Understanding Self-Directed IRA Strategies Ft. Mat Sorensen

Welcome back to another episode of the Invest Like a Billionaire podcast. I'm your host, Ben Frazier, and we've got a very awesome guest. I'm excited to chat with Matt Sorensen. He is the CEO of Directed IRA and Directed Trust Company. He's an attorney and a bestselling author on a book, basically the Self-Directed IRA Handbook, sold over, I think he said, 50,000 copies before, which is pretty incredible, especially on a topic like IRAs. So really excited to have you on. Directed IRA is one of the fastest growing IRA custodians. You guys have amazing track record and really kind of pushing out the education about what you can do with your IRA. Right. And we've talked about this a little bit on our podcast. A lot of our listeners are real estate entrepreneurs, so they're familiar with this. But I'm really excited to dive in a little bit more because I don't think people fully understand really what's available to them. So, Matt, thanks for coming on, man. Excited to dive in.

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My pleasure to be here. You know, I was a tax lawyer by trade and I was helping clients from the very beginning just for me trying to figure out, oh, what can I do with my IRA? And we had a lot of real estate clients, business owners. They didn't want to buy stocks and mutual funds. And so we got into this space of helping clients buy real estate, invest in private funds and companies. And so Long story short, we get to Directed IRA. We are the fastest growing. We're on the Inc. 5000, 730% growth rate. I got an amazing team, $1.5 billion in assets, 14,000 accounts. We're growing quickly, but we're just trying to get this message out, which I thank so much for having me, Ben. And I want to just like get the message out about what's possible and let people know. And for some people it's like, this might be for you, it might not, I don't know. But a lot of people just never even knew this was on the table.

Right, right. And I mean, before we kind of get into it, I mean, to me it's amazing that you started an IRA custodian because I've been in the space for, you know, a decade and worked with a lot of different IRA custodians. It's not a glamorous business and you kind of get thrown under the bus a lot because you're the one that's in the middle of these transactions and it's, it's a hard business. So the fact that you started it is kind of mind-blowing to me, but—

Well, can I tell you why I started it? Because— okay, let me— because if you've self-directed IRA, you're already— you will appreciate this, hopefully. I mean, I was a lawyer. I did write the number one book on self-directed IRAs. Like, every major company in the space uses my book to train their employees. The National Association in my industry uses my book as the only required book as part of their national certification training program to train people in the industry. Like it is like the Bible in our industry. I'm super proud about that. It took me years to write. I was a lawyer helping clients for 10+ years, figuring all that crap out. Well, I started getting a lot of clients. People would email me every day. I'd get like 5 emails. Hey, where should I set up my self-directed IRA? Who do you recommend? And I would send them to people and it was kind of like the best of the worst, you know? And eventually I was, got tired of sending my clients to companies that wouldn't take care of the customer. And so I'm like, I could do this better. I love self-directed IRAs already. We need to just handle this part of the service instead of just providing the tax and legal advice about it. So that's what we did in basically 2019, end of 2018, was we just got our own license. You have to get licensed with the banking department. It's not easy to do. And then yeah, we just went full steam ahead at it and just trying to drive exceptional customer service. That's really what it, like many businesses, that is the secret sauce is how are you delivering the service? You know, like we don't have any revolutionary product. The next company has a Roth IRA. I can do a Roth IRA. It's how you deliver the service and how you educate and train and all that. And so we're just trying to be better, you know? I mean, it's like, like Nordstrom, you know, it's like I can walk in any store and get shoes and clothes. And I mean, I don't know, it's just like how you deliver the service really makes a difference. And it's, it's a simple concept but hard to execute. It really is. But we are super laser-focused on it, and that's why we've had success.

No, I love that. I mean, it's a perfect entrepreneurial spirit to see the problem, and then if you don't have a good option, just create it, right? And I think, um, that, that's amazing. I would agree. I mean, especially in your space, customer service is the foundation of everything because it's— you're selling a commodity. I mean, it's not nothing like rocket science, but you can do it a little bit better, you know, it creates a huge competitive advantage.

Um, and So I'll just give you an example. I guess give you an example. This guy shared this with my team the other day. So we had a financial advisor that advises over 100+ investors, you know, and this advisor was like, she still directed her own IRA, but she had 100+ clients and she's like, all right, I'm going to try you guys out. We spent a lot of time working with her, answering her questions. She's— she knows the space, you know, she's worked with a lot of the companies and She started testing our team. She would just call up like a random customer and she was like testing response time and what were the answers and all that. And she wrote us and said, dude, you guys crushed it compared to your industry. Like, you guys crushed it just because you answer the phone, you're helpful, your people know the answers to the question. They don't pass me around. I'm not in a call queue getting dropped somewhere, you know? And, and so I think those small things really, really add up. To someone making a decision to use your service, whether it's a self-directed IRA or anything else. And so, but, and I think sometimes business owners get a little detached from that, especially as you grow like we have and we've scaled significantly. You can get super detached from like what's happening on the front lines and the initial customer experience. And so you got to be really like in tune with that, I think, to win.

Yeah, absolutely. I mean, let's kind of shift a little bit to just the opportunity. Like, why should someone— what is a self-directed IRA for those that aren't familiar?

Yeah.

And why, why is this a big deal? Why is this so cool?

Okay, there's 33 reasons why this is cool, Ben. It's actually 33 trillion reasons. There's $33 trillion in U.S. retirement accounts. Like, there's no more money anywhere to invest in anything than U.S. retirement accounts. And so if you're someone out there that's got your little sliver of that $33 trillion, I want to talk to you about how you can invest it. And basically Wall Street's told you we're your only choice. Yep. You got to buy a stock or a mutual fund or some publicly traded asset. That's all you can do. But the reality is that's not it. You can invest in real estate like you could invest in like something you guys do, you know, bigger commercial real estate. You can invest in a private fund. You could buy the single-family rental. You could buy it. You could be a private money lender. I mean, All these things you can do with a retirement account in real estate. You can invest in a small business, you could own crypto. These are all assets your retirement account can own. Wall Street just doesn't sell it, so they never told you about it.

Right? Right. I mean, it's pretty eye-opening to this, the statistic of $33 trillion. I mean, that is a mind-numbing number. And most people have some retirement accounts, right? I mean, if you've been working in the corporate world at all, you've been contributing and getting a match and so you kind of build up a little, little nest egg. And generally, if you're— if it's employer-provided account, you only have a few options you can invest it in. But if you leave that employer or you retire, you now have kind of free rein with this cash. And hey, maybe you already have a heavy allocation to public markets or you just don't like the roller coaster. You want to, you know, get into other alternatives, get more diversification, do something that you're you know, passionate about doing. And so talk about some of those options and, you know, just give some examples of things you can do and then we can kind of go into the different types of retirement accounts. So there's some different kind of nuances there.

Yeah. I mean, I think this has kind of been a high net worth investor area for a while because it did take some sophistication. And frankly, the self-directed IRA companies weren't big enough. They didn't have a lot of traction. And so you had to have like some really smart advice. Like the classic one is Peter Thiel, you know, so I don't know if you've ever heard the news of Peter Thiel, but, you know, he's a very famous venture capitalist, one of the original board members, not original, but early board members of Facebook and large South Side shareholder for a long time there. But Peter Thiel, and then if you've seen the movie The Social Network, by the way, about Facebook, how it started, there's a whole scene that depicts this, what happens. Okay, Facebook needs to raise money. At this point in time of Facebook, they're still thefacebook.com. You could only get on it if you were at some Ivy League school. It wasn't widely adopted, but they were running out of money. And Eduardo Saverin's family was kind of funding this and they're like, we're not dropping any more money in your dumb computer company, you know, whatever business they thought, you know, they didn't really understand it. And they're like, crap, we need to go really raise money for this. So they went and got their first venture capitalist. you know, to drop in money. And it was one guy, and it was an angel investor essentially, and his name's Peter Thiel, and he did it with a Roth IRA. Okay, so he dropped Roth IRA money, and he was like, why would he go buy a mutual fund or go buy Microsoft or Hewlett-Packard or, I don't know, Oracle or whatever, whatever big software company was out there at the time? I mean, Peter Thiel was a tech guy. He was one of the original co-founders of PayPal and involved in so many other cool things. But he's like, hey, I believe in this business, it's going to grow. I'm going to use my Roth IRA to buy these shares. And, you know, he invested about $500,000. Well, his account is worth $6 billion, you know, and because he just invested in what he knew. And so this is a concept we teach a lot of our clients is, you know, you can invest in what you know. Now, Peter Tilded with the Roth IRA, you know, and his tax returns got disclosed with Warren Buffett's and Donald Trump's and all these people's, famous people whose tax returns got disclosed. And this is the big thing on his that was all in the news is how does someone have a $6 billion Roth IRA? Well, he did it by self-directing.

Oh my gosh.

And you know, a $6 billion Roth IRA, if people understand what a Roth is, that's coming out totally tax-free. Right. So a Roth account comes out totally tax-free. And for him, you know, making a huge investment where you can hit a home run, that was a huge advantage. And so we have a lot of smart clients that like to use Roth accounts for tax-advantaged benefits. But that's just one example. Investing— start— my largest client has a $300 million Roth IRA and he invests only in real estate. He just does real estate. He's done it for 20-plus years in the account and very successful. He's in syndications, he does his own deals, and he's just grown it by, by being very good at what he does. And so, but this client, was a real estate guy and he was like, why would I go buy mutual funds or stock? I know and love real estate. I believe in this asset class. I feel like I can pick the winners and losers of individual properties or, or asset sponsors better than I can what mutual fund or stock I should be throwing my money at. And so he just kind of invested in what he knew and what he believed was going to grow. And he used the retirement account as the vehicle to make those investments.

Yeah, I absolutely love that and agree. I mean, I think Warren Buffett's one quoted saying, invest in what you know, right? If you don't invest in, invest in what you know, that that's the simplest and best advice you can, you can do. And so many people have idle funds sitting in their, in their retirement accounts. Right. And another little thing too, I used to be a commercial banker. There's a cool program called ROBS, Rollover for Business Startups. You can actually, you know, leverage some of your retirement funds to start a business, right? If you're out.

Yeah.

Start a business. There's some really cool stuff you can do there. And if you look at the ultra-wealthy, right, if you study what do their portfolios look like, you know, for most of the research I can find, most high net worths are only investing, say, 25 to maybe 50% in publicly traded investments. Yeah, but half or more, it's in, it's in private equity, it's in businesses, it's in real estate, it's in hedge funds, all these different things that you can't get through the public markets. And what better way than to do it through a tax-deferred or a tax-free vehicle, right? And so it just, it really opens up the whole gamut of things you can invest in. Yeah.

And so I think for a lot of people, they're like, all right, Matt, you know, we kind of like, I get you excited. You could do this, you could buy real estate, you can do all these things. But a lot of people usually are like, all right, Matt, well, I called Fidelity. Where I have my IRA and they said I can't buy real estate with an IRA. You're full of crap. That's not because IRAs can't buy real estate. That's because Fidelity IRAs can't buy real estate. So you need to move your account. And this is the first step, really, if someone's like, all right, I want to do this, but you need to move your account from kind of a broker-dealer IRA, which is where most people's IRAs are at, over to a self-directed IRA. And our company, you know, there's 30 companies that do what we do. We're the best, so you don't need to know the rest. And so, but you need to move your account to a self-directed company like us. And now when your money's there, it's just a transfer. You have a Roth IRA at Fidelity, you can move it to a Roth IRA at Direct IRA. You have a traditional IRA at TD Ameritrade, it's a traditional IRA at Directed IRA. You know, you got a SEP IRA at your local bank, it's a SEP IRA at Directed IRA. You can just move it and it's no tax. It's just a transfer of the custodian of the account. But accounts with a self-directed IRA and like our company at Directed IRA, We're going to say, all right, you want to invest in a private fund, you want to invest in a syndication, you want to invest in a startup, you want to invest in a small business, you want to go buy a duplex, you want to buy a short-term rental. Like, those are all assets that people own in IRAs here. You know, every day we're processing one of those investments into someone's account. And so, but that now your account owns that. So think about like your IRA owns, you know, Apple stock, let's say, you know, and like, okay, I can sell and get a gain if it goes up. When there's dividends, those go to my IRA, right? And I'm growing my account. That's how I'm growing my account. There's dividends that might come from the stock, but otherwise I'm really hoping that it appreciates and goes up over time. Well, the same thing happens with real estate. You buy real estate in an IRA or a private syndication. The income coming through goes to your IRA and it's growing the account. The cash flow coming in when that asset appreciates or when it sells, You sell it, that gain goes into the retirement account. It's not on your 1040. It's not, you know what I mean? It's not your personal money. This is your long-term wealth building in your IRA. So just think of how people have already invested their IRA or 401s buying stocks, bonds, and mutual funds. We're just changing the asset. The rules still apply. The retirement account gets the income, the retirement account gets the gain, and it's not showing up on your taxes. It's not taxable. It's all growing tax-deferred if it's traditional. Or tax-free if it's Roth. And so again, for everybody has their little sliver of that $33 trillion, like this is an option. Like don't feel like you're just stuck with ticker symbols in your online account or on your app of what to buy. Like you can break free of that and get into a self-directed account.

So one of the things you said there with like Fidelity or Schwab, like the real big custodians, because this has happened so many times where we have an an investor that will say, well, I talked with Fidelity and they said they have a directed IRA program. Yeah, I don't know what they call it, if it was even called that. They're like, yeah, they said they have that, but then, you know, I can't invest in, you know, are you guys on their platform? Right. And yeah, though, it's like, why, why do they not allow this? Like, what, what's kind of, you know, there's a couple of reasons.

Yeah, there's a few confusion points. The first is a lot of— and first of all, if you call 1-800-FIDELITY or 1-800-TD-AMERITRADE, you know, you're not getting the sharpest tool in the shed, let's be honest. And they're— and frankly, I think the industry's intentionally tried to confuse the heck out of everyone. Yeah. And in fact, I think the training is designed not to give you the right answer, you know, so because they, they call it a self-directed IRA because you can pick whatever stock you want.

Okay, so they do call it that, which is— yes, using—

and they do. I know they kind of stole the term to say, well, we have self-directed IRAs, you can buy whatever stock you want, you know. And so that'd be like a brokerage self-directed IRA if we're going to call it anything. But, but then the other thing is they're all— there are a lot of alternative assets that are on place— not a lot, but there's some alternative assets that are on like a Fidelity Schwab is a little bigger in this space, but they're very closed funds. They're like $1 million minimums. You have to have an advisor to get access to it. You can't just individually go in without an advisor. And so those funds are very limited and, and we run into it a little bit. But for the most part, people wanting to do real estate investment, private syndications, funds, small business, any of that stuff, kind of the Main Street America investing, you know, what I consider like the real alternative assets, they need to use a self-directed IRA. They'll need to get to a self-directed custodian or you're going to need an advisor that, by the way, has got to at least take 1% of your account value a year to manage. That'll then use— that can then help you get on to then look at alternative assets that might be on like a Schwab or Fidelity.

Right. So they're using the same terms, but they're not necessarily the same things. And yeah, I thought too, because I think another confusion point that I've run into with folks is, you know, they, they call Fidelity, they call Schwab, and then they kind of get the runaround, right? Well, how do I actually get my money out? Well, first, they might not even realize that they can transfer, right? Because a custodian is just that. They're the custodian of your funds. It's your retirement account, you can do whatever you want with it and you can custody it wherever you want regardless of what they say. And maybe they say there's restrictions on transfer or whatever. Then we found like sometimes it can take weeks, if not months, to get the transfer because they have no— at this point— financial incentive to make a transfer because now they're losing out on future revenue. So what are some like tips or things like that you would say to investors that are Hey, I want to get my money out of jail here and I want to kind of open it up, you know, to a lot of different options, but I'm getting some pushback or I'm just confused on like why it's so hard to roll it over. Like, what tips would you give people?

So I always tell people it's a 3-step process to do this. And step 1 is you need to open the account at the self-directed custodian so you can get on directedira.com, schedule a new account, call with one of our reps. Once you have the account opened, it's pretty easy because we are going to handle the transfer and rollover. And this is different from a lot of companies. You know, they're going to be like, all right, go figure it out or go to our website and do the form. You know, we have an onboarding team and transfer team that like is focused on this because I don't want to just open accounts. I want them funded and invested. Like our goal is to have an account invested in something, you know. So what good is an account open if it doesn't do anything? So we want to open the account and then we're going to help the client with the transfer. We actually submit the transfer, you know, so that can go from institution to institution and that'll arrive. Now, if it's at a Schwab or Fidelity, they're actually pretty good. They'll send it in 3 to 4 business days.

Okay.

If it's like an LPL Financial or any of the Wall Street firms, you know, like a JPMorgan or something, or particularly where there's an advisor involved, it's going to take 2 weeks for a number of reasons. One, they're typically not going to release funds until the advisor improves it. And if you have an advisor, you know, the kind of the traditional, you know, Wall Street advisor, they're going to try and talk you out of it, right? Because they lose money. They're not making fees on this anymore. And so, so you might need to get organized if you have an advisor on the front end, make sure they know what's going on because they, they do have to like release it in many ways. If you don't have an advisor, which is a lot of people that do self-direct, then which is frankly most people, it just depends on your institution. But the big ones are actually pretty fast with the exception of LPL. So it should be here within a week. And so that's step 2 is you got to fund the account. Again, most people are that are self-directing their IRA are just moving existing retirement account funds. You know, when I mentioned that $33 trillion, the actually the largest piece of that $33 trillion, a lot of people think it's 401s. It's actually in our IRAs already. It's just in broker-dealer IRAs. The majority of retirement account funds now are already in IRAs. And so when you want to self-direct, it's easy because there's no rules. You can move your account, whatever custodian you want. You want to go from Schwab to Fidelity, you want to go from Fidelity to directed IRA. It doesn't matter. There's no transfer rules, no restrictions, no penalty, nothing. You can move whenever the heck you want. And so most people are coming from an existing IRA. They've just decided, I don't want to just be 100% in mutual funds or stocks. I'd rather do something else or get a little diversification, get into some private real estate funds or a real estate asset or small business or startup, whatever your thing is, you know. And so they get over to self-directing. The other category that's popular in moving is an old employer 401. A lot of people just leave their 401. You know, we see that a lot. People like, oh, I heard about this and I've, you know, I've got my IRA or my, my current job 401, but I had this job 10 years ago and there's $50,000 sitting in the 401 and I've just never moved it. It's just like, it's like now I got a reason to like grab that money. I mean, like, it's crazy. Like, I just done 10,000+ calls of how many people are like, oh yeah, I want to invest $50,000 in this. I don't have $50,000. Oh yeah, my spouse had this job 10 years ago and this 401 is just sitting there. It's at Vanguard. They don't even know what it's invested in. You know, but we can grab that and go into this deal. So old 401s are good. The big roadblock where people are like, all right, man, I want to self-direct and I call, but I called my 401 at my current day job. Generally your 401 where you work, if you're still employed and you're not yet at retirement plan age of 59 and a half, they're going to say you can't move it, you're stuck as long as you're employee here. We got the Vanguard 401 plan. You're stuck at Vanguard. You know, we got the John Hancock 401. You're not doing anything but whatever John Hancock lets you do. And so for employees at a day job, you are kind of locked down, unfortunately, until you leave or until you hit retirement plan age of 59 and a half, at which case you can roll it out even if you're still working there.

Yeah. Yeah. So talk a little bit about the next step. So you made the transfer, money's all worked out, you got cash in your self-directed IRA.

Yeah.

But this is another problem too, right? I don't know the number. Yeah, if you have the number, but there's a ton of cash sitting in self-directed IRAs that's never been deployed. Right. So what do you— what's kind of the next step? Like, I got excited, I'm going to make the rollover, I can now do all stuff, but then people get excited and then they don't actually invest it. Right.

Which is— yeah, right. It's crazy that that does happen more than we would like. So yeah, that third step is you invest the account. So open the account, fund the account, which is usually transfer of funds or rollover. And then third is invest the account. And when you're investing the account, a lot of people come to us with a preplanned deal, like they're going to go into an Aspen fund. You know, you guys are raising— they know what they're going to do. They open, they roll over, they're like, I'm going to go into that deal. Some people, and I would say the majority of people, have a preplanned investment. Already in mind. That was the impetus of setting up the account. But we do get a lot of people, I don't know the percent, but millions, tens of millions, if not $100 million, that is like, what do I invest in? You know? And they, they were sick of the stock market. They want to get off the roller coaster and they were like, I'm going to find something. And, or they, they sold a deal and they got money in their accounts. There's a lot of people that have money in accounts and they're looking for alternative investments. Well, the one thing that a lot of people have been investing in the stock market or mutual funds is they get on a tick— they get on the website of their broker-dealer or their app and they just throw in a ticker. And if they don't know, they buy the S&P 500 or something like that, you know. And so there's always like a little default investment that people can make in the stock market. But when you're self-directing, you know, these are unique assets. You've kind of got to go out and hunt these things, you know. And, and some people just don't know where to do that. And so we've tried to provide lots of opportunities, educational resources. We have an Alt Asset Summit and things like that. But that's— I mean, I think, Ben, where you guys are a great relationship with us is people need to be able to find these investment assets, quality sponsors that have experience in the field, that have raised, that have had investors, that have it down, and that provide that opportunity to actually then invest those dollars. Because at the end of the day, Yeah, you— that is the thing. Like, that third step is the whole point of it.

The whole goal. Yeah, you know, exactly. I mean, talk about that too, because I think a lot of people don't understand, as a custodian, you legally cannot recommend investments, right? So some people might think, well, I'm going to go work with Directed IRA and, you know, they can tell me the best things to invest in. But you're not advisors, right? You can't make recommendations. And so most what you can do is provide education. You can provide introductions, but I think it's important for people to understand you still need to do your own due diligence. You still need to go and determine what's the right strategy, right? And the cool thing is you can create your own destiny. You can choose your own adventure in this, but there still is an element of being proactive that you have to do. And obviously you guys are, I think, one of the best at this, of providing the education, of doing these events, of doing webinars and trying to just expose people to what's available. But at the end of the day, they still have to make the decision. They being the investor.

Yeah, right. Yeah. And that's where there's— you kind of got to develop some skills. If you haven't done this before, you need to get comfortable doing due diligence. You need to start learning how to analyze deals and read numbers and, and, you know, everybody gets better as they go. And so, and I'll tell a lot of people, you know, hey, if you've got a $500,000 account, maybe invest 50 on the first deal, you know, and just get a feel for it. Understand what you're doing. You know, let's get some reps in before you like drop the whole thing into one investment. And so I like to tell clients like, this is a learning process and a journey really. But the returns on alternative assets have proven to outperform the stock market, you know? And that's when you're talking about like high net worth people, Like there's an Ernst Young study I show in my regular presentation on this that shows 80% of ultra-high-net-worth people have their money in alternative assets. They're only allocating 20% of their net worth to the stock market. If you take the quote-unquote mass affluent, which is someone has $100,000 to $1 million of investable money, the mass affluent have like 70% of their net worth in the stock market. You know, and it's a reverse split, you know, and, and but, but the people that have money are a little more focused and a little more smart and savvy on where they're putting it, let's be honest. And so, but it does take a little bit of work and but it's not hard. And I think it's actually fun. The nice thing about self-directing and why I got drawn to it from the beginning, because I self-direct my own account, like I do this myself. You know what I mean? I'm not just like, well, you should do this. Like, I do this myself because I like it. It's because it's a little bit of like you're connected to your money and totally in like all that $33 trillion that's in retirement accounts. So many people are disconnected from it. I'm telling you that the average person could not even tell you the fund that their money's invested in. They could have $500,000 in it. They don't even know the name of the fund. They have no idea what the fees are. They have no idea of the performance of it. They're just totally detached from it because Wall Street told you set it and forget it. And they love that, right?

I mean, yeah, it's not a conspiracy, but it definitely benefits them for you to be confused, not think you can do anything about it and set it and forget it. Right. It's just— it's out there in the ether. You can come back here when you're, you know, 59 and a half, right? And see, see what balance is there. You never compare what your return is, but it's probably more than you put in, so we'll just call it good, right? It's so opaque and people, it's so funny because like we've talked with some folks that have advisors that are saying, oh, you shouldn't be going into alternatives, you shouldn't go into self-directed because it's so risky. And they're not, they're just throwing that out there because they're just not defining what risk is and ultimately they just don't understand it. But then if you, you know, use the kind of same, that level of diligence and, you know, process that you're looking at alternatives, you apply that to, you know, advisors of publicly traded markets, you're not going to get any better answers generally, right? It's, it's, yeah, it's very one-sided. And so it's, it's something that's kind of frustrating to me because we're on the side of it and, you know, we get thrown the big, you know, risky, you know, right, blanket that just covers over. It's just, you know, shouldn't do it, too risky. But I agree with you. I think it's you still need to have a level of ownership of it, right? But you also find it's really fun to grow your money. And I say all the time on this podcast, people work so hard to earn. Yeah, they're investing, right? They work so hard to just save a little bit, invest a little bit, and help it grow. And they spend so much time in their career earning the money and they spend almost no time learning how to grow it and multiply it. And it's so much easier to multiply money, I think, than to actually create the nest egg in the first place.

Yeah.

What you're doing. So yeah, I love what you guys are doing. Let's shift a little bit because I want to talk about some of the, you know, roadblocks potentially in IRAs and things that, you know, conversations we hear all the time. And first, what I think you have to cover is the prohibited transactions, right? There are things you can't do in retirement funds through self-directed vehicles. Can you talk a little bit about where those bright lines are?

Yeah, there's the biggest rule everybody needs to know is what's called the prohibited transaction rules. And this rule doesn't have to do with what you would like, what assets you can buy with an IRA. A lot of people are like, so what's restricted? What can't I buy with an IRA? Well, the only thing on that is collectibles, life insurance, and S corporation stock. Those are only 3 things you can't buy with an IRA. Everything else is fair game. But the big rule you need to know is who can your account transact with? And that's what the prohibited transaction rule is about. If my IRA is buying real estate, who's buying it from? If my IRA owns real estate, who's leasing it to? And so, so like, for example, if I have real estate I personally own, I can't sell it to my IRA. Or if my IRA buys a rental, I can't have my kids go stay at it. It's called the prohibited transaction, and it basically is designed to prevent you from trying to just benefit from your retirement account, you know, personally, and take advantage of the money in there for your own personal use before you get to 59 and a half. So what I always tell clients is your IRA needs to be for investment purposes. Don't be buying assets or investing in things because you personally make money or get to use the asset. So if you're like, well, I'm investing in this property on 123 Green Street, I don't know anyone involved in this. I'm investing in XYZ Fund. I don't— I'm not involved in that. You know, that's what most people are trying to do. But we always get like the wheeler-dealer clients. And I don't say that in a negative way. I freaking love them. But we get the kind of wheeler-dealer clients and they're like, well, I want to buy this. And, you know, it's for my— it's in a college town my kid's going to and my kid's going to stay there. Well, you can't do that. You know, the retirement account like that, that causes this prohibited transaction. And so as long as you're not personally getting involved in benefiting from the property or deal or business personally, or your spouse, kids, parents, there's all these people on the list who can't benefit or transact. It's you, your spouse, or anyone in Utah. That's all your spouses, kids, parents. Hey, those are all disqualified people. And so your, your account cannot transact with them, nor can you financially benefit from. Another common example that could be prohibited is let's say you buy a property, you want to fix and flip it, you know, well, you can't go do the physical work or your construction company can't go do the work. If you're the real estate agent, you can't go get the commission. Like, you can be the agent for your own IRA buying property, but you can't go get the commission because these things financially benefit you to personally make money. So there's a lot there, but that's the gist of the rule. Not everyone runs into it, but if you're kind of wheeling and dealing, doing your own deals, that's where like we've spent a lot of time in our law firm. I have a law firm, KK Lewis Lawyers. We have 4 offices, represent clients across the country, and we do tax and business on— we advise clients all the time on this. If they're doing a weird deal that they're involved in, their IRA's involved in, or they got a partner thing or whatever, like we can help advise and structure that and make sure they avoid avoid those issues.

I love how you said at the beginning where it's not what a prohibit, a prohibition on what you can invest in, but on who you can transact with. I think that's a really helpful distinction. And basically if you're benefiting somehow, some way on this, it's— yeah, probably shouldn't do it. It's probably prohibited. But again, it's, again, if it's investment, you know, there's a lot of things you can do. Just as a point of clarification, so you said, hey, you have a Airbnb in a college town or wherever and someone stays at it or you go on vacation there, that's prohibited. But you can have an Airbnb that you rent out 100%, not to yourself or, you know, to family, right? So you still can do that. It's just you can't stay there.

Yes, exactly. So, you know, and I've had clients that like a lot of clients that do short-term rentals, they like to have use of it every once in a while themselves. And that was part of their strategy. It was a quasi-second home.

Sure.

Now, Airbnb, short-term rental type deal, you can do that personally, but you're not going to do that in your IRA. It's going to be 100% for investment rental purposes. Right. And we have, you know, hundreds of clients that have short-term rentals in their IRAs. Very popular strategy.

So the other kind of, you know, big bad thing that we hear all the time and we hear from investors is UBIT, right? So unrelated business income tax. Talk about that. How should someone think about it? What are ways to, you know, manage it, avoid it? You know, if you're— explain what it is first and then kind of talk through some of the nuances there. Because I think it's kind of become this big thing that people think is a worse thing than it actually is. But yeah, maybe you might disagree.

Yeah. Yeah, there's— so there's, there's So there's a tax called UBIT, and there's really two versions of UBIT. There's what I call traditional UBIT and there's UDFI UBIT, and these are different things. So, so these are, this is a weird tax that can hit your IRA. So traditional UBIT is a 37% tax. And basically when retirement accounts were created, the rule was your IRA can get investment income, rental income, capital gain income, interest income, dividend income. As long as it gets investment income, the IRS is like, you don't pay tax when you make money in your IRA. But if your IRA gets business income and this UBIT stands for unrelated business income tax, if you're already getting business income, then you got to pay this tax. Business income would be like your IRA owns, let's say it owns 1/3 of a restaurant, you know, it's, and it's an LLC. There's no corporate tax being paid. It's passing through. Ordinary income on a K-1 to your IRA, that's it. That your IRA is going to end up paying tax on that. Now, most publicly traded companies are selling goods or services, but they're all C-corps. This is one of the reasons why they have significantly have ownership. Retirement accounts own a lot of these companies or a big piece of them. And so in a C-corp, the corporation pays a corporate tax, then distributes a dividend. When an IRA gets a dividend, it doesn't pay tax. That's on the investment income side. And so that's like traditional UBIT is business income. There's no corporate tax paid and operating business income is flowing to the IRA. So now there's a lot of clients that invest in startups that are just LLCs. They're not paying corporate tax and they might have a little bit of UBIT, but they're trying to— the company's trying to sell and get capital gain income on selling the business. That's how they're really going to make money, not by owning and operating it, you know what I mean? So there's some planning that can be done there if you're investing in something that creates business income. For example, my client I mentioned that has a $300 million Roth IRA. He does a ton of real estate development. His Roth IRA does it. He uses an LLC taxed as a C corporation. He pays a 21% federal corporate tax and then it goes to his Roth IRA, no tax. So he's paying 21% tax instead of, you know, he's, he's in California, so he's paying like, you know, 50% tax when he's making money. So for him, that's like he's cut his tax bill in half. And so everybody comes at this different, but I'm just trying to give some examples. There is a way to block it in this traditional UBIT fashion. Now, the other version of UBIT that you guys might run into more commonly, or we see a lot of real estate clients run into more commonly, is called UDFI, and that stands for unrelated debt financed income. Basically what UDFI says, hey, you can use your IRA to invest in real estate or any asset really, and you can actually have it leveraged with debt, whether your IRA buys it directly and you get a loan and leverage it, or your IRA invests in a fund and they're using debt to leverage to buy a bigger asset. You know, they raise $2 million and they buy a $6 million building or asset, you know what I mean? So in the eyes of the IRS, they're like, well, one-third of that was the IRA's money, two-thirds of that was debt, or one-third of that was investor money, which comprised the IRA for their piece of it, you know.

Sure.

Two-thirds of this is debt. Well, what the IRS does is they're like, all right, when the IRA gets profits, you know, and let's say the IRA owns 1%, okay, just so I can run math here. Okay, let's say there's a million-dollar profit coming down. The IRA owns 1%, so $10,000 is going to go to the IRA. The IRS is going to look at that and say, well, two-thirds of that is, and let's say this is the sale of the property, by the way, and if $10,000 goes to the IRA, they're going to say, well, two-thirds of that is from the debt. One-third of that is representative of the IRA's money and the other investors, and this is the IRA's share of it. So you don't pay tax on that. But the other two-thirds of this $10,000 profit is debt. Now the gain on the debt, you get capital gains rate 20%. So you're going to pay 20% of, in that example, $6,600. So what is that, $1,200 approximately? You're going to end up paying in tax on a $10,000 gain. And that's way better than you get personally when you're investing. And what I always tell clients is because some clients are like, well, Matt, I had to pay taxes, my IRA, that's crazy. Look at the total return. Hey, don't worry about whether you're paying tax or not. Like, look at what's the total return. And at the end of the day, if you're getting a better overall return, you're far better off. Now, that example is on the gains. So you got to take long-term capital gains rates. Again, you only are paying on the debt part of the deal. And there's, you know, there's a lot more resources we have on how to do that. It's a whole chapter in my book, The Self-Directed IRA Handbook. There's a lot of strategies to minimize it. We don't have enough time to get into all that, but But there's some tax planning there if you want to get into that conversation. The other thing, though, I get a lot of questions is, well, what about the rental cash flow? Generally, the K-1s are going to pass through a loss even if the property's cash flowing. We just see this on the K-1s that come through for people's IRAs that are invested. And if there's a loss, there's no UDFI to pay. And in fact, that loss gets to be carried forward and used when the property sells to offset that gain I talked about earlier on the sale of the property. So, but that's UDFI in general. It's a tax on the leverage piece of a deal. You never pay tax on the investor IRA portion of the deal. That's the actual cash invested and you're able to buy a larger asset than you otherwise could. And so we've— I mean, I've gotten debt on deals for my own retirement account. I'm focused on the total return at the end of the day, not whether there's a tax involved. And, and so people can get a little distracted by that. And or like their tax account or their CPA will be like, ah, because frankly, their CPA doesn't want to deal with it, you know? And so they try to talk them out of it because they're like, they don't know this rule. They're like, crap, I got to file another form or return for you. So but that's UDFI and how it works. Like I said, there is a number of strategies to get out of it. 401s are exempt from it on leveraged real estate, including solo Ks. If the debt's paid off before the property's sold and there's no debt for 12 months before the sale of the property, there's no UDFI to calculate on the sale of the property. We've had a lot of creative strategy deals with clients where they've brought in joint venture partners to get rid of the debt for a year and then they sell the property and they distribute a little bit of profit sharing to that joint venture partner and they can have no debt on the sale of the property. I'm just giving some quick ideas here. Another one that's common, we're seeing a lot more private funds going to REIT status. One of the bigger ones that we work with here, Neighbor Ventures, and they've gone to REIT. You've seen Grant Cardone go to REIT. You've seen a lot of these people that are raising large sums. They've gone to a REIT. One of the reasons is they've got a lot of IRAs and REITs are exempt from UDFI, you know. And so there are some other little things there and there's a lot of exemptions or strategies to try and extinguish it. They don't always work, but there are some, there are some little maneuvers that could sometimes happen.

No, I think that's super helpful. And if you have questions, you know, more in-depth, definitely check out Matt's book, The Self-Directed IRA Handbook. And you said you have resources online.

Yeah.

So with that, you know, talk about what's the best way for folks to get a hold of, of you and kind of get into your ecosystem of education and training and just other things you guys are doing. Yeah.

Best place to go to directedira.com. You can book a free call right there with one of our senior account executives or one of our managers over self-directing, how it could work, what funds do you got, you know, and you again, we don't tell you what to invest in. So you got to come with what you want to invest in or figure that out on your own. But we'll help make sure you get the account open, the funds transferred and rolled over so you're ready to actually go invest in that alternative asset. The other thing is we do have a learn page. So if you go to DirectIra.com, there's a one of the menus is learn. We have a monthly webinar, we have our Directed IRA podcast, which is 100 episodes deep, the top 3% podcast. There's my book, The Self-Directed IRA Handbook, you can find on the site. We have articles. We're just like, no one delivers as much content on this subject as we, as we do. So get over to the site if you want to like read up more on it, whether it's podcast consumption, webinars which are recorded and you can watch the videos. We're going to do a webinar with Ben, by the way. And then, and then also just articles and stuff you can check out. And then of course, if you want the deep dive, there's my book.

All right, Matt, thanks so much for coming on, man. This is really, really helpful and I'm sure be very valuable for our listeners. So probably have you back on at some point and appreciate you coming on.

All right. My pleasure. Thanks, Ben.