Building up your IRA or 401(k) takes a lot of time, effort, and dedication, all in the dream of taking it easy after retirement. However, you don’t have to wait for years in order to reap the benefits of your retirement account. Vice President of Specialized IRA Services, Amanda Holbrook, reveals what your retirement account is really capable of and how you can utilize it in preparing for the future. Joining Athena Paquette Cormier, she talks about the specifics of what you can do with your accounts to maximize your benefits. She also explains what not to do with your accounts for you to keep yourself from trouble and safeguard your retirement accounts.
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Retirement Accounts: Planning For Your Retirement With Amanda Holbrook
I am excited to introduce you to Amanda Holbrook. She’s the VP of Business Development for Specialized Trust Company, a company that helps you own real estate, notes, and other nontraditional assets in your IRA and other tax-deferred growth vehicles. Welcome, Amanda. Thanks for joining me.
Thank you for having me on.
I’d heard before that you could own real estate in your IRA and that certainly has become more popular. I’d never heard things that you shared with me about a child could have real estate in their IRA or that they could even have an IRA and that you could partner with a child and their IRA. Is it true you partnered with your own daughter in acquisitions?
I do. We practice what we preach around here. Not that what I did matters.
Tell us a little bit about your background and how you came to be in this business and about Specialized. What exactly is an IRA and why should we even care?
For the audience, thank you, I appreciate the time and dedication and kudos to yourself for self-educating and making a difference in your own financial future and your family’s legacy and all that jazz. I’m Amanda Holbrook. I’m VP of Business Development here at Specialized Trust Company. I’ve been doing this for years. I’ve been around the block. I have a long history with starting this about with one of the 900-pound gorillas in our industry where, like most, I found a mentor. He’s one of the founders of Specialized Trust, Edwin Kelly, who showed me the ropes and the foundation of self-direction and I ran with it.
Since then I’ve done successful years as a senior portfolio advisor in the turnkey real estate industry. With that experience and having both sides of the fence from the investment side and the passive custodial side, I saw there’s a much-needed demand to apply the KISS method to all of it to keep it simple for your everyday people working with a multitude of different administrators and custodians. At the time, I saw that there was a need for that staples easy button. Here we are at Specialized Trust Company with our passive custodian. With that said, I’ll insert the disclaimer. We do not recommend and endorse any specific investment sponsors, it’s for educational purposes only. I’m not a CPA, I don’t offer tax advice. I’m not an attorney, I don’t offer legal advice.
You did turnkey for six years and then discovered the self-directed IRA or the custodian business.
I knew that before I went on the real estate side. Probably about 80% of my clients that I work with personally were doing self-direction in some way, shape or form. I always had the background and that’s always been my niche. I had a fantastic mentor. It’s one of those true things in business, you work with those that like you, loyal, etc. We came back full circle and teamed up again here for Specialized Trust Company. I even share that with everyone reading to know I’m not just here standing on the soapbox of IRAs. Of course, I am a little bit. The well-roundedness of seeing the impact of the various types of accounts, how you could partner accounts, leverage accounts for creating passive cashflow and taking control of your own retirement has always been my secret ninja power.
Start us with the basics because people get a little confused about what’s an IRA versus a 401(k) versus SEPs. There are all these words for retirement plans. Can you walk us through what they are briefly but also, which ones do you guys help with and what’s your role with that?
I’m going to start high level which is what does self-directed mean? I have clients tell me all the time. They’ll even show me the screen and say, “I have an account at XYZ Big Bank and it says it’s self-directed right here.” That’s not truly self-directed. That form means you get to pick your stocks, bonds and mutual funds yourself, whether it’s an IRA, Roth IRA, 401(k), etc. Whereas the types of accounts we do at Specialized are all truly self-directed that can hold what is considered in the financial industry nontraditional assets, such as real estate. That’s the way the new code is written. The banks and trust companies are not required to offer it as a selection or opportunity but you’re not prohibited. IRS.com, IRA FAQs, you can fact check me there. That’s exactly where you can find it.
To your question, what types of accounts can you self-direct? The types of accounts that we have here, there are personal accounts, which are IRAs, Roth IRAs, traditional IRAs. Business owners sometimes have SEPs or SIMPLEs if they have W-2 employees. You also have the Roth Solo 401(k), which is the triple threat of entrepreneurial accounts. AKA, more acronyms, a QRP, known as Qualified Retirement Plan, and Specialty accounts. Everyone has health insurance. Entrepreneurs are worried about their cashflow so they offer higher deductible plans. You’ve got the lower premiums so they have an HSA, a Health Savings Account. You can self-direct that. If you’ve got little kids, you can do a Coverdell Educational Savings Account. You can self-direct that. You noted before, you can partner these accounts together. Give yourself more buying power. I’m a big fan of saying investing is a family sport.
The common ones that I hear is like, “I don’t know if I can do that.” The current employer is 401(k). To move that, you either have to be 59.5 years old or if you’re not working there anymore. Here’s a great ninja tip, in-service rollover, that’s a technical term but a lot of 401(k) plans will allow you to roll over a percentage of your vested balance. For all of our military out there, service members, we thank you. You will have a TSP. It’s called a Thrift Savings Plan. You can self-direct that when you’re no longer active. A lot in the medical field and teachers have 403(b)s. Those are also qualified plans that you can self-direct. It’s just a matter, if you’re unsure, ask. We’re a big fan and I know you’re a big fan too, which is being in control of your money, controlling your own freedom, and that’s what self-direction is. Being in control and investing in what you know. Unless all of us were becoming stockbrokers in the womb, I don’t think we were all born knowing how to trade the stock market.
A lot of people put money in and let it ride. They’re not self-directing. They’re putting it in and closing their eyes so that’s not the same person maybe that would do this, probably. What kinds of things can you own in your self-directed IRA that maybe you can’t? We’re talking about real estate, but what other things do you know of? I’ve heard some things are prohibited and you can’t put that stuff in your IRA. Give us an idea of what we can and can’t do with that.
I preach about to invest in what you know. The IRS revenue code which I encourage you if you’re having trouble sleeping, please, by all means move away. I’m here to be the interpreter and a lot of it is many shades of grey. We’re up for interpretation. However, it does listings in black and white that you can’t do, things like artwork, no Picasso’s in your retirement account. This is a collectible. Your stamp collection is out. Somewhere around this office there’s a picture of a car. It’s a ‘57 Chevy, a collectible up for interpretation. There’s that gray. Collectibles, things like liquor, stack if subchapter S life insurance, these are all things that are listed in black and white that cannot be done. Outside of that, it’s up to your creativity.
If you take any walk of life, you can apply it to what you know. Real estate is a house, a roof over your head, is one of the basic needs of a human being. Whether we consider ourselves savvy real estate investors or not, all of us have experience in real estate in some way, shape or form. That’s the easy one. I’ll list some nontraditional ones that you may not have thought of, foreign exchange currency, oil and gas, timber harvesting. Clients that do cacao in Panama. If you’ve driven through Ohio, not a major city, there are a lot of corn and cows. You have crop harvesting, lien leasing, equipment leasing, you can do entities, private companies.
If anyone’s ever researched or followed or read about PayPal, Peter Thiel, the popular one. We all probably have a PayPal account. That company, it was private and he owned a couple of those shares in his Roth IRA. When he sold that company, he made millions, tax-free in his IRA to production, anything you raise capital for. I’m sure you’ve heard of the Blue Man Group, that was capital raised from IRAs to tax liens, wholesaling, rental properties, flips. One of my favorites is, the tallest building, Metroplex. If you had to guess what’s the tallest building?
A bank building usually.
It’s usually the bank. What if you could take your own retirement account and be the bank? A borrower comes to the bank, who makes the terms? The bank. It’s a good position to be in. You could be the bank with your retirement account. Everyone needs capital for something, commercial real estate, single-family to a startup company, supplies, etc. I always do a fund exercise when we do one-on-ones, “Tell me about your hobbies. What’s your background?” There’s a way you can apply self-direction either personally or business development-wise to what you know.
There’s an ad locally where this couple talks about starting up a business to get your kid off the couch. It’s a cute ad but it brings the point that you could start a business, get cashflow from that and eventually the cashflow pays you back what your investment was. If someone has a 401(k) they probably can’t do what you’re describing in there for work 401(k), they have to roll it over to an IRA and that’s where you’re saying the in-service withdraw.
Either it’s a rollover and in-service rollover, and it can go into an IRA or your “side hustle.” If you have rental properties or you’re doing flips, you have another side stream of income. That’s done under an entity. One can have two 401(k) plans to maximize their tax benefits. The key is it comes to a self-directed account of some sort so that you can invest in nontraditional assets.
Because we have real estate investors mostly joining us, first of all, how would they get the money to you or how does that work? Let’s say they have a regular IRA with a big mutual fund company and they want to be able to do this and they know that that big mutual company doesn’t do that so they would want to get it to you. What’s the process of doing that? What does it look like to buy real estate in your IRA? What are the steps? Can you use the money for the down payment? How does that work process-wise to buy real estate in an IRA?
How do you get in a position to do a self-directed investment? The simple part is you open an account. I do that for you. Our team does that for you. There’s an application transfer form, ID statement. It’s simple paperwork we do over the phone. It’s all done via email. Going back to that KISS method, keep it simple. Depending on where your funds are coming from, the process takes 1 to 2 weeks from initial submission and paperwork to money is in your account and you’re ready to do a deal. That’s the easy part. You open an account inside, you deposit money into it, moving over, and then you pick an investment.
Let’s say we identified a property. What do we do?
It’s the same process. The key difference when you’re purchasing in your IRA or 401(k) is the titling. We’ll use an example. If you’re going in your personal property in your IRA, you find a property, how do you lock it down?
I write an offer and I’ve got to give them money.
When you work with those that are loyal, it always comes back full circle. Click To TweetThat’s that consideration contract. On that contract, you personally are not the buyer, it’s your IRA. It would be the Specialized Trust Company custodian FBO, Athena Paquette, IRA. That’s the key part and we help you with this. I don’t expect anyone reading to remember all of this. That titling, it’s almost like you’re a little bubble that you’re using to invest through that goes on the title, the contract, the deed, the insurance, the property management agreement, all of it. Once you have that accepted, you get to turn around and boss us around. You tell us what to do. You say, “I have property 123 Main Street with an accepted contract. I need you to send $1,000 earnest money to ABC Title Company.” You do that via email. We do as you tell us. It’s exactly the same process for closing. The title company is going to send everything to the attorney, depending on your state, they send everything to us on behalf of the IRA and that is the closing.
The next day you wake up, you feel proud, you’re pumping your chest, “I’ve done my first self-directed deal.” What do you do because you’re freaking out? Log in your account and you’re going to see a property and any cash reserves for rentals. Let’s fast forward. This is the fun part. We’re getting rents. Who are those rents paid to? It’s right to the IRA. Three months later, you’ve got the house and you’ve got cash stacking month after month in the form of rents. It’s very simple. The same thing happens if you have an expense. Remember, you’re not commingling any funds.
A year down the road, it’s summertime in the south and that’s where your property is and the AC unit goes you need a new coil or some Freon, “Our property has maintenance.” Properties always have maintenance. You are guaranteed maintenance, you are guaranteed vacancy, taxes and insurance. Those are always guaranteed with real estate. Accordingly, you tell us, “I need you to send to ABC Contractor or the property management agreement however you have it set up. Send $500 to them.” We send it out. Also, the managing of it is easy. You touch on a couple of things with your question and that will lead to the creative part but that is the clean-cut outright purchase of a rental property. What goes out comes in. We hold long-term for cashflow. Rental properties is not a sprint, it’s definitely a marathon with passive cashflow. What if you wanted to get out of your property? What do you do? You sell it off.
Do you have to pay for all the expenses? Some property managers don’t want to pay certain expenses. Would you then pay the expenses or can I pay the expenses and get reimbursed? How does that work?
You would never ever pay it and reimburse yourself. That’s a commingling of funds. Everything is at arm’s length. In this instance, you have a property manager and your property manager doesn’t want to take it out of the gross rents. You have 1 or 2 things. You send your property manager the money that’s needed. Some will require a reserved bank, they keep on file for you. You offer them $400 or some $1,000, it’s up to you. The expenses have to be paid for through the retirement account. Another way of saying this, if you have $100,000 in an IRA, you’re not going and buying $100,000 property. The same rules you do outside the retirement account.
Some people do spend all their money and then wing it along the way when expenses come up. That would not be a good strategy with this. If the IRA owns it, the IRA has to pay for it. Keith is asking you, “Don’t put the solo 401(k), LLC name on the offer, you need the trust listed instead.” What he means is the trust company for the benefit of Keith. That’s how the contracts are written.
In this case, Keith has a little bit of a different structure. It’s an added layer, we didn’t put into this specific example. The example I gave you, the IRA owns the property directly. The solo 401(k), I’ll use Keith’s example, loan the property directly but with the structure that you outlined, Keith, your solo 401(k) owns an LLC. You have your solo(k) and then your solo(k) LLC, which the funds from here are what you’re using inside the solo(k) LLC to acquire properties 1, 2, 3, 4, for example. In that scenario, where your solo(k) owns the entity, Keith, you’re absolutely correct. Your 401(k) LLC would go on the titled deed, contract insurance, property management, all of that. These rents would go right back to that LLC. The same commingling rule applies. You wouldn’t go and take your business credit card and say, “I’m going to Peter Paul it for this trip to Home Depot.” For whatever reason. We wouldn’t do that. It would have to come from that LLC operating checking account.
His other question was about a debit card. Also, if the business, the LLC has a debit card, that would be okay. If the IRA owned it, it would not be okay to use an outside credit card.
The reason why the 401(k) LLC, if you open up a checking account anywhere at any bank, what do you need?
An ID.
You need an ID or an EIN. An IRA is not a separate business, it’s an account. You hear a bunch of generic terms for this, “I got a checkbook IRA.” All that is when any retirement account, whether it’s a solo(k), Roth IRA, and HSA, owns an LLC as an asset underneath and it’s funded through that. Once you have an LLC, you have an EIN. You open a checking account underneath that LLC and it’s funded from the solo 401(k) in Keith’s case or HSA or Roth IRA. With the checking account, you will have a debit card. This structure is ideal for investments that have a lot of transactions. An example would be someone that would be flipping a property and they’re doing the management of all the subs. You’ve got a lot of money coming in and going out. Having that check-writing capability is paramount for the smoothness of that investment. Whereas a passive rental property or someone that might be a private money lender may or may not want to go there. There are pros and cons to both.
Someone that has the LLC structure, it’s awesome. You want to make sure you know what you’re doing as far as the rules. It’s not for the person that comes on to the blog and says, “I found out about this checkbook IRA. Can I fund my whole business with my self-directed IRA?” That’s a prohibited transaction, it’s self-dealing. You need to know the rules and have good record-keeping but the solo(k), LLC or any IRA, LLC portion or structure, it’s great for that.
Let’s say we bought a duplex with the IRA and we did put aside enough reserves so that’s good. We want to save money on the work so we decided that when the tenant leaves, we’ll paint it ourselves because you can save a lot of money doing that. Would that be okay if we don’t reimburse ourselves?
One would think logically to say yes. It’s considered sweat equity. That would be a form of self-dealing. Here’s the litmus test, because this is where all of my creative entrepreneurs like to push the envelope and the one-on-one conversation could go on until the sunrise. If you are benefiting in any way, shape or form, it doesn’t have to be monetarily. Outside of the retirement account in the here and now versus in retirement when the IRS intends, you should not be doing that investment with your self-directed account.
How am I benefiting from painting it myself? I’m saving money, but for the IRA, not for me because the IRA owns it. I would be getting in trouble doing that.
Would you be increasing the value property?
I’ve got to get it rented and if it’s dinged-up then you’re bringing it back to par, but it’s increasing it you’re saying.
That’s how it’s interpreted.
Tell us what is self-dealing and why that is bad. I thought self-dealing was a great idea.
Here’s the no-no. Self-dealing, here are the common ones I hear. “Amanda, I have a cash cow of a duplex in, pick your major city. It’s a great one. I would love for that to be a tax shelter. Can I buy that for myself in my IRA?” No, because you’re buying it from yourself. You’re benefiting outside the retirement account.
This person already owns the duplex and wants to transfer it. You’re saying no because I am the IRA or the IRA is for my benefit.
Peel back the layers of the onion, you’re where the buck stops. The same thing with an LLC, “What if I have an LLC?” Another one is, “I own an LLC or C corp, 100%. Can I lend my own money to myself to do A, B, C or D?” The answer is no. You can’t because you’re benefiting outside.
The IRA cannot be the bank for my corporation for myself.
Your IRA or 401(k) cannot be your own little personal piggy bank, operating capital or your petty cash for your company. Since Keith has the solo 401(k), you can also go ahead and the 401(k) has the ability to do a restriction-free loan. That’s one of the only instant gratification tools I have in the retirement account. The retirement account arena is delayed gratification. That’s one little ninja tip. Rule number two is who you do business with. This is going to be an awkward one. I’m going to give you guys a visual. Everyone’s done the elementary school project of your family tree where you had to write it out. Think of anyone above you or below you in your family tree including your spouse is off-limits. You couldn’t buy a property from them in their IRA and vice versa. The only caveats to that are beneficiaries and fiduciaries. Athena, let’s say I made you as a beneficiary on my multiple trusts or my will. I couldn’t lend to you my IRA anymore because you’re a beneficiary to me.
Even though I’m not related to you because what you were saying is your IRA can’t help anyone who’s your parent, grandparent or your kids and their kids.
Beneficiary or fiduciary, those are considered disqualified individuals listed publicly on IRC 4975. If you branch off your family tree, there’s aunts, uncles, cousins, nieces, nephews, they’re okay. You can lend to them your IRA, they can lend to you, etc.
Always invest in what you know. Click To TweetMy sisters will be calling to try to borrow from me and from my IRA.
I always feel awkward explaining that because they’re like, “Why?” We do certification classes like the alphabet after my name is SDIP. It’s Self-Directed Industry Professional.
You said there were three but you did two rules or was that the third?
The third is the disqualified prohibited transactions. The collectibles, artwork that we covered. Those are the main ones that you run into.
We have a question here from Brian. How should he think about depreciation tax benefits as it pertains to self-directed IRA? Obviously, that’s one of the most valuable benefits in owning income properties.
For someone that’s doing rental properties inside their retirement account, they’re doing it outside of their retirement account as well. Where you’re going with this, Brian, you’re absolutely correct. Inside of a retirement account, it’s already a tax shelter vehicle. You are not taking depreciation on an annual basis. Where you recoup that is when you sell a property, there’s no capital gains tax applied either as you make that up on the exit strategy of the property. Rental properties give you that great thing of depreciation. We have two tax environments. You have tax-deferred, which is i.e. kicking the tax can down the road with the old school thought, “We’ll be in a low tax bracket when we retire.” Is that the goal of everyone reading? No. It’s not for most. That’s where it’s broken.
In comes tax environment number two, a Roth IRA, in which you pay the tax on the seed and not the crop. Most of us, strategically, you put money in a tax-deferred account. You don’t want to pay Uncle Sam more than he’s owed. That’s how we keep more money in our pocket. I encourage that. That’s part of my mantra. However, long-term, the more you can amass tax-free, the better off you will be. Tax-free has only been around since ‘97. We haven’t seen the full magnitude here. To switch from tax environment, tax-deferred and tax-free, you have to pay Uncle Sam. He always gets his cut because you pay the tax on the seed and not the crop. If you have $50,000 over here and you want to move it over here to the Roth, you’re going to get a 1099 with that $50,000 because you pay the tax on the seed and not the crop. However, that $50,000, will be tax-free forever.
That’s a long time, especially for young people. That could be 60, 70 years.
If you have young kids and you’re thinking of Roth, play with a compounding interest or Roth IRA calculator. It’s huge. My point is, when you do that, Brian, you are going to incur tax. What would be a great way to wash that tax for someone that has amassed rental portfolios outside their IRA? All that lovely depreciation. You see how they play together hand in hand. That depreciation can help wash out the tax for getting your growth and it didn’t have to be in rental real estate and here. I have many that do notes in here. It’s similar to real estate but they do the rental portfolio outside, which is fine but getting moreover to the tax-free side.
Take a mom and pop, all they’ve done is the stock market because it’s all they were ever told to do. They learned about, “I can go in my own backyard and get a rental property that is tangible, insured, produces consistent, predictable income or I can gamble it in the stock market.” Would it make sense for that couple to get a tangible asset, double-digit, even higher single-digit returns consistent predictable income that cashflows, insured and also appreciates versus leaving it in the stock market? You have to weigh the asset class too. Stock market? I’m not going to sit here and bang Wall Street.
I could do that for you.
Go for it. I like to keep it friendly. I work with a lot of financial professionals. I have non-fee based advisors. They love it. They have accounts themselves but they can’t refer it to their clients.
It’s against their rules.
It’s frustrating. The self-directed piece is a great vehicle that you can diversify with, rental properties notes, wholesaling, partnering together. A lot of our clients are busy professionals, a lot of entrepreneurs. Busy professionals that know they want to diversify but their struggle is time. They don’t have enough time. I do this because I’m passionate about it. For those of you who are reading, it’s because you want something better and bigger. You have a vision. You want to live a life that you love. An easier way to dip your toe in the real estate pool would be to be a private money lender or joint venture with someone. I’m assuming everyone knows what a joint venture is, you’re the money person and the other one is doing the work. You split the profits.
I have a question for you on how to finance. People want to buy real estate and it sounds great to buy in the IRA or maybe even in an HSA, but I’m afraid that’s too small. Let’s say we’re buying it in our IRA. We usually will put 20% or 25% down and get a loan for the rest because then you can own more property. Can the IRA borrow money? Is it illegal for an IRA to borrow money? How does that work?
It is not illegal to borrow money. I’m going to walk you through leveraging. There are three ways to purchase. Outright, we covered. Partnering, you guys can figure that out. If you and Athena partner on a deal, you’re going to split whatever your partnership is, expenses, profits. That’s easy. You can merge accounts. Take that baby HSA with the big momma 401(k) and put them together. That’s another one. I like HSA. They’re double-dipping accounts. Do you know what I mean by that?
No. Why don’t you take that little side street there?
The money you put in, you get to write-off to put it in your preferred account, but it grows tax-free. You get to double-dip. It’s tax-free money forever for qualified medical expenses or what you can qualify the distributions for which let’s face it, we are all going to get old. As our bodies turn on us, they become more expensive to maintain. It’s like an old car, sink more money and do it. If you do more tax-free account, it’s inevitable.
That is brilliant because you’re saying the HSA, we get to deduct it before tax thing, but then also it’s growing tax-free but the Roth is after-tax money and grows tax-free. That’s a huge difference right there. Is that the only one that is that way?
It is. That’s a nod to the medical insurance industry. Going back to your question leveraging, absolutely you can. Do you think the IRS is nice enough to let you borrow money on a tax-sheltered account that you’ve been saving for years and years and get the same tax preferential treatment and that money you’re borrowing?
I’m sure they’re okay with that. They love us. They want us to succeed.
No. It’s incorrect. The leverage portion when you’re doing it in a Roth IRA, traditional SEP, is subject to this nasty thing called UBIT. It’s not a CPA but it’s Unrelated Business Income Tax. It’s 30% on the leverage portion. UDFI is another acronym. It’s ugly. Leveraging, we know as real estate investors, there’s power in OPM, Other People’s Money. You get there quicker if you’re using OPM. It’s intelligent leveraging. It’s a matter of doing it in the right type of account. Keith, you’re the man here because you got a solo(k) and a solo(k) LLC. When leveraging a QRP or Qualified Retirement Plan such as the Roth solo(k), that I love so much, you will not incur UBIT. There are two things. It cannot be a conventional loan. You can’t get a Fannie Mae and Freddie Mac underwritten loan. It has to be nonrecourse. That’s an IRS rule. That’s not a specialized trust rule. What that means for those of you that are reading that may be a little fuzzy on it, you’re not guaranteeing the debt. It’s an asset-based loan against the property itself and any equity in it is all they could ever go after if your IRA or 401(k) defaults. It doesn’t go on your FICO. It doesn’t go on your Fannie Mae ten count. They cannot come after your other assets and your IRA. You’re completely protected.
The other thing I’ll touch on because I’m a numbers girl at heart, I’m a spreadsheet geek. Anyone that knows me knows that. When you talk about real estate inside of your retirement account or out, it’s cashflow. What are the terms you see on nonrecourse? We’re not a nonrecourse lender. That’s not a feature of a self-directed company at all. They are out there or you’ve got a private money lender. Typical terms are not your 20% to 25% down. It’s usually more like 35% to 50%. It depends on the property. The rates I’ve seen usually 7% to 8%. If you’re to go back several years, the norm used to be 12% to 14%, to give you an idea.
They’re way more competitive now.
It’s becoming much more competitive. Self-direction is a big part of that. Peer-to-peer lending has become a huge thing. The terms are a bit more competitive. Amortizations, I used to see only maybe 10, 12 years but we see 20 to 30. I share this because a lot of your followers here are doing real estate. That’s huge. If you have the opportunity to buy and let’s say you have $100,000, you can buy one property outright or leverage. Depending on when you need that cashflow for retirement, what makes more sense? That cashflow is locked in that account until you’re 59 and a half. I’ll pick on myself mid-30s. I can’t take my kids to Disney with this cashflow if I wanted to.
The strategy is you take that net and you pay off one loan off at a time. It’s accelerate and leveraging strategy and then you can rinse and repeat. It’s properties in multiples when you do that. That’s a powerful tool. I strongly urge when you go into leveraging, that’s the key of the right person right seed. If you’ve ever read Gino Wickman’s Traction. It’s the same thing with your financial team. You have to have someone that knows what they’re talking about. Unless they practice what they preach but it’s more of a doru and not a guru. You can read about this stuff, Athena, but unless you’ve done it, you’ve walk people through it. You don’t know the nuances. You don’t know the what if hiccups. The process would be a breakdown.
Rental property is not a sprint. When it comes to passive cash flow, it’s a marathon. Click To TweetI can essentially give you a checklist for everything that we’re touching on. It goes smooth and seamless. We have all that internally. That’s why I always say for the transactional piece, for those that are learning about self-direction. It can be like, “My mind.” It doesn’t have to be. I urge you. The analogy I always use back to my mom-isms, I can explain to you how to ride a bike. You will likely fall. I can walk you through the steps and this is something you remember. It’s a process and procedure. That’s all it is.
I have a question about RMDs. People tell me, “What am I going to do when I retire? I have all this real estate but the required minimum distributions are a percentage of the overall portfolio.” How do you deal with RMDs? For those who don’t know, when you turn 70 and a half or after you turn 70 and a half, you have to start withdrawing and it’s a percentage. It’s a good chunk. What are your thoughts on that? What would you advise people on that part with the RMDs?
I’ll use an example. Let’s say it’s a piece of land worth $100,000 and it’s not even cashflowing. You have RMD come up, what do you do? I get the question from CPAs and from advisors. If you’re thinking of this as just an account holder, you’re in good company. If you have an asset, you can take a distribution part of the asset. Let’s say the fair market value, because you do fair market valuation annually with original assets. The CPA says, “You need to take out $10,000 to satisfy R&D. We’re going to retitle that asset so that 90% of it is in your name of your IRA and then 10% goes to your personal name and you will get that 1099 at the end of the year.”
It doesn’t have to be cash-cash.
As long as the custodian will generate that RMT, it triggers that 1099.
Who orders these valuations because I caught that you said you have to do a yearly valuation of your assets in the IRA.
It’s any nontraditional asset in any self-directed account, 401(k), etc. You should be doing a fair market valuation and it’s for reporting compliance purposes. It’s not like you have to get appraisals on your properties every year if you have rental properties or whatnot. Like a realtor BPO, Broker’s Price Opinion would suffice a qualified third party and say, “That property you bought for $100,000 is worth $100,000 or $102,000.” They know for recording purposes. An example of a red flag valuation, purchase this property for $100,000, didn’t see any work going into it, no construction, no nothing but all of a sudden it’s worth $1 million. That would be an example of a red flag. A fantastic one, I welcome that real life. That would be an example. The stock market is regulated by the IRS, SEC, etc. As a custodian, we are also under the IRS and our state charters were audited frequently to make sure that paperwork is correct, concise, reporting. That’s a part of doing business in a tax-sheltered environment.
You’re reporting this to the IRS yearly. You’re telling the IRS the value of the assets in each one or is it an internal thing that you have to show that you track?
That’s all for internal compliance purposes. Know your paper trail, the same thing with your business and keeping minutes and board meetings and all that jazz.
In someone’s IRA, is it possible that they might own real estate but then also a business and also some gold coins? Can you have multiple different asset classes mixed all together in this IRA?
Absolutely. Would you have an IRA all in one stock? Diversify your heart out.
As the custodian, is there anything that you don’t want in the IRA? You mentioned farms and horses in Panama. Is there any asset that you guys say, “We don’t want to be involved in that?”
Anything that’s prohibited you can’t hold or own by disqualified individuals. Those are the things that we look for. We’re not checking for legality but if you come we’re going to say, “That’s a prohibited transaction.” Be it self-direction. If it’s ever questionable, get a letter from an attorney. As far as things that we look for, just that are compliant within rules of the IRS. I want to encourage us to get creative. Some of us may have grown up on a farm and we’re doing rental real estate. If I ever run into them in person here in Ohio and they’ll be like, “You always use this as an example.” They breed alpacas in their retirement account. Alpacas are free lowly animal and they’re lucrative.
The reason I’m asking that is cannabis is popular. It’s legal in a lot of states. People are buying land to grow it. It’s not legal yet federally. What’s your take on the cannabis industry in the IRA?
I have to err on the side of caution. I don’t think there’s been anyone that’s been made an example of the court of law that it would have to be on a federal level. IRAs and 401(k)s are not state specific. They’re not governed by state laws. They’re governed by federal law.
You would go with that?
Yes. I would always err on side of caution. Are there ancillary industries to the cannabis and CBD industries that there are IRA, 401(k) ownership in some way, shape or form? I’m sure there is. It’s unchartered territory and with how we’re regulated, there’s a letter ruling and opinion or someone’s been made example of in the court of law, we don’t have a standard to go by. I’ve asked this to attorneys because of course that’s who you would consult and I too get the gray answer, but it would have to roll up to federal.
You don’t want to be the one to be the example because it’s costly to go through that system and to be the example.
If you do, unknowing prohibited transaction, which again that’s a gray area. You’re looking at fines, penalties, and disqualification of the tax treatment of your account. There could be big punishment.
That’s maybe a great question to end with. If someone does not follow the rules and they do something prohibited is that little amount becoming taxable or does it open your entire account up to taxation?
It depends on what your boo-boo is. Was there an intent or not? There are a couple of different types of boo-boo’s that you can have and it goes under, per se, etc. You want to make sure that you’re operating knowing the rules. If there are questions, get a legal opinion on it. When I get those questions or the crazy what if’s scenario, we can spitball about this all day long. If you want to go forward with it and you feel confident in it, get a legal opinion. That’s exactly what you do. The majority of real estate investors and stuff listing, you’re not going to run into that too much. The one other thing I’ll touch on, do you have a lot of flippers that you work with? We talked about passive cashflow a lot.
I only have a few flippers but I have wholesalers.
You can wholesale in an IRA. A beautiful thing to especially beef up younger accounts or considered starting without having excess cashflow. Do a deal a quarter in a Roth IRA. If your average assignment fee is $10,000, that’s $40,000 grand in a year. It was as an example. Raising private money or using private lenders, I joked saying OPM and another term we use is OPI. It’s Other People’s IRAs. This is where the peer-to-peer and the networking piece goes especially during the holidays. I was talking with a younger gentleman and he’s done well in his second-year flipping and he’s got several transactions that have been successful. I’m like, “Kudos. You’re not even 30. You’re killing it.”
You’re suggesting that a house flipper connect with people with IRAs that could become their bank?
Yes, become their bank. Especially on holiday time. A handshake, it’s my name, it’s what I do. We earn X amount of returns and people with retirement accounts. My point is you don’t have to worry about having this whole in-depth conversation. Leave that to the experts. You have someone in your pocket. You’ve got someone in your team. I’m forthcoming with my time and contact info.
How would someone reach you if they wanted to ask a question or even go ahead and start up their venture into the self-directed IRA?
SpecializedTrustCompany.com, that’s where you can learn a little bit more about the account ties. Register for our field guide. Put in that you learned about us on the show. Make sure we know that you learned it from here. We’re always tracking those KPIs. Directly for myself, giving my direct dial, it’s (505) 514-0587. Email at AHolbrook@IRASTC.com. We make that easy for you. If you shoot me an email, and I know Athena, you love, I use TimeTrade. I don’t get endorsement for that. We’re all so busy. I’ll give you access to my calendar. We’ll make it efficient. Also, if you’re self-employed, your solo 401(k) deadline is December 31st, meaning you should get it by December 1 if you want it set up for this calendar year. You don’t have to max fund it until your tax filing deadline for your business.
The account has open.
If you’re converting to a Roth IRA, it has to be done. That follows every year.
I loved our conversation. I love the idea that people can partner because a lot of people tell me, “I can’t invest in real estate because all my assets are in my previous jobs 401(k) or IRA.” They don’t have a lot of cash and checking. I love the idea that you brought up about partnering a couple of different IRAs together and going in on it and the idea of the HSA. I always thought about the self-directed IRA but not all these different other vehicles that you’ve brought up. That’s helpful to people to know that they can still have that control that they want in those other areas, not just their IRA. This has been such a great conversation. Thank you so much for joining me, Amanda.
Talking IRAs, it’s fun.
I love how high energy you are. I’m sure you’ve enlightened lots of people. Thank you so much for joining us. This has been great and I appreciate you so much. Everybody, get in touch with her and get your IRAs going so you can buy a property.
Thanks, Athena.
Important Links:
- Specialized Trust Company
- Edwin Kelly
- IRS.com
- Traction
- SpecializedTrustCompany.com
- AHolbrook@IRASTC.com
- TimeTrade
About Amanda (Pankratz) Holbrook
Real estate & Self-Directed IRA investing is not only a profession for me, but a passion. We also practice the same strategies that our clients have successfully implemented for over 10 years now so I can relate first hand. I take personal pride in outlining strategies that lead to the path of financial freedom for my clients and their families through self-directed IRAs. Self-Directed IRA, passive cash-flow investing, & retirement planning are a large part of my background & large part of the success my family and clients have seen to date.
I am true believers in you can have everything in life you want, if you will just help enough other people get what they want. When you help others to succeed in life, your work is done. I have to give Zig credit there, but it’s a value I was fortunate enough to learn at a young age. Those of you who know me can attest to that as well as my surmountable drive and infectious laugh.
We are currently accepting new self-directed IRA investors who are looking establish a self-directed retirement vehicle with the most senior team in the business to get started on the path to financial freedom.
