have to go through an attorney. Uh, and so I, I— it's amazing to me that they can— these fraudulent criminals, they create businesses out of this, and they just go from one property to the next to the next to the next.

They do. We call them bad actors.

Yes, that's a nice way to put it. But it— so yes, you have to be leery of these things because they certainly are out there and you can lose lots and lots of money through those fraudulent processes. Well, the self-directed retirement accounts have been with us, like you said, for over 50 years, but they do evolve, though there haven't been tremendous amounts of changes in the last 50 years. These last couple of years and into the future, there are some changes coming. Inform us of what, uh, what we need to be looking for.

Yeah, there are, there are a number of changes recently since SECURE Act 2.0 was made effective or signed into law at the end, actually at the end of 2022, it was December 31st. It got signed that last day of the year. Um, one of the things, oh, and another thing that's changed in IRAs is specifically contributions. So each and every account type has seen a contribution limit, of course, to the highest level it's ever been. And SEP IRAs and solo 401s now have a contribution limit of $69,000. It's a lesser of 25% of your income up to a cap of $69,000. And that is a significant increase, like percentage-wise, from where it was. I mean, I think when I started in self-directed IRAs, that cap was in the $40,000 mark. And now it's nearly 70. So it's a great way. It's just a real great thing to take advantage of if you can and stick away those tax-deferred dollars. But even the traditional and the Roth contributions have increased. And now with 2.0, what we're looking at doing is has to do with a catch-up contribution. So every year you can contribute, but if you're 50 plus, you can contribute a little bit more. It's called a catch-up contribution because you're catching up. Maybe you haven't saved enough for retirement. You're trying to catch up. So instead of being a flat amount every year of $1,000, they're looking at changing that to index that, maybe index it with inflation so that that amount will go up even more so that people can save even more and try to stay in pace with inflation. So we're looking at changes like that. But one really interesting change is with 529 plans. I have a couple of kids who are out of college now. And they have 529 plans that they didn't use. I don't know why, but they didn't. So, it says we've got some 529 money sitting around. What do you do with that money? Your kids are out of school. They're done with their education. They're not going to— you have to have had, by the way, this exception I'm telling you about, you had to have had a 529 for at least 15 years. Okay? So, that's a rule. But if you do, you can take that money and put it into a Roth IRA.

Wow.

So, it becomes tax-free. Now you can only put up to the contribution limit of a Roth IRA. All right. So you can't exceed that. So it's $7,000. So you can put that much, but you can put that much in every year and take that 529 money and turn it into Roth dollars. And that is something brand new for 2024 that I think a lot of parents like me will be really happy to hear about, that their kids can move that money.

Yeah. So, so the kids can move that into their accounts. You can't move it into your account.

Correct. It belongs to the kids. It's always their money. Yeah.

Yeah. Okay.

It's for the kids.

Okay. Talk to us just a little bit here. We've got just a couple of minutes here, and that is about inheritance and retirement accounts.

Right. There's a whole— yes, that's a whole topic. So just, you know, go over it briefly, and I'm happy to go deep on any that you like, but when you hit— it used to be 70 and a half, you hit your RMD age. Then it changed with SECURE 2.1 to 72, and now with SECURE 2.0, it's 73 years old. And so, we're going to see that RMD age in the year 2033 increase to 75. And that is the government's acknowledgment really that we live longer, and we do. So, that's something that's changed is when you take your RMDs, required minimum distributions, now It starts at age 73. And so you say, okay, well, I'm about to be 73. I'd really like to understand what I need to do here. That's, of course, it's on the IRS's website, irs.gov, really very easy-to-read publications that describe it. But you need to take a distribution. You need to withdraw the money out and have it be taxable to you. Now, of course, Roth money isn't taxable, so you don't typically make a RMD of a Roth IRA. So, how do you figure out how much money to take out? The IRS has a chart with factors on it. So, you align the factors and it will— the numbers, it'll give you a factor. So, you take the amount of dollars you have saved in pretax accounts, all of them combined, multiply that total times this factor, and that will tell you how much you need to withdraw from all of your retirement accounts to meet that required minimum distribution age. Now, another thing that has changed, the penalty for not taking an RMD used to be 50% of what that RMD should have been just to make sure that you really do it. And that has gone down to 25%. The SECURE Act 2.0 made that penalty less punitive, but you really want to do it. I mean, and that way, by the time, you know, it's going to reduce your retirement account with age. And so, you know, the government is giving you this tax benefit. And now they give and they take away. That's how it works. So, it's called a required minimum distribution. So, you know, and it's important really to factor that in when you're investing in that. You know, when you're, you know, say 60, 70, and you're choosing an asset class, you want to choose an asset class, I would think, that's fairly liquid because, you know, this is on the horizon or you're in there now. You need to be able to take those RMDs. So, of course, if you've got a 10-year horizon, you want to invest in a house. I think the average horizon on a house is usually about 7 years. Uh, on average. Um, so that might be good, but maybe something like a note or some asset that's more liquid, or something where you can get your money back if you have to use it for R&D. So that's, that's something to take into consideration when you're investing and you're closer to that R&D phase.

Yeah, well, we have been talking with, uh, Corinne Hall, and she is the founder and the owner of UDirect IRA. is where you can find, uh, Corinne. So that is www.udirectira.com. So Corinne, thank you for being with us today. It has been my pleasure having you as a guest.

Thank you, Alan.

Enlightened Investors, thank you for being with us and live abundantly in all areas of your life. And we'll see you in the next episode. Enlightened investors, wait, wait, don't go just yet. I just want to remind you about our recently launched webinar that you will not want to miss. If you're at all curious and would like to learn more about how real estate investing can diversify your investment portfolio, alleviate the anxiety associated with Wall Street swings, leverage your 401s and IRAs to substantially increase the return on your investment, and do all of this with turnkey, hands-off, passive real estate investments, then you'll want to immediately go to stevetalker.com/webinar. In the webinar, we'll also address the common dubious investment schemes that you want to avoid. To access the webinar, go to stevetalker.com/webinar. I look forward to seeing you in the webinar.

Thank you for tuning in to Real Estate Investing Abundance. Brought to you by Steed Talker Capital, a company working for passionate professionals like you to develop financial independence built on solid passive real estate investments. As part of our efforts to make the world a better place, Steed Talker Capital contributes to activities and organizations committed to better understand the equine. These endeavors attempt to enhance the human treatment of horses worldwide. Steed Talker Capital, working for a world where all creatures great and small flourish abundantly. For resources to develop your financial independence, connect with us at stevetucker.com.