What is a Self-Directed IRA?

Welcome everyone to the Directed IRA Podcast. This is Matt Sorenson, joined by the incredible Mark J. Kohler, and we are here talking about the critical question you might be asking yourself: What is a self-directed IRA and how do I use this thing?

Yeah, common question. I, I, yeah, I just want to play like we, we just bumped into you in a bar and you ask us what we do for a living, or what what we love to talk about, and we say this, and you're about to run away. You're about to say, I do not want to talk to this bozo. He's going to bore me to death. I get that a lot as an accountant. But no, you've got to hear this. I think you're going to love it. I really, I really do.

Yeah, no, the true story is we're actually very popular at the parties. You know, we had the kids— no, no, I'm serious. We had the kids' flag football team over at the house. All the parents are there asking what you do. Oh, you sell cars? Oh, you're a contractor? I'm like, oh, I'm a tax lawyer. I have a self-directed company. I'm not kidding. I was answering everybody's questions. What about this?

What about that?

So one of them wanted— she wanted to buy real estate with her Roth IRA. She's like, that's so cool. She's like, I can buy real estate with my IRA?

She's like, I'd never heard of that. So did you— did you have an open bar there?

We got some— we had some adult beverages, you know, juice boxes for the kids. Adult, you know, sorry.

Well, let's get to it. And I want to let everybody know here as well that I'll be the guy you can understand because the GOAT, the one and only that has the bestselling book on this is Matt Sorensen. And at the end of this show, we will give you some different calls to action 'cause I know you'll be excited. And I'll tell you, one of them is now, there's a lot to learn and you may want to read more. We've got great podcasts that follow this one on, What's next? So, Matt and I, without, just joking of course, Matt is so smart and he is literally the pioneer in education on this topic over the last 10 years. He's just unbelievable. So we're gonna have a lot of fun breaking this down. So can I say something? That was part intro, but can I say one more thing?

You okay with that? Okay, all right, yeah.

Okay, a self-directed IRA, Let's start with this. All of you, I would suspect all of you listening today have at least a 401(k) or an IRA or a Roth sometime in your life. You've had one. It's a retirement account that you equate to Wall Street stocks, bonds, and mutual funds. Whether your employer set it up for you or you set it up, you've heard of this account, you've had one, but That's probably the extent of what you know, and that's typical. Matt, your thought? Would you agree?

Yeah, and I think we've all learned that these are great places to save, that these are tax-advantaged accounts. I get a deduction when I put money in a traditional, or I invest with a Roth account, no deduction, but it grows and comes out totally tax-free. Either way, we know like the government's incentivized us to save and invest with these accounts. We've just been told that the investment options are ETFs, mutual funds, stocks, and you may like that or be good at that. But a lot of people are like, well, can't I invest in something that just is like the best investment? Why do I have to stick to the menu that Wall Street has? Why can't I invest my IRA in real estate if I feel like that's the best investment? Why can't I invest my IRA in crypto if I feel like that's the best investment? A small business, a private fund, a startup. These are all assets your IRA can own. That's what a self-directed IRA is. You just can't do it at a Wall Street provider because they make you buy what they sell. That's not what IRAs are for. That's what Wall Street IRAs are for. So that's what the self-directed IRA is, is these other assets that you may think, that's actually a better investment. My account will grow faster if I invested it in real estate or, or whatever investment you want to do. That's what the self-directed IRA empowers you to do.

Yeah. And I think this show, we're going to be probably demystifying more than we're going to be explaining because there's so much misinformation on this or misunderstanding. Matt, last night it was such a great group. Jocelyn, I don't want to say more. She had a group of 40 entrepreneurs and real estate investors and she asked if I could come teach them the trifecta and get on a whiteboard. So I got on Zoom and then I started to answer questions. And one of the first questions they said, how can I buy real estate in my IRA because I can only put in $7,000 or $8,000 a year? How do I do that? And I said, oh my gosh, another misunderstanding. Think of Monopoly. When you pass go, you get $200. Every year when you pass December 31st, You can put another $7,000 in, $7,500 this year, $8,500 depending on your age, whatever. 401(k)s, they have limits too. But every year you get to put more money in. You went past go. But your returns are unlimited. You can invest in these alternative assets and make as much as you want. And keeping that point of view and understanding they're different, they're separate. There's the contribution. And then there's what you earn and you can earn unlimited amounts. And that's the beauty of this IRA is don't feel limited on the asset because you think you're limited on the contribution.

Yeah. Yeah. And most people who come to this as well are— there are— you already have a retirement account, right? The most common self-directed investor is like, okay, I've got $400,000 over at Fidelity in an IRA, in a mutual fund or an ETF. I couldn't even tell you the name of it or what it owns. But I have that. So now I wanna buy this duplex on 123 Green Street and collect the rental income in my IRA and the gain in the IRA. And I wanna, I think I can build the account faster in that duplex than I can this mutual fund. Okay, well, all you need to do is transfer that money at Fidelity and you can still have an IRA at Fidelity. You open up an account at a self-directed IRA provider, like the number one best company in the space, Directed IRA. You just transfer that money over. It's still IRA money. It's traditional at Fidelity. It's a traditional at Directed. It's a Roth IRA at Fidelity. It's a Roth IRA at Directed. Now that money's sitting in a self-directed IRA, directed IRA, and we say, okay, you want to buy that duplex? Great. We're going to go buy it with the money in the account. So even your existing retirement account dollars, you can move. You got an old employer 401(k), you can move that too. And that's what a lot of people will start their self-directed account with. You can also do, like Mark said, the contributions. But the investment potential and growth is unlimited. We have a client with a $400 million Roth IRA. He started at zero. All right. And then, and then great investor, real estate guy, made some incredible wins. But, and that's not the typical client, but I'm just saying, it's like your, your earning potential is not capped in that. So we can build that as big as we can depending on the return we can get from the investment.

Well, and Matt and I are going to probably say these— the same thing, but in different ways.

And maybe—

and the purpose of this whole show is, again, to just open up this whole new world to you and give you some ideas and give you realistic options that are— that have been around for 40 years or more. Ever since the retirement accounts were established, people have been self-directing. It's just that Self-directed companies can't keep up with Merrill Lynch and Fidelity with Super Bowl commercials. So you just don't hear about it as much. And they, Wall Street has created a mechanism where they get commissions off of what you put in your retirement account. In a self-directed format, you get to keep more of the profits. You don't have to pay a financial advisor. You are, wait for it, self-directing. It's up to you. So here's another way of thinking about it. I like what Matt said about having 2 IRAs. You can have 2 IRAs, you can have 5 IRAs. You can only put in your $7,500 this year, but you could have 7 different IRAs and put $1,000 each one. So that's an important concept people don't realize. Number 2, think of it this way. You'd have a Fidelity app on your phone with your Fidelity IRA money. Then you can go to your Directed IRA app, which we have, and you can look at your money in your directed IRA account and you go, oh, well, what's this one invested in? Oh, Fidelity is in Tesla stock. Oh, my directed IRA account is in crypto. And I was able to buy directly XRP or other tokens that I believe in. And I am personally managing that account, self-managing it. But they're both IRAs. And if they're both Roths, They grow tax-free and come out tax-free. So that might give you a better way of looking at it.

[Speaker:MARK KOHLER] Yeah, and I think as we start thinking of these assets, we've already talked about a couple, and that's the point here is you're using a self-directed IRA 'cause you want to buy an asset that Wall Street won't let you do, okay? So you go to the self-directed IRA 'cause you're like, I want to buy crypto, whether it is XRP or Solana or, you know, you could even be Bitcoin and all these other, you know, whatever crypto you want to buy, you can do that with, we call it a crypto IRA at Directed IRA. You can do real estate. I'm like, and we're not talking about like the REIT or the publicly traded real estate company. We're talking about like, I got the duplex down the street. We talk to real estate investors and real estate professionals all the time. And they're like, you mean I can buy real estate with my IRA or 401(k)? They've never even heard of it. They've been in the industry forever. They sell real estate all day long. There's $45 trillion in US retirement accounts. And they're like, what? I didn't know I could do that.

Yes.

Why would you not invest in what you know? If you know real estate and you believe in it and you get deal flow and opportunity, why would your IRA or 401k be buying a mutual fund you don't even know what it is? So we want you to, to realize that the investment opportunity widens with a self-directed IRA where you can take advantage to invest in the thing that is the best investment that you think will have the greatest return, not the one that's on the limited menu that you can pick only the best investment that's on the menu. So that can be real estate, small business. We've had clients invest in startups, private companies that eventually went public. We've had clients invest in private funds or syndications for real estate or private equity or venture capital. I have a client's IRA that owns a small percentage of professional Mexican soccer team. Mark's accounts bought cows. You know, like these, these are all assets that your IRA can own.

And some of you right now might start feeling a little bit, okay, a little overwhelmed, or you're like, I'm not interested in real estate, or I'm not interested in crypto. We have, I think now over 400 episodes on— over the last 10 years, Matt and I have been doing this podcast in various forms and titles, and you can go back and catch a show just on how to do real estate or how to do crypto or what are the pitfalls or this or that due diligence. So just hang with us a little bit longer because you're going to have plenty of opportunity to go dive deep on a couple other podcasts. All right. And so maybe, Matt, too, I wanted to just kind of go through a couple of steps because that might help some of you grasp this process, too, because it's really easier than you think. So let's say you still have that $300 or $400 old 401(k) sitting at Fidelity. It got Your investment advisor said, let's buy some mutual funds. You don't even know what it's making. It's just sitting there. Very, very common. Don't beat yourself up. It's out of sight, out of mind. I get it. Okay, so the next step would be to open a self-directed account and a directed IRA. You can get, we'll give you contact information at the end. You'd go open an account around $500. You got your account up and going. It'd be an IRA, it could be a Roth, it could be an HSA, whatever. So you open your account. We've got our toll-free number and our support team. Will walk you through whatever your questions are to make sure you open the right account. So you open the account, 24 hours later, then you go, "Hmm, I want to move over $100,000. I want to go buy X, a little private equity fund, some real estate, crypto, whatever you, gold, whatever you want to buy." And so you would call Fidelity and go, "You know what? I'm moving $100,000." Now prepare yourself because there your investment advisor is going to flip out. They do not want you to pull that $100,000 out of there because then they make less money. They get paid based on the— you're typically on the size of your account. So you're going to say, I want to self-direct. They're going to say, oh, you can't do that. Well, no, you can. It's just Fidelity can't because they're not built for that. So be careful. Stay strong. Move your $100,000. There's no tax. There's no penalty. The $100,000 ends up in a directed IRA. If Fidelity is on top of it, you might see it in 2 or 3 days.

Boom.

Day 3, Direct IRA. What do you want to do, Tom? What do you want to do, Susie? I want to buy gold. Okay, here's the process. Go watch Mark and Matt's podcast on that too, by the way, so you're informed. Okay. And you're off to the races. That's it. No tax, no penalty. It's your freaking money. Invest in what you know.

Yeah, exactly. And we kind of say it's as easy as 1, 2, 3. Step 1, as Mark said, open the account, pick the account type that you want. Usually if you have a traditional 401(k) or a traditional IRA, you're going to open up a traditional IRA directed. If you've got a Roth account, you're going to open up a Roth account. You could even go traditional and convert it to Roth with us. Lots of options. So we open the account. Step 2, you fund it. And if it's a transfer, if it's an IRA at Fidelity, we send the request to Fidelity for you, and then they will set—

as a—

we're a trust company, licensed, regulated, audited, so we can send money back and forth between other providers like a Fidelity or a Schwab or a directed IRA. So we can— so we'll receive the money in your account here. And then step 3 is you invest it. You tell us how to invest it. And so another thing that can sometimes happen is many of you don't have an advisor, so there's like an advisor talking in your ear, make money. You already self-direct your account, but you're buying stocks, like you're choosing— you're kind of self-directing in that you're managing your account and deciding how to invest it, but you've just like put it in the S&P 500, or you bought Tesla stock, or whatever, you know, you just you kind of just did it with on your own. Well, when you call Fidelity if you need to, and a lot of times they'll call to verify, hey, did you submit this transfer request? You want to send money over to directed IRA? Yes. They'll, they'll typically ask you questions, and it might be like, well, what are you doing? What are you investing? Well, I want to do real estate. Well, your IRA can't invest in real estate, you know. Yes, it can. It can't at Fidelity. A Fidelity IRA can't buy real estate because they're a broker-dealer. They want to They want you to invest in what they sell. If you had an IRA at Northwestern Mutual or New York Life, what can your IRA buy there? Annuities. Why? That's what they sell. Okay, so, so then that money gets over there, that's over to Directed, and we have those open, fund, invest, and our team's here to help you through that process. And it is truly as easy as 1, 2, 3.

Yeah, no, I love it. Well, I— we don't want to beat a dead horse here. I, I just want to say a couple things to wet your whistle, you know, give you a little bit of something to think about. Your kids. You may have children that you employ in your business or want to. Your adult children that you're trying to teach how to save. You can help them start to open accounts and invest together. You could create an LLC where all of your IRAs work together. You could do this with a health savings account. Gosh, the list just goes on and on and it just starts with getting a little more educated on it. And realizing this is mainstream, non-risk, non-audited risk stuff. Peter Thiel, owner of PayPal and Facebook, has a $6 billion IRA. Mitt Romney, that ran for president, he got— Wall Street Journal pushed it to the 50th page because they didn't want everybody to know he had a $100 million self-directed IRA. So Wall Street is trying to not let this information out. So you have just found the secret sauce and it is so exciting. And we hope that we can be a part of your journey.

Yeah, we'll have some other episodes on this following, of course, and a lot of content and resources that we have. But I want to make sure you understand one rule. Okay? I want to hit a couple rules before we sign off here. And there's going to be more detail. Yeah. So we are tax lawyers. Okay? Let's, you know, we're not just like marketers and podcasters. Mark and I are both tax lawyers. Mark's also a CPA. I did write the number one book in the field on this that government regulators have used, most of the companies in the industry use, the National Association in our industry uses. Like, we're credentialed on this stuff, okay? We're trying to be fun and keep it light, but I want to let you know we're actually like professionals in this space, okay? So, all right, first, what can't your IRA buy? There's only 3 things: life insurance, S corporation stock, and collectibles. That's it. Those are only 3 assets that are restricted for retirement accounts, okay? So What's left? Everything. All the stuff we talked about that you can buy. This is all fair game. Okay. Okay.

Can I give another rule to number 2?

Okay. Rule number 2.

And you may have 3 because you may like— rule number 2, you're not creating a job for yourself. You can't take your IRA and create a business that you get to work in, that you get to put sweat equity in, that you can get paid from. You cannot benefit from what your IRA is investing in. You can oversee it. You can manage an LLC. You get to make the decisions, but you've got to be careful. And we have episodes on this prohibited transaction rule of not benefiting, like buying a rental property that you're going to go stay in every 4th of July. Can't do that. You cannot benefit from what you're investing in.

Yeah. Yeah. So that's called self-dealing. So if you're buying an asset with the reason is, is I want to pay myself, you know, or I want to, you know, my IRA is going to buy this fix-and-flip property, but I'm going to go put the tool belt on and do all the work in it. No, your IRA can buy a fix-and-flip and pay another third-party contractor to do the work, and you can oversee it, look at it, make sure they did it right. But you can't be the one with the tool belt physically doing the work. So that causes that self-dealing or having use of the asset. Like Mark said, like you can't stay and have personal use of the asset. So this is called the prohibited transaction rules. And there's one other variety of this, and I want to make sure you understand this.

Yep.

Congress, when they created IRAs, they were like, these are like tax-advantaged accounts. And when they created these, they said we need to put some restrictions on them because we don't want people to manipulate these. And really what they were concerned about is people moving assets they personally owned over to their IRA to get out of avoiding taxes. So like if I had an asset that is appreciated personally, I'll sell it to my IRA at a low price and then I'll have my IRA sell it for actual market value to a third-party buyer and I'll pay no tax. Well, Congress knew you would do this. They knew we would talk about this on the podcast as a strategy, so they restricted it. They created this prohibited transaction rule which says your IRA cannot transact, buy, sell, lease, loan, any of that. Your IRA cannot transact with someone who's disqualified. And you are what's called a disqualified person— your spouse, your kids, your parents. What that means is my IRA cannot buy an asset from me personally. So I'll have clients call and they're like, man, I have these stock options in this company I work for. They're actually going to be valuable. How can my Roth IRA buy these options from me? No, because you personally own those, personally earn them. That would be you selling those to your Roth IRA. That would cause a prohibited transaction. Let's say that your dad owns a rental property, your mom, they want to sell that and you're like, oh, I want to buy that and I'll own it in my IRA. That would be a prohibited transaction because it would be your IRA transacting with someone who's disqualified. So they basically got these like little insider rules here. They don't want you transacting with yourself or certain family members, spouse. And then for Utah, this is all your spouses. Okay. Parents and your kids, grandkids, um, and spouses of your kids as well. So that's who's on this list. We got a lot more content and detail on that, but I just want to flash that just so you know. You're not doing this to kind of move assets you personally own. Crypto— that question comes up a lot too. We're not trying to personally sell that to the IRA as a tax strategy. What we're trying to do with the IRA is buy new assets that we feel are going to appreciate in value and do it in this tax-advantaged account with the goal of having the biggest retirement possible when we hit 59 and a half. And if we think we can do that from these self-directed assets, real estate, crypto, private funds, whatever it might be, precious metals, better than we can a mutual fund, that's who does the self-directed IRA.

Yeah. And I want to offer just one last perspective on this topic of rules or guidelines. Jim Cramer, Mad Money, CNN. Yeah, very smart guy, gives all sorts of stock tips, and he's fun, shows exciting. Whenever a caller calls up and says, hey, I heard I can self-direct, he hits his little buttons, rip, rip, rip. You know, don't do it, you're going to screw it up. You don't know, you know, we know better. Wall Street's smarter. If you self-direct, you could lose it all. You've got prohibited transactions. And he just craps all over it. And why? Because it is not in Wall Street's best interest for you to do this. So I want to remind you, the rules are not that hard and they're easy to keep. You just have to know the rules of the game and then you can win. And so don't be dissuaded or talked out of learning more because someone you trust doesn't know about it. Doesn't mean you learn something new that works.

Yeah, yeah. Here's where I want you to go. Go to directedira.com where you can learn more. We have educational resource center. Every week we have a webinar at Directed IRA. We're doing a weekly podcast episode. We have our Self-Directed IRA Summit, SDIRAsummit.com, coming up on April 17th. A full day of training on how to self-direct your IRA, hear from other investors, new and experienced ones, what they're doing. And then also just book a call with our team. We have a team of experienced account representatives that have helped hundreds, if not thousands, of self-directed IRA investors just like you— new people, experienced people. So you can just book a call with the team at directedira.com to get your questions answered and get your account going as well. So we want to be there for you. Let us be a resource. We've tried to lay it up and make it easy for you so you can truly take control of your retirement, but have the confidence to do it too with the team that's behind you.

Yeah, well, I can get better. There's no better call to action but take action. And we hope to see you and hear you at one of our open forum calls. We take questions from around the country on a regular basis. Please give us a 5-star, a like, a thumbs up, whatever, and allow us to be a part of your American dream, a part of your journey. And I think you're going to find out that you just literally found plutonium, and it's going to be a lot of fun. So thanks so much, everybody, for watching and listening. We'll see you on the backside. Get over to DirectAtIRA.com, get an account open, start listening to the webinars, and start this journey. You won't regret it. 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.