Self-Directing 101: The 5 Golden Rules of Self-Directing

Welcome everyone to the Directed IRA Podcast. This is Matt Sorenson, joined by the incredible Mark J. Kohler. We are two tax lawyers here who love to talk about self-directing, using your retirement accounts to invest in alternative assets. And today we have the 5 golden rules to self-directing. They're going to come hard and fast today. We want to make sure you know them.

Yep. These are the 5 golden rules to make sure you succeed. You're in a new world and you're on this little Aladdin carpet ride. We want to make sure you don't fall off and you get to enjoy the ride, look at the stars, have that beautiful song. And this is going to be incredible.

And Jasmine is there or not?

I could live with Jasmine there. I think she's adorable.

And for the ladies, you got Aladdin. So just saying.

All right. Yeah.

Something for everyone.

They're a sweetheart couple. Okay. These 5 things are to help you succeed. They're basic concepts that you may know or are already practicing 2 or 3 of these, but I'm hoping one of these 5, you're like, aha, I needed to hear that. So let's get into it, Matt. What is your number one golden rule to self-direct? All right.

Number one, you've got to source an investment. The number one thing about self-directing is you're the one deciding where to invest your account. And that's what we do at Directed IRA. When you have a self-directed account, you get to invest in the best investment you can find. Not the best investment that, you know, Wall Street has for you. Not the best investment at Fidelity. Not the best investment at the life insurance company or the best annuity they have. Just the best investment, period.

And this is a tricky one 'cause you're like, well, yeah, I've gotta source one. No, no, no, hear me out. With a lot of brokerage account, for example, there's an investment advisor that's their job to source an investment and bring it to you. And you've got to take the bull by the horns and realize no one's out there looking for me. This is, but now this is the beauty and the curse, because the beauty is you get to now look at all these other investments and get to choose what you want to do and what's best for you. But at the same token, it's on you. No one else is going to do that for you. So the golden rule is own it.

Yeah. And for some of you, that's scary. For some of you, that's exciting. But you have— the potential is unlimited. Okay. All the limitations from the brokerage or Wall Street are taken off. Find the best investment out there because that's what we're trying to get at the end of the day, the greatest return to grow our account and compound over time. So we have a retirement account we're looking forward to. Okay. Number 2. I got a good one for number 2.

Yeah, well, I got one. I got a number 2. I got a good one.

Okay. I was teeing it up for you.

Oh, okay. Okay. I like these plays on words, so I want to do this one. Treat it like it's your money, but don't. What's that mean? What that means is when you find that investment, it's just weird. Some people are— they just feel a little more detached from it. So they feel like they don't do the due diligence they really should. They just— they think because it's an IRA or 401(k) or a Roth, it's one step away. That for some, and maybe it's just slightly, but I see it all the time. They're just not as diligent, vigorous in their due diligence. And so what people with their own money or their grandma's money, they freaking tear into it. They're doing background checks, they're kicking the tires, they're looking at the property. That's not a prohibited transaction. You look hard at these deals. But then when I say don't treat it like your money is you've got to realize the prohibited transaction rules exist and you, it's not your money, it's your IRA's money. But when it comes to due diligence, It is your money.

Love that.

Agree with you. Do you agree with that? Yeah.

And that's, that's a good way to think about it because, um, another thing I'll just add on it when we're talking about your retirement account funds is these are like sacred funds. Another way to think about it, which is they can't have personal use. I'm not trying to make money personally because my retirement account did it. I'm not trying to buy a rental property that I'm going to live in and have personal use of, right? I'm not trying to abuse it. Think of it as sacred funds in that, like, these are the most important funds I have, the best tax-advantaged funds I have. So, like, I want to put it in the very best investments that I really believe in the most because I get to keep all of the returns coming from it in a Roth IRA, or it's all tax-deferred in a traditional account. So even better, because when I win on those, I really win more because of the tax advantages. Okay. Number 3.

Okay, Matt, I even have an awesome 4 and 5, I think. So I'm going to tee this up for you. My dear friend, I get to 8 then.

Okay.

Yeah. What's your number 3?

My number 3 is because we're talking about your self-directed retirement account, we need to start thinking about what are the retirement funds I'm using for this? If I'm new to self-directing in particular, do I have that brokerage IRA that I'm going to roll over that's currently in an ETF or a mutual fund? I don't even know. Is this my old employer 401(k)? We gotta start thinking of the funds we're gonna use here. Maybe there's a new contribution, but what's this investment gonna take? Is it $50K? Is it $100K? Is it $300K? What is the amount here? How do I, I wanna make sure I know in my brain here what retirement account funds I'm pulling from. And you might have been needing to think about ahead of this when you think about what investment am I looking for? 'Cause that investment might be $100K, $300K, half a million, whatever. But be thinking about the retirement account funds you're gonna pull from here. You're going to need a self-directed account. I'll talk about that. But I think it's good to get into your head right now. What am I getting out of? Because if you have a retirement account at TD Ameritrade that's in an ETF, you're going to sell that position to get to cash to come over here. You're generally doing that because you think it'll do better.

Okay. If I could add to your number 3, I'm going to add a couple of dimensions and I love it. You're thinking about You're thinking about where's this money coming from? How much do I need?

La la la.

I just want to open up the can of worms that you might have multiple accounts that you could pull from and pool. You might want to open up the LLC concept and pool accounts of other family members and say, hey, my wife or husband has an account. I want to pool those. Now, I'm just saying that everyone, you're new to this, maybe. We have other podcasts on using the IRA LLC. Just don't feel— my point to match number 3 is I don't want you to feel limited. If you need more money for that perfect investment, oh, you can get there. It's maybe you pull from some other older accounts or pool other accounts from family. It's not prohibited to do that and there's ways to do it. Okay. You okay with that?

Yeah.

All right. Okay. Number 4. Now, in this number 4, I'm Brad Pitt. Okay? This is a very important point. And Matt, your character, is it Noah? What's his name?

Jonah Hill.

Jonah Hill. You're Jonah Hill and I'm Brad Pitt. Let's make sure we're straight on this one. Okay. Number 4. You do not need to swing for a home run. You do not need to hurt yourself swinging so hard to make big money on this first deal that you make a mistake. People, Jonah, what's it about? I'm going to go like this and point at you. It's what is it, Jonah?

Base hits. You just need to get on base.

There you go. Okay. Now, for those that are Moneyball fans, that was a famous scene, and I'm trying to have fun with it here. But the point is, Base hits, long-term game, people. You got 9 innings. Do not overdo it. Yes, it's cool. You can hit some home runs here that you would never be able to hit at Fidelity, but you don't want to get overanxious. Just when you are shooting for base hits, once in a while you're going to hit a home run and that's great. Just focus on base hits and you'll be surprised what happens.

Yeah, and I'll just give you an example. When we say base hits, that, that might be the boring rental property, that might be private lending secured on the asset. Okay, this might not be the new cryptocurrency that's going to go 1000x or the startup that 9 out of 10 of them fail, but it sounds super cool. Okay, like there's some risk and return basics here to think about. And we get into self-directing because the world is your oyster. You can start getting a little more risky to, to chase higher yield. But you want to make sure you're being smart about it and not taking on unnecessary risk if the return is not there.

Okay, number 5.

I got number 5: make sure the investment documentation is all correct. We see this— there's two facets of this. Okay, so I got a part A and part B here. Um, I don't want to say, you know, 5-6 or 6-7, but, um, That was for the kids. But I'm just saying, A, B, okay, A, B here is there's two things on the investment docs. One, this needs to be in the name of your IRA. When you're investing with your self-directed IRA, let's say this is me, but do make an investing in a private fund that I found. Okay, I'm putting $50,000 into a private fund doing something cool I'm excited about. And that $50K on that subscription document and the investment documents It's not Matt Sorenson Investing, it's Directed Trust Company FBO Matt Sorenson's Roth IRA. Okay, that's the subscriber investor in that deal. So the investment documents need to be in the IRA's name. That's part A. Part B is make sure that the investment documents actually represent what the deal is. And Mark and I have done due diligence podcasts before, top 10 due diligence items. We have articles on this of things to be thinking about. But one of the most important on those is make sure you understand the documents and the documents reflect reflect what you've been communicated. A lot of people get sold on an investment, private investments, and they're told this and that, and then it's nowhere to be found in the actual investment documents. But it's actually a critical reason of why you decided to invest. So just make sure the documents reflect your actual understanding of the deal.

Okay. All right. I love that. And making sure your document— and it kind of relates to that due diligence, but it, but it's the second part. You need to really drill down on the due diligence, but then you can't cut corners on documents. I knew this guy once that said, bad documents make a good deal bad. You hear that, people? Bad documents can make a great deal bad. I stole that from Matt Sorenson. Yeah.

Yeah. He has to pay. He has to pay me a nickel every time that he says that. So we have a contract. I have royalty on that. On that.

It'll be in the mailbox. Mailbox money. Okay, now I've got number 6. You may say we're done at 6.

I like it. Let's give them a bonus. You know.

Oh, you want— this is the bonus or you got a bonus? This is the bonus.

I'll let you— you get the bonus.

Okay, here's my bonus. I'm trying to find— I've got some several words here. Matt kind of doesn't like this, these words, but I'm going to try to make sure it's good. Do not forget gun safety. Now, what do I mean by that? Gun safety, like hunter safety, is learning how to handle a firearm. Don't point it at people. Make sure when it's loaded, treat it always like it's loaded. La la. Matt and I are both Scoutmasters, and we had to teach kids, even with a BB gun, what's gun safety. Well, people, you're dealing with a pretty cool strategy here. It could argue, you know, it could be a little dangerous. You have got to know the rules. Do not skip over our podcasts on prohibited transactions. You need to know the rules of the game. They're not just getting, and you can't use the excuse, "Well, I didn't know the rules." Bless your heart. That doesn't cut it. So it's on you to know the rules of the game. And Matt and I will make sure you know them backwards and forwards. This podcast should be a regular podcast for you for the many, many more months until you feel like you could teach a class to your family about this. You've got to know the rules of the game and know the gun safety 'cause you're dealing with a loaded weapon here and you want to be careful with that.

Yeah, and I'll say we, in addition to the podcast, we have our Self-Directed IRA Summit coming up April 17th. That's a full day on self-directing. If you're a client at Directed IRA, it's free, or a new client, you're a client of our law firm, KQS Lawyers, you get to come to this for free. Go to sdirasummit.com. Anyone can go. You got to pay. This is virtual. But just saying, if you're a customer of ours, reach out to our individual offices, or it should be in your newsletters. Just check your newsletters for the code to attend that for free. But that's a full day getting into those rules Mark was talking about. We should give you a certificate at the end, kind of like you get, you know, a hunter safety, you know, or maybe even a merit badge. Maybe we'll create a self-directed IRA merit badge or something. Who knows?

Yeah.

But, but it's a great time. You get to network with other investors, learn about strategies, and of course, the rules to make sure you're staying compliant and up to speed on what matters.

Yeah, I, you know, it's funny, I wanted to say this too. When Matt and I were Scoutmasters, there's actually a little safety card that the boys have to earn before they can play with their pocketknife around the campfire. And hey, when you're a Scout, And you're an adult says, hey, does anybody have a knife? Oh, that is the moment a boy becomes a man because he'll be like, I got a knife. And they flip out their knife and give it to an adult in the proper way. That is a big moment. But before the kid can get there, they have to pass off a special little card that shows they know how to handle a knife. And much to their mother's chagrin, we send them home with knives and their little card. And then, you know, I get nasty phone calls for a week. But you know what? These kids, they got to learn. And that's right. When you get a self-directed account, you got to know how to run that account. You know, like, how do I handle it? And it is such a powerful tool that will change your life, change the trajectory of your family, your retirement. And once you know the rules to that game, oh my gosh, you freaking own it. It's amazing.

Yeah. And we've got, like we said, we got all the resources and tools here. Our team's available too. You can book a call with our new account team at directedira.com if you're like, I got some questions on this. We're here to help and be a resource to you. And if you need the deep dive with a lawyer, you're into really technical stuff, we have a law firm, KK Lewis Lawyers, as well. So we got all the resources for you. We like to say self-directing your IRA, even though we are, we're making— it's making a serious point here, um, it's— but it's not rocket science. It's more like learning a board game. You just need to learn it, figure out how to work it, whether it's the pocket knife, the BB gun, the archery, whatever it is. Um, there's just a few things to learn, but it, but it, it can be exciting once you learn the rules, and empowering by being able to invest in things you know and believe in the best to grow and build your retirement. So thanks everyone for tuning in, of course, to the Directed IRA Podcast. Make sure you get over directedira.com/podcast. You can catch all the episodes there. We'll see you next week. Until then, stay calm, self-direct on.

And thank you everyone for listening. A quick disclaimer and reminder: this presentation does not constitute an attorney or CPA client relationship, and it is always in your best interest to consult competent legal and tax professionals when conducting your own personal transactions.

We also want to make sure you know this is not investment advice or financial advice. We're just trying to give you education, ideas, and strategies you can take to your professionals or conduct your own research on.

We'll see you next time.