CW 787 FBF - How to Invest in Real Estate With Your Self-Directed IRA / 401k

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This is Jason Hartman. Thanks for joining us. We have got a great show for you today. We've kind of moved some upcoming shows around because this topic is very topical and basically what we're going to talk about today is how to bypass tough lending regulations, how to invest in income property using your ira. We're going to expand on the very short segment. We did a few shows back on Roth IRA conversion rules which have changed and that goes into effect in just what, about three weeks here? Two weeks actually, January 1st of 2010. This is a big, big tax giveaway. So it may or may not apply to you. If it does, you should be ready to take advantage of this. So that's why we wanted to kind of move this show up in the lineup because it is very topical right now. Again, we have an interview here with Jennifer from Entrust and and I'll play that in just a few minutes for you. Want to tell you about some upcoming shows. We've got Lisa Broma who is the author of a couple of investor books, most recently Wise Women Invest in Real Estate. And we've got Laurel Langmire, I'm sure you've heard her name. She's a big guru and she is going to talk about making money. Now her latest book is all about how to just generate quick income and simple stuff, but it works. So we'll continue along the investment finance and economic forecast track as well as the Home Based Business four hour Workweek, micropreneurship entrepreneurship track as well. And we'll be covering a lot of that great stuff on upcoming shows. We're trying to get about three shows a week out to you now because we have so many recorded that we have not published yet. I interviewed an attorney on asset protection recently. He did a great show. So just a lot of stuff coming up for you. Also, be sure to listen to our other shows, the Speed of Money, the Holistic Survival Show, Creating Wealth Video show. Okay, this is all free for you. And we've posted a lot of videos just recently to the Creating wealth video show. So if you'd like more details on the various income property investment areas and a lot of the other concepts that we cover, completely different from this show is the video show. So make sure you're watching the video show as well. And by the way, those are short. Those are usually six to 10 minutes long. They're much shorter shows on video. So take advantage of all of that and look forward to our new show. Coming up, our Jetsetter Travel show, which we're about to launch. And let's go to the interview with Jennifer. Oh, one more thing, of course, upcoming events I got to tell you about 23rd of January, creating wealth in Today's Economy Boot camp, March next year, the Masters Weekend. And we've got a couple of conference calls and things we're going to be scheduling pretty soon here that we'll tell you about as well. So stay tuned for that. Here's the interview on investing in real estate with your IRA and how to get past the tough lending restrictions and regulations so that you can purchase more properties. If you've already reached your 4 property or 10 property limit, depending on which way you look at it, this show is also for you because we're going to talk about that anyway. Here's the interview with Jennifer from Entrust.

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It's my pleasure to welcome back to the show Jennifer Williams with Entrust Group or the Entrust Group I should say. And today we want to talk about the ever more desirable. And again, we have not covered this topic in depth before because over the years I haven't felt that this was as desirable as it is today. And you'll hear why. So what am I talking about? Self directed IRAs, self directing your retirement plan so that you can invest in real estate. The stock market is probably getting close to a peak here. Many experts think we are due for another correction. And you know how ugly the last one was. So let's talk about having a self directed account. Let's talk about being in control, which is commandment number three, thou shalt maintain control. And when you maintain control of your personal finances, you don't leave yourself susceptible to the three major problems of outsourcing your investments to somebody else. What are those three things? I'll just remind you real quickly before we welcome Jennifer. They are number one, you might be investing with a crook. Number two, you might be investing with an idiot. Number three, assume they're honest, assume they're competent. The third problem is they take a huge management fee off the top for managing the deal. And that is why we love investing in income properties done properly, done on a nationwide basis so that you are diversified because all real estate is local. You're buying properties that make sense the day you buy them. You're following our 10 commandments of successful investing basically. And with that the self directed IRA plans have become much more desirable just recently. So that's why we are now interested in this topic. And Jennifer, we're glad you're here to talk to us about it today.

Thank you for having me, Jason.

My pleasure. What is it all about and what can people do here?

Wonderful. So what I'll tell you about today is a little bit about interest. What it means to truly have a self directed IRA account, what you can and cannot do in your Iraq. We'll also talk a little bit about prohibited transactions, what to watch out for as well as who you can't do business with, who are disqualified people in your ira. Okay, good Intrust will not give you financial or legal or investment advice. But we do do these educational type events or broadcasts with you to educate the public and our clients on what you can and can't do in the ira. So let me tell you a little bit about who interest is. Interest is the oldest and largest provider of self directed IRAs in the country. So we currently have over 27,000 clients and over 3 billion in our clients assets. All of our clients assets are all FDIC insured. So hopefully that will give some of your listeners a little bit of peace of mind at this point.

Now just Jennifer, tell us what that means. If they buy an income property in their account that's not FDIC insured.

Correct. It would only be their undirected funds, meaning once they have an account funds.

In the bank account.

Exactly.

So NTRUST maintains a bank account for non invested funds.

Exactly. So your actual IRA will hold undirected funds or uninvested funds. Any assets you purchase such as real estate, once that leaves the ira, obviously that's not going to be insured. But any cash or any funds that you leave in your IRA to pay for expenses, which we'll talk about a little bit, all of that is FDIC insured.

So this is similar to when you have a brokerage account at Charles Schwab or whatever you always have. I think at least I do a money market account there. So that when you're trading in and out of positions, there has to be some place to catch the cash that's uninvested. So that part is FDIC insured.

Yes, it absolutely is. And along those same lines, and again we'll talk about how the money should come in and out of the ira. But along those same lines of the FDIC insurance, keep in mind if since we are speaking specifically about real estate today, let's say you sell a property so all of a sudden you're putting four or five hundred thousand dollars into your ira. You do not have to worry about that hitting that $250,000 FDIC insurance threshold. Interest will immediately split up your funds into little sub accounts. It's all within one IRA so that it's all FDIC insured. So you don't have to worry about how close are you to that $250,000 mark.

Okay, great. And the FDIC insurance limit, obviously when the financial crisis occurred went from 100,000 per vesting to 250,000 per vesting. The disclaimer I want to give you with that folks is that yes, the FDIC may be insuring your account. And note that the FDIC is on the verge of bankruptcy or insolvency, I guess is a more proper word for that. They don't ensure what the money will actually be worth when you get it back because they're going to print a lot of money to bail it out. But I digress. Go ahead, Jennifer.

So let's go ahead and talk about what it means to truly have a self directed ira. So the term self direction is used really loosely these days. So many brokerage firms consider their accounts self directed. So wherever you're currently.

Like stock brokerage firms.

Exactly. So if you have a current account at one of those standard stock brokerage firms and if you ask them if your IRA is self directed, chances are they're going to tell you that it is, but not necessarily. The real test there is you ask them if you can hold real estate in your IRA with them and that's where they're going to be like, oh, no, no, probably not. So what it comes down to with.

A true far be it for a brokerage firm like Wall street firm to mislead anybody, I can't imagine that.

But unintentionally perhaps.

Here we go again, Jason, with your commentary.

Okay, so to have a true self directed IRA account with someone like interest, they'll allow you to invest in anything except for a life insurance or a collectible. And we'll talk more about what that collectible means in just a few minutes. But basically you want to think about your IRA as being almost like an umbrella. So all of your funds, in most cases, except for a Roth account, in most cases, all of your funds are going into your IRA on a pre taxed basis. Right. If you have a traditional account or a SEP account and then all of your investments grow tax deferred, right. Until you start pulling those funds out at retirement age.

And when you take distributions. Now this I gotta just make a comment on, Jennifer. I think when Wall street lobbied Congress to make all the laws that govern all of this stuff years ago, the sales pitch for a retirement account is while you're in your earning years, put this money away pre tax so that it grows pre tax. And when you take distributions at 59 and a half optionally, or you're forced to, it's 70, right?

70 and a half.

70 and a half. Then you, you, you'll be in a lower tax bracket, they say. But folks, I don't know about you listening and I don't know about you, Jennifer, but I hope to be in a much wealthier position when I'm that age. And I certainly don't think with our Obama government we're going to see lower taxes, lower tax rates, I should say.

Right. Well, that's why some people feel that way sometimes a Roth is a good fit for them. Right, but, but you know, just letting.

It grow, putting it into the account before it's taxed and having the power of it growing before the tax. Even if the rate is higher in the future and your personal marginal rate is higher too, you can still win the game that way. Absolutely, yeah. Pardon my sarcasm. I mean there are.

Absolutely. So along those same lines, you're putting all the money into your retirement account on a pre tax basis and all of those investments are growing tax deferred until you start pulling those funds out at retirement age. Along those same lines, all the rental income or any asset gain from those assets you hold in your IRA are going back into the ira. So an example of that would be, let's say I, Jennifer Williams, bought in my IRA a condo and then I'm renting that condo out. All that rental income from that condo is 100% going back into my retirement account. All of my tenants are just writing out a check in the name of my ira, sending it into interest, interest is putting it in my IRA account. All that's growing tax deferred. Along those same lines, any expenses I have associated with that asset. So it's a condo, let's say it needs a new water heater, new carpet, something like that.

Paid out of the account.

Exactly. All of those expenses come out of the account. So you just send in as the, as the owner of the property, my ira. I would just send into interest an invoice for that new water heater, that carpet, and then interest cuts a check out of my IRA to pay those expenses.

Sure.

So you just want to keep in mind that it just needs to be a complete circle.

It's a separate entity.

It's a separate entity.

Arm's length is the, is the rule is the word. You need to know the phrase. You need to know.

Exactly. And in regards to real estate, the real key thing is to have your self directed IRA set up before you find the property that you want to invest in that way.

And I just set mine up with you last week, by the way. I've got to say that I'm really excited about it.

So you're in the process of getting.

That funded and booking property today and we're just moving the money from that rotten stock. Brokerage.

Can be challenging, but we're helping you.

They've lost so much of it for me. I don't think I should trust them by giving them any more or letting them have the honor of holding the account. You know, and by the way, when I'm talking to you folks, the Dow is up right now. I mean, the market's over 10,000 today, so. But still, it's nowhere near the 14,000 it used to be.

So along those same lines, like I mentioned, you want to have your retirement account with interest opened first before you get your heart set on a property, meaning that once you find the property, you want to make the offer on from that very first stage, that first letter of intent, or the first time you write that contract. You want to make sure you're doing the proper vesting. So it wouldn't be Jennifer Williams as a person. It's going to be Jennifer Williams, ira.

Just a reminder, you're listening to Flashback Friday. Our new episodes are published every Monday and every Wednesday.

So interest Administration Inc. For benefit of Jen Williams ira. And my account number makes it really crisp and clear with the IRS that it's two separate entities purchasing that asset.

Yeah, absolutely. Now, Jennifer, before you dig into this a little more, can you just sort of give the broad view here? What are the different types of accounts of retirement accounts people can have? They hear all these acronyms. IRA, which means Individual Retirement Account, SEP, 401K. Keogh. What are the other ones?

I can't remember. That's a really great question. Basically, you want to think about as being two separate categories, more ira, of.

Course, Roth, you know, Exactly.

So you want to think about as being two separate categories, IRAs versus qualified plans.

Okay.

So under that IRA umbrella, it would be a traditional IRA, a Roth IRA, a SEP IRA, simple things like that.

Okay.

The traditional and the SEP and the simple, you're putting money in on a pre taxed basis, like what we've been speaking about. The Roth is a little different. You're putting money in post tax, then all that profit and gains is growing, tax deferred for life.

And we got to tell everybody that's pretty exciting opportunity here because you were on the show just for a couple of minutes previously and there's a big opportunity coming up which talk about it when you wish. But this is pretty exciting.

Yeah, absolutely. I'll touch on it just briefly if you'd like. Now, so for 2010, there's going to be some Roth rule changes, normally for a Roth. So this year and previous years, you have to make under a certain dollar amount in order to qualify and contribute to a Roth account. Those numbers vary every year. So they can be a little bit different. If you're married, you need to make about 166,000 per year. And again, that number changes. So based on when someone's listening to this, they want to double check those figures.

Right.

If you're single, about 100,000 per year. And then you have to make under those thresholds in order to contribute to the Roth ira. And if you do a traditional to a Roth conversion this year, in previous years, you can convert at any time, but then that's a taxable consequence. So when you do your taxes at the end of the year, whether that's the next April, the next October, you're having to pay taxes on that difference, that amount you converted. But for next year, they're doing two things, which is really, really exciting. You're taking away that income limit for 2010.

You know, if anybody actually still makes money.

Again, being sarcastic. I know a lot of people do, because a lot of money is made in these down times. But there's no limit on the income to make them eligible for a Roth contribution.

Correct.

Okay.

So no matter how much someone makes next year, for 2010, okay, they're able to do a contribution to the Roth ira, which also means they can do a traditional to a Roth conversion next year. So no matter if you make 250,000 next year, you're able to convert however much you would like out of your traditional IRA into your Roth ira. Now that's still a taxable consequence because you're going from pre tax dollars to post tax dollars.

Explain that a little bit.

Meaning that when you have a traditional account or that pre taxed account, you're say you make 100,000 per year, you're putting in your $5,000 contribution to your traditional account, that pre taxed account. Now, when you do your taxes, you're saying that you made basically 95,000 that year. Right. So you're getting that immediate benefit and you've already paid taxes on those funds or you've not paid taxes on those funds. Excuse me?

Yeah.

With the Roth or the post tax dollars, you're in that same scenario making 100,000 per year. You put $5,000 into that Roth account or that post tax account, you don't get that immediate benefit. When you do your taxes, you're still saying you made $100,000.

Eventually when you take distributions, you don't pay tax on that.

Exactly. So for that Roth or that post tax account, all that profit and gains, all that asset that you earned over the time, the lifetime of that IRA tax, deferred for life. So if you die and a half when you start paying, pulling out your funds, you never pay taxes on it because that initial contribution, you already pay taxes on it.

Right, Right. So the difference is, folks, is a traditional ira, you're putting the money in pre tax, letting it grow pre tax. Hopefully it's growing in your investments. And with the Roth, you've paid taxes, taxes on it, you're depositing the money post tax. But you get a lot of gratification later because when you eventually do pull it out, there's no tax, there's no.

Tax consequence at the end.

You know, it's a different kind of thing. Delayed gratification or now gratification, you know?

Absolutely. So when you do that conversion from the traditional Roth conversion, it's a taxable event. You have to go ahead and pay the taxes on it at that time, getting it to that raw status. But for next year, that second benefit is that they're allowing you to spread that tax consequence out over two years, meaning that you can spread out that tax consequence in 2011 and 2012 if you so choose. So it's just a really exciting thing. And if anyone wants to learn more about it, we can definitely put them in contact with CPAs and financial advisors to make sure it's the right fit for them.

Yeah, and we want to say to everybody, we don't give tax advice or legal advice, but check out these concepts with your tax advisor. Now, Jennifer, have they ever done that type of thing before? I mean, the Roth is only what, 10 years old or so, right?

Yes. They have not done that before, but there's talk about them, you know, perhaps extending that income ceiling going away, there's talk about that. But again, definitely speak to your tax advisor, your CPA, or get in contact with one of us and we'll put them in contact with someone who can advise them.

This is pretty cool opportunity. All right.

Absolutely. So let's talk a little bit about why you would want to self direct what those benefits of self direction are. We've already talked about what it means to have a truly self directed account. Some of the reasons that people like to self direct is it gives them control over their retirement account because let's face it, who's going to take better care of your money than you?

Good point. Commandment number three.

Self direction gives you the freedom to invest in what you know and understand. So, meaning if I'm a Realtor, do you think I'm going to feel more comfortable buying real estate or stocks and bonds? Probably real estate or let's say I'm a mortgage broker, I'm probably going to feel really comfortable loaning money to someone and doing things like that instead of the stocks and bonds and mutual funds. So basically it gives you the potential to invest in what you an area that you're already familiar with and something you're already really comfortable with. And something I think is the best is by utilizing self direction. It truly gives you a larger range of investments so you're more diversified. We would certainly never tell someone not to do stocks, bonds, mutual funds. It just allows true self direction. I'm not allowed to.

Can you tell I'm bitter?

So basically it allows you to invest in whatever your area of expertise is. So if you want to invest in real estate, you can. If you want to do notes, loans to people, private companies, you absolutely can do so. So when I spoke before, the IRS will not tell you what you can invest in. They're just going to tell you what you cannot invest in. So that would be everything we spoke about today except for a life insurance or a collectible. So when we're speaking about a collectible, the code is talking about things such as an art collection, a wine collection, antique cars, rugs, things of that nature.

Right. And the reason being here is that the value, number one, is, is somewhat amorphous. Nobody really knows with a lot of these collectibles what the real value is. But number two is it's not going to be arm's length. So you can't hang beautiful art on the walls of your house and do that inside of your plan. Also, you can't really do the precious metals. Well, you sort of can. Here's what I want to just make a distinction about that because I saw a commercial for a gold dealer today and they were saying ask about investing within your IRA and buying gold, but you can't hold the gold. Correct. And you know what, folks, I think that type of investing in the metals is nothing more than investing in fiat money. It's just if you can't hold it. By the way, folks, I don't keep any of this stuff in my house, so don't try to rob me. But if you can't take possession of it, I don't like it as an investment, just personally.

And you're right, absolutely. With the gold, you can't hold onto.

That because it wouldn't be arm's length. That.

Exactly. Which is actually Perfect timing. That's what we're going to lead into is those prohibited transactions. Now keep in mind, I think a key to understanding prohibited transactions is understanding who's disqualified to your ira. So please know in just a moment I'll go into more detail about who's disqualified to the ira. But prohibited transactions are what the IRS says we cannot do in our retirement plans. So the key thing to remember is that you nor anyone disqualified to you can have any sort of present day benefit from something going on in your ira. So back to that condo scenario. If I had a condo in my ira, I couldn't live in that condo, I couldn't vacation to it, I couldn't put my college age kid into it, things like that.

Because it wouldn't be arm's length.

Exactly. And perhaps even someone disqualified to me, which we'll speak about, would be getting some sort of present day benefit from something going on in my ira.

Right. And you're going to talk there about relatives and so forth.

I will. So in just a moment I'll go into the disqualified people. So you can't sell, exchange or lease any property between yourself and your IRA or anyone disqualified to you. So let's just say Jennifer Williams is a person, owned a great condo in Hawaii. I couldn't vacation to it. Let's say I decide I want to sell it in a couple years. I'm getting really great rental income from that and I want the tax benefit of that being in my ira. Do you think I'd be able to just sell that to my IRA or put it into my ira? No, no, absolutely not.

Arm's length.

Exactly. You also can't lend money or except credit between yourself and your IRA or anyone disqualified to that. So an example of that would be, let's say, let's say I have a daughter who was recently laid off from work and she really wants to borrow some money. I wouldn't be able to loan her money out of my ira. I could certainly loan her money as an individual, but not from my retirement plan. You also can't provide goods, services or facilities between yourself and your IRA or anyone disqualified to that. So an example of that would be, let's say I had a piece of raw land that needed to be excavated and my son had an excavating company. How convenient would be. I could not hire his company to excavate that property for me. He couldn't do it for free and he couldn't charge me fair market value for that either.

Right. See folks, I think generally the rule of thumb here, and you're thinking about this disqualification stuff is if the government does it or if Wall street does it, you can't do it.

Nice.

I'm just grinding that you also, you.

Can'T use the income or assets in your IRA for personal gain.

So like, if the government or Wall street does it, you can't do it.

Sure, you can say it. I can't say it. So an example of that would be, let's say I'm a realtor again. So I want to go out and find that piece of real estate that I want to hold in my ira. I can absolutely do so as the realtor. I can write the contract. I can do that all day long. I just can't take the commission on it. Oh yeah, because I'd get some sort of. I'd get a present day benefit from something going on in my ira.

Right, right.

So like I mentioned, a real critical aspect and determining whether a transaction is prohibited or not is understanding that disqualified person to you. So let's talk a little bit about that. You are disqualified to your IRA as well as your spouse. And then you want to picture your family tree. It's your direct ascendants and descendants and their spouses. That would be your parents, your grandparents, their spouses, your children and grandchildren, their spouses. Okay, so it's that real arm's length.

Distance that we're your cousin or your uncle. What about those?

So brothers and sisters and aunts and uncles for the most part are fine according to the code. If you read the code, brothers and sisters are fine. We tend to really treat that as a gray area though. Personally, would I do it? Probably not. But as far as the code is truly written, brothers and sisters, aunts and uncle are fine. But definitely want to analyze that. Perhaps speak to interest about it first. Maybe speak to an attorney about it first. Just to make sure that you're not connected on too many levels.

Right. For example, if you have a terrible relationship with your brother or sister, then it might be okay because you could.

Just.

Perhaps maybe do you live with that sibling still? That would probably be bad. Right. If you're connected on too many levels, you have power of attorney over some aspect of an uncle or an aunt's life, then the IRS could argue that you might have undue influence over that person.

So the point is, do your business with outside strangers and keep Barnsley distance.

Absolutely. Absolutely.

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