The Lesser Known IRA – Episode 34

This transcript was auto-generated and may contain errors.

[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your hosts, bestselling author Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have co-host and bestselling financial author Kim Butler in the house with us. Welcome, Kim. Hi, Todd, happy to be here. Looking forward to talking about self-directed IRAs today. Super. Well, a lot of people, I shouldn’t say that, some people are familiar with the concept of an IRA, which is of course, it’s an individual retirement account. But a self-directed IRA, you’re into a very select group of people know about these

[00:52] and they’re an incredible, powerful product that I’m really excited for you to be able to share with our listeners today. Absolutely. And it is funny how we get swayed in our own knowledge thinking, well, everybody should know about these. But I do find that the self-directed IRA arena has not only not a lot of people familiar with it, but a lot of misinformation. So a self-directed IRA is at the beginning, just the same as your regular IRA. In other words, it might be money that was rolled over from a 401k account or it might be money that you actually deposited into that IRA. But taking it up a notch into the self-directed arena has two roads that you can go. So the typical brokerage house, like your Schwab or TD Ameritrade or something

[01:40] like that, they say that they have self-directed IRAs and they do. But I have to admit, I might have a little bit of a snobbery approach to them because their self-directed IRAs are still effectively invested in most of the typical investment arena, stocks, bonds and mutual funds. There might be REITs or something like that, but they’re self-directed IRAs that are inside the typical brokerage houses are still invested in the typical brokerage offerings. A truly independent self-directed IRA is kicked up a notch in that you literally could invest in anything that you wanted to, as long as it qualified for the IRA arena. And what typically happens is you will want to pick your investment first and

[02:30] then find the self-directed IRA trustee that works with that investment because each trustee has their favorite areas and each investment has to have a trustee that has okayed that investment. Now I use the word okay, not approve because technically they don’t really approve it, but for example, if you want to invest in life settlements, which is one of our favorite things to do with IRAs, there’s only a couple self-directed IRA trustees. I’ll explain that term a little bit more here in a minute that allow for life settlements. You can’t just go to E-Trade or Charles Schwab and invest in life settlements inside their self-directed IRAs because they haven’t okayed them. So the self-directed IRA trustee or the self-directed IRA custodian, thank you.

[03:25] That’s the word I’m looking for, custodian, is available to a particular list of investments that they have okayed. And so these are often trust companies and there are a variety of them out there that will have a hundred or more okayed investments on their list, but it’s so much easier if you pick your investment first and then go to their custodians that they already work with because you as the client don’t really care who your IRA custodian is. Most self-directed IRA custodians charge a little bit more than regular IRAs, so your typical IRA is going to have maybe 30 to a hundred dollars a year in fees, your typical self-directed IRA is going to have anywhere between 75 and maybe two or $300 a year in fees.

[04:26] Your typical IRA is going to have maybe no setup costs or maybe a hundred dollars of setup costs. Your self-directed IRA is going to have easy a hundred dollars up to three or four or even five or $600 of setup costs. That’s just the nature of that environment. A lot of clients get real frustrated. Oh my gosh, that’s so expensive compared to what I was used to. It’s partially because you get the freedom. So you’re paying a little bit more for the self-directed IRA. I find that that’s well worth it because inside your self-directed IRAs, you can typically get investments that are actually going to get you what we always look for, which is that double digits, no loss of principal goal. And you still follow the same rules as far as the age 59 and a half.

[05:12] If you’re going to withdraw the money before age 59 and a half, there, there is a penalty. I know there are some strategies around that, so they do comply to the traditional IRA arena as far as the tax rules and things like that. What really is significantly different is your choice of investment options. And a lot of times the IRAs that are free are so inexpensive are loaded with high commission products so that the people who are selling the product are actually paying part of the compensation to pay for that annual fee for the IRA. So that’s how I try to look at it is the fact that I now have the ability to buy no commission or, you know, I could, I could buy a piece of investment property or whatever that I decide and in order to get out

[06:09] of having my choices be so limited, I have to pay the fee and it’s not a huge fee annually. That doesn’t seem like a bad trade-off to me. I agree to me, the investment choice is really where the difference makes and whether you’ve got a little bit of fees or not is not the big issue. But a lot of times that gets overlooked in light of the big picture. And to me, the IRA custodian or the IRA trustee, and those terms are largely interchangeable, is really just a service provider that’s going to give you the platform to keep that money without tax. And as you said, there’s some strategies to work around that. But a lot of times clients don’t want to pay the tax. Yeah, they could convert to a Roth or they could go ahead and take it out

[06:59] of the IRA environment, but it’s pretty tough to write a tech, a big tax check in order to make those happen. Now we do have some valuable strategies that make very good Roth conversions. So if that’s of interest to you, reach out to us. That’s a pretty specialized area, but something that we could help you with. But again, it’s a pretty tough thing to write a check. So we find a lot of IRAs being rolled from IRA to IRA or 401k to IRA. And it can get rolled to a self-directed IRA just as easily. There’s really no difference there at all. Now I think inside the industry, that term rolled is pretty accepted, but why don’t we go through a scenario where a person has a traditional job and then separates and explain what that rolled means?

[07:48] Sure. Thanks for asking that question. Yeah, we don’t want to get caught up in industry jargon. It’s easy to do. So if you have a job where you have a 401k plan, you’re contributing, maybe the company’s matching a little bit and you’re probably just contributing to the match level and you have been there for quite some time, you’re going to get a balance, you’re going to be vested in that balance, meaning that you would actually get the money if you did leave the employer, then at the time that you leave, whether you leave because you retire from that company or you want to leave, or they want you to leave, whatever the case is, you now have a particular balance in your 401k plan and it has not been taxed at this point.

[08:28] So your money, as well as the company money match, if there was one, is all in this one account. And the most common thing to do is roll, that’s the verb, the money from that 401k to an IRA. And at this point, it could go directly to a self-directed IRA. It could also go to a regular IRA. And I think technically it’s called an IRA rollover because what is happening is the money is going straight from the 401k plan to the IRA or the self-directed IRA without any tax, without any penalty, typically without any charge, again, we’ve talked about the IRA charges, but typically your employer will send that money over without any charge on their part. And that again, enables you to do that without any tax or any penalty

[09:19] to roll your 401k to an IRA. You can also make that same transaction from an IRA to another IRA. So let’s say that you chose to roll your 401k to a regular IRA and you had some investing that you were doing, or you were just sitting in cash and then you met us and you wanted to roll again from a regular IRA to a self-directed IRA. No problem, no tax, no penalty. Again, the only cost might be small setup fees, but it’s very feasible to roll from a regular IRA or a rollover IRA into a self-directed IRA. There are some rules around frequency, but for the most part, you can do that without any penalty, without any tax, and you’re just moving it from one IRA to another IRA, just a self-directed IRA instead.

[10:15] The biggest mistake to be careful of is if you like, say we’re to separate from your job, you had your 401k, you told them to send you a check and they cashed out your 401k and then at that point, you tried to put the money into an IRA. You’ve just created a huge taxable mess for yourself. So if you let everybody know that it’s a rope, that you are moving money from a 401k to an IRA, they’ll automatically take care of everything to make sure that you don’t take possession of those funds and that you keep those in that tax deferred status, which is why you put the money in there to start with. Now, a lot of people are going to go from one job to another job and their new employer is going to ask them to roll the money into the

[11:12] new 401k plan versus setting up an IRA or self-directed IRA. What’s your opinion on that? Yeah, as a general rule, I’m not in favor of that simply because 401ks have very limited investment choices. Now, if you have small dollars and there’s not really anywhere else to put them, that’s totally fine. Just for convenience sake to have it all together, but if you have 50 or a hundred thousand dollars, you’ll want to be choosing yourself where to invest that money, not being limited by the new 401k plans restrictions. And that’s a challenge with 401k plans. No matter how you look at it, they’re going to only have certain investments that are available to you and you won’t have the ability to do anything else.

[12:00] Back to your comment about the 401k checks and where those get mailed. Something that happens sometimes that I want to just mention so that people don’t get confused is that the previous employer will send the check to your address, but it’s made out to the new 401k provider or the new self-directed IRA provider for the benefit of you. And if you look at your statement, your statement reads the same way. It says for the benefit of Kim Butler, but if it is made to that payor, the other IRA and sent to your physical address, you’re still okay. You don’t need to worry about that because what you’re going to do is just pass that check on. You’re not going to cash it. You don’t want to cash it. In fact, you can’t because technically not made to you.

[12:52] It’s made to the new IRA. It’s just sent to the address of record, which is typically your home. So that’s fine. You just don’t want to cash that check because that will get you into the paying taxes plus the 20% penalty, et cetera. Got it. So now we’ve talked about why and how we do the IRA. What are some payoffs to doing this self-directed IRA? I think we need a couple of examples of those to really make people understand the power that is in a self-directed IRA. Sure. So our favorite investments inside that environment fit our stated objectives of double digit and no loss of principal environment. And so if you are an accredited investor, which is million dollar net worth or more, or a suitable investor, which is turned 50,000 or

[13:45] more of net worth, then as long as your IRA is $50,000, you can invest in a couple different things that fit the double digit, no loss of principal environment, which in our minds are bridge loans or hard money loans, you’re investing in a real estate based environment that again, it’s going to get you that low double digit, no loss of principal guideline for those investments or life settlements, which also gets you that double digit, no loss of principal. And those are both investments that can be done at particular trustees slash custodians that work with those investments inside IRAs. So again, our two favorites for the self-directed IRA arena are the life settlements and the bridge loans.

[14:34] Now, if you’re not an accredited investor and you have dollars that you want to invest in an environment where you’re not going to lose principal, or at least not very often, you know, that’s the goal, obviously. Um, one of the things that we recommend are the peer to peer lending environments. So prosper.com lending club.com are both places where if you have say 20 or 30,000, and that’s pretty much all you have, you can invest your dollars, you pick the type of loan that you’re going to choose. And that’s what dictates your interest rate. So those are fun things to take a look at. They’re a great place to get the double digits. Again, there may be a loss of principal, but the goal is not, and it’s very,

[15:25] very far and few between, and you control the risk that you’re taking in that peer to peer lending environment. So that can be a valuable place as well. Let’s say the whole self-directed IRA, that is the goal is if you’re, if you’re tired of delegating that responsibility to somebody else, um, and you want to educate yourself, make your own decisions and find investment choices that are outside the traditional market, but do things that other investments don’t. Um, a lot of times you can find those on your own. And certainly we have some resources that we like to give folks. And Kim, I think you brought something for our listeners today. Absolutely. So we have available an ebook called financial planning has failed.

[16:12] In fact, it talks a little bit about these life settlements and bridge loans. And it is available to our listeners at partners. Number four, prosperity.com slash ebook that’s partners for prosperity.com slash ebook, 60 pages, couple hours on an audio. If you prefer it that way and a value in the learning field on both the bridge loans, the life settlements, why financial planning doesn’t work. And also our favorite place to store cash, the life insurance arena. And we, I would encourage you regardless of what your financial position is today, whether you’re accredited, maybe you’re not, there’s never a bad time to start the educational process. The partners for prosperity website got a ton of information on there

[17:02] that can start your learning curve. Um, also Kim would be welcome to, uh, have one of her people sit down and talk to you as well. Anything else you want to say to kind of wrap up the self-directed IRA conversation? I think we’ve covered it. Well, send in your questions. If you have them, we’ll cover them on the podcast. Super. Well, this is no BS money guy, Todd Strobel for the prosperity podcast. Once again, thanking Kim Butler and keep sending in those questions because we love giving you the answer. Thank you for listening to the prosperity podcast to take control of your money and have it work for you. Visit us at partners for prosperity.com. If you liked this episode, make sure you subscribe and leave a review.