Latest / The Wealth Vibe Show / Episode #106 Self-Directed IRA Investing in Real Estate

Transcript

Episode #106 Self-Directed IRA Investing in Real Estate · The Wealth Vibe Show

• 0:00
  So let's say I go out and buy a multifamily property or a storage facility and the seller carries back financing.
• 0:08
  I am not exempt from unit under a solo for a1k.
• 0:11
  The tax code is very clear in that let's say that I invest in a partnership and that partnership is buying a self-storage facility or multifamily property and they're buying it on sale or financing.
• 0:23
  My solo for one K is not going to be exempt from it.
• 0:26
  So you have to be careful with little nuances like that.
• 0:30
  And then lastly, there's also unrelated business income tax.
• 0:34
  If you start running your retirement plan like it's a business, for example, let's say I wanted to buy a car dealership or a laundromat or a car wash with my IRA.
• 0:46
  I'm going to have Yuba City, I'm going to have Yuba City under solar 401k.
• 0:51
  The only exemption to that you bet is under the debt finance type arrangement that we talked about.
• 1:27
  This is my beloved wife, Jill.
• 1:29
  I'm your boss thinking you are a commercial real estate investor.
• 1:32
  And do they have any special guests?
• 1:34
  John Boyd's with me and I just saw John at a conference.
• 1:39
  What a great meeting over there, John, and welcome to my show.
• 1:43
  Thank you. Thank you.
• 1:44
  Really appreciate you having me on the show and excited to share a little bit about what I do in real estate and how I help folks that are real estate investors utilize these unique tax tools.
• 1:55
  Awesome. So a little bit about John.
• 1:58
  He's a director and head of education and Investors access that equity Trust company is a highly sought after and respected educator in the self-directed IRA industry.
• 2:09
  With over 20 years of experience in real estate and active investing.
• 2:13
  He has trained 60,000 investors, 60,006 0 to 400 workshops and classes.
• 2:21
  John promotes the power of building tax free wealth and leaving a lasting legacy through investments and familiar assets.
• 2:29
  John has also coauthored a book, Self-Directed IRAs Building Retirement Wealth two Alternative Investing.
• 2:36
  He has also been a guest on national real estate and finance related radio shows such as The Rich Dad Radio Show.
• 2:43
  Welcome again, John.
• 2:44
  I'm so excited to have you with me today.
• 2:47
  Yes, likewise.
• 2:49
  And today, I want to discuss self-directed IRA investing and real estate.
• 2:54
  So, John, I'm going to start briefly with your background.
• 2:57
  If you can tell me where you are and how did you become where you are today?
• 3:01
  Yeah.
• 3:02
  So my background I got started in real estate about 20 years ago, and I was working for a commercial real estate company and the family that owned and operated this company.
• 3:14
  I observe them paying lots of money in taxes on their real estate transaction.
• 3:21
  Mainly when they would sell a commercial building, they would have a tax situation.
• 3:25
  And so I observed that and I thought to myself, there's got to be a better way.
• 3:30
  And along the way, I was studying finance.
• 3:34
  And really I was being at that time groomed to become a financial advisor, maybe a financial planner or some sort of traditional wealth management consultant.
• 3:43
  And so I spent thousands of dollars academically learning about IRAs and 401 KS and other types of retirement plans.
• 3:52
  And in my mind at that time, the only way to save for retirement was to put money away into an IRA or a401k, and then put it in the stock market.
• 4:03
  So really using a retirement plan was synonymous with investing in the stock market through a mutual fund.
• 4:10
  Maybe there's some fixed income exposure.
• 4:12
  And I learned about this model called the 6040 model, which is put money in your retirement plan, 60% into public equities, 40% into fixed income.
• 4:22
  And that was the only way to invest and save for retirement.
• 4:26
  And all along the way, I was working for this real estate company.
• 4:29
  And so I was watching the family that ran this company.
• 4:33
  I was watching them make a lot of money and create a lot of wealth for themselves in their family, in real estate.
• 4:39
  I was also watching them pay a lot of money in taxes, and that was always the complaint.
• 4:43
  They would sell a building and maybe they couldn't do a 1031 exchange and they'd have to pay capital gains on the sale of that property.
• 4:51
  And so they were always complaining about the tax liability.
• 4:54
  And along the way, I had stopped and I asked them one time, you know why?
• 4:59
  Why don't you have an IRA or for one K?
• 5:01
  So academically, I was learning about IRAs and 401 KS, and I said, you know, why don't you have an IRA or 401 K?
• 5:07
  And they said, We don't believe in those types of accounts.
• 5:09
  And I said, Why don't you believe in those types of accounts?
• 5:11
  They said, Well, we don't we don't believe in investing in the stock market.
• 5:15
  We believe in investing in real estate.
• 5:15
  That's what we're good at.
• 5:17
  That's what we've been doing for two generations now.
• 5:20
  That's how we've created our family wealth.
• 5:22
  And so, again, the retirement plan was synonymous with investing in the stock market.
• 5:27
  They didn't know that they could use a retirement plan to invest in real estate.
• 5:32
  So at that point, this was 15 years ago.
• 5:35
  I stumbled across Equity Trust Company, and I actually met our company founder, Dick Dosage, who's widely known as the pioneer of the self-directed IRA industry.
• 5:43
  And what I learned from Mr.
• 5:44
  Dosage, who was my mentor, still is my mentor to this day, is that, hey, you could use an IRA or 401k to go out and buy a single family rental property and all of your cash flow comes back and you pay taxes and then you eventually sell the property, let's say.
• 6:00
  And there's no long term capital gains tax, there's no recapture depreciation.
• 6:03
  So there are these highly privileged tax benefits associated with these accounts.
• 6:08
  I can also use a retirement plan to be a private money lender to loan money to another real estate investor.
• 6:13
  I could use my IRA to invest in a commercial real estate partnership.
• 6:18
  So then I started gaining exposure to multifamily real estate and how I could invest as a limited partner in a fund that owns multifamily real estate.
• 6:28
  And there's plenty of opportunities out there.
• 6:30
  As you know, Venky being in the commercial real estate space, multifamily real estate, there's plenty of opportunities to participate as a limited partner in these types of real estate projects in these value add multifamily real estate projects.
• 6:42
  And so I learned that I could use an IRA for one K to invest in that type of project.
• 6:48
  Again, in my mind it was always only invest in stocks, bonds and mutual funds.
• 6:52
  So Mr.
• 6:53
  Decius taught me all of this, and then I started teaching other investors across the country how they could do the same and along the way also investing self-directed my own retirement plans into individual rental properties, private money lending in other non-stock market based investment.
• 7:10
  So everything that I do, everything that I help customers do here at Equity Trust our firm as a custodian, we have the infrastructure, the tools and all the support and education built around how to help people invest in non-stock market based investments with their IRAs, 401 KS and various other retirement plans.
• 7:30
  Now, we don't sell investments, we don't offer investment advice.
• 7:34
  We are the conduit for investors to be able to really take control of their own retirement savings accounts and invest in the alternative assets that make the most sense for them.
• 7:45
  And that's why most people come to us because they want to invest in assets that, generally speaking, are not correlated to the traditional financial markets.
• 7:53
  They want to invest in assets like real estate.
• 7:56
  Now that's great.
• 7:56
  And I started in me a lot.
• 7:59
  I started like that too.
• 8:00
  I started investing with my IRA account or self-directed IRA account.
• 8:05
  I have a A.P.
• 8:07
  as well.
• 8:07
  That's how I started investing in commercial real estate.
• 8:10
  That was my journey.
• 8:11
  But I'm going to go ask you one question here.
• 8:14
  You said the traditional IRA was more focused on the stock market.
• 8:18
  Is that 40, 60 rule that you explained earlier?
• 8:21
  But how different is accelerated, Ira, in today's world from the traditional IRA?
• 8:27
  Yeah.
• 8:28
  So an IRA or fall in care?
• 8:30
  The retirement plan at any other financial institution is really no different than the IRA or retirement plan that you would open up with a custodian like Equity Trust.
• 8:40
  The difference is the IRA Retirement plan with Equity Trust allows you to self-directed and not all retirement plans.
• 8:48
  Not all financial institutions are the same.
• 8:51
  Most financial institutions, in fact, are not going to allow you to self-directed into real estate.
• 8:56
  And if you're working with a financial advisor or financial planner, they may not be able to help you invest in real estate or other alternative assets.
• 9:07
  And that is because most financial advisors, financial planners, they represent a firm.
• 9:13
  And those firms in some cases can't sell you these types of investments.
• 9:17
  So if you go to your financial advisor, a financial planner, they're only going to be able to sell you certain types of investment products or portfolios.
• 9:26
  So they can only advise you in certain ways.
• 9:29
  They're most likely not going to be able to help facilitate a real estate purchase or invest in a multifamily limited partnership opportunity or other type of alternative investment.
• 9:40
  So you have to find the right financial institution that's going to work for you, that's going to allow you to diversify your portfolio into the types of investments that you deem as the best fit for your portfolio, Not what someone else is dictating is a good fit for your portfolio.
• 9:54
  And when you hear that term self-directed, that's just an industry term that that just indicates that you can self-directed into the types of assets that, again, you deem as a best fit.
• 10:05
  Opposed to call it non self-directed, which means you're relying on a third party to make decisions on where and how you're investing that money.
• 10:15
  Some people will get confused and think that if they rollover or transfer their money into a self-directed IRA, that there's some sort of taxes or penalties.
• 10:24
  You're not really changing the account type.
• 10:27
  The best way to think of it is you're just moving from one bank account to another.
• 10:31
  And so there's no taxes or penalties if you do it the right way.
• 10:35
  You're simply just migrating your money into a self-directed IRA environment.
• 10:40
  And now you have access to that money to be able to invest in real estate and other types of non stock market related investments.
• 10:48
  Yeah, he said it very well because a self-directed business like you have a full control on your account, just like your checking or savings account and you can direct your money anywhere as long as the profits or dividends coming back to the same account.
• 11:02
  And you're not using it with your personal use, so you're not co-mingling it with your personal account and your account because these are two different accounts.
• 11:10
  So as long as you keep that separation is perfectly fine and you can use the self-directed account to invest in real estate, right.
• 11:19
  Also, the way self directed IRA custodians operate like Equity Trust were what's referred to as a direct IT custodian so we don't have to approve or do any type of underwriting for a customer's investment.
• 11:32
  In fact, we don't do that because we don't provide any type of advice or any type of fiduciary services where a non fiduciary custodian.
• 11:41
  So what that allows customers to do, it affords them the ability to be able to really be in control.
• 11:48
  Now, of course, there are transactions that are considered prohibited transactions.
• 11:52
  So the the Internal Revenue Code is specific.
• 11:56
  And what you can't do with your IRA, they don't tell you what you can do there exclusive rather than being inclusive.
• 12:02
  So you can't use your IRA to invest in collectibles, You can't transact with disqualified persons, you can't use your IRA to invest in life insurance policies.
• 12:13
  But your IRA could certainly invest in real estate and many of the other types of non stock market related investments that we've talked about with regard to prohibited transactions.
• 12:24
  You know, good example is if you own a property now, you can't sell it to your IRA, you can't use your IRA money and loan money to yourself personally.
• 12:33
  Those are considered prohibited transactions.
• 12:35
  So your custodian Equity Trust can provide information to you about that.
• 12:40
  Although we're not a legal advisor, we can provide that factual information so that you don't potentially enter into one of those very common pitfalls that people don't know that they can't do.
• 12:54
  It is important to know that when you're directing your funds, you're directing them through a custodian, so you're providing instruction to the custodian.
• 13:02
  But again, the custodian doesn't necessarily have to approve that transaction for legality risks, merits on and so forth.
• 13:10
  We are operating as the directed custodian to allow you to facilitate that transaction.
• 13:14
  So for example, our customers, when they need to send money out for, let's say, a limited partnership or LLC investment, they would go into an online portal, we call it my equity, and it's a digital interface.
• 13:29
  So it allows the customer to go in and tell us what they're investing in, how much money they need to have sent out.
• 13:35
  They upload their documentation for the investment and then equity trust wire transfers the funds out the door.
• 13:41
  And again, we don't have to go through any type of extensive underwriting process.
• 13:45
  So in that instance, you know, the money is sent out almost instantaneously.
• 13:49
  So it's a very fast and easy process for an investor to complete that transaction.
• 13:54
  There are some investors that will utilize you had mentioned QR, PE, some people refer to those types of accounts depending on their scenario as a solo for a1k or individual for a1k or just qualified retirement plan.
• 14:10
  Those plans operate a little bit differently.
• 14:13
  In some instances, you don't actually have a custodian.
• 14:16
  You're essentially writing the check for the transaction.
• 14:19
  And some folks, because of their situation, if they're self-employed, they prefer to use a QR, PE or solo for a1k.
• 14:27
  There are pros and cons to using a self-directed IRA or a solo for a1k or XP.
• 14:33
  The good news is as far as the difference between those two types of accounts, it really just depends on you as an individual if you're self-employed or not, and what's going to make the most sense for you.
• 14:46
  But from an investment perspective, you can use either an E, Q, R.P solo for a1k or IRA in order to invest in all of these types of alternative assets.
• 14:57
  Yeah, I think it's let me ask you this, since you brought up the AQ IRP here, because the way I see it on the standard and correct me if I'm wrong, that in the AQR fee, you're not liable for the UBA tax, but when you're doing the self-directed IRA account, you still pay that?
• 15:14
  You bet. Is that correct statement?
• 15:17
  Yes. So with unrelated business income tax for all of your viewers, unrelated business income tax is a special tax on a retirement plan such as an IRA, but also could include other tax exempt entities.
• 15:31
  And IRA, of course, is a tax exempt entity, and it applies when an IRA there's a couple applications to it.
• 15:39
  But to answer your question, the one application that you're referring to is if an IRA buys a property with a loan.
• 15:48
  So if there's debt financing, this could also apply.
• 15:51
  If an IRA is invested in a fund like an LLC and that LLC, let's say, buys a multifamily apartment building and then there's debt against that apartment building.
• 16:03
  So what happens is when there's a loan against the asset that the IRA owns or is part owner of, then the IRA has unrelated business income tax.
• 16:14
  Now the way it works is it's based on the percentage of the property that's debt leveraged.
• 16:19
  So as a for instance, let's say it wasn't a multifamily partnership.
• 16:23
  Let's say you just went out and used your IRA to buy a property for 100,000 and you borrowed $50,000.
• 16:31
  In that instance, 50% of the property is leveraged.
• 16:36
  Therefore, 50% of all of the net profit will be subject to this special tax called unrelated business income tax.
• 16:45
  Again, it's only based on the percentage of the property that's leveraged.
• 16:49
  So as you pay down that debt, less and less of the property is financed.
• 16:53
  Therefore, less and less of your income is going to be subject to this tax.
• 16:57
  Now, I did say net income there.
• 16:58
  So all of your expenses, your operating expenses, your taxes, insurance, if it's applicable, all of your repairs, things of that nature, all of those are operating expenses that are going to offset the income.
• 17:14
  Also, there's depreciate.
• 17:16
  So in commercial real estate, you might do a cost segregation study and you might have a lot of bonus depreciation that passes through on the K one or if it's just an individual single family home, it's likely just going to be the straight line 27 after your depreciation.
• 17:30
  But you can also take advantage of the depreciation to offset your gain, just like if you owned a real estate outside of your IRA.
• 17:37
  So the long and short of it is that, yes, you do have this special tax to your IRA, but you might have with a buy and hold transaction, you might have enough losses or you might have enough write offs through depreciation in your operating expenses to really significantly offset those gains, maybe even show a loss.
• 17:57
  And then you can carry forward those losses to offset future gains.
• 18:01
  The reason why I bring that up is because some people are fearful of using their IRA to invest in real estate with a non-recourse loan or use their IRA to invest in a multifamily real estate partnership.
• 18:14
  Because of the you Betye or Yuba City.
• 18:18
  It's a tax that you have to be aware of.
• 18:19
  You should be made aware of it.
• 18:21
  You have to file what's called a 990 T tax return to claim the income.
• 18:25
  We encourage folks to talk to their CPAs about what that looks like and how to prepare that document on an annual basis.
• 18:31
  It's totally separate from your own individual tax return.
• 18:34
  It's a tax return for your IRA, and really you just pencil it out and determine, you know, does it make more sense to do this multifamily real estate project, even after paying the tax every year?
• 18:46
  Or does it make more sense to leave my IRA in the stock market?
• 18:49
  For some investors, when they do the math, they determine that it makes more sense to do the commercial real estate deal even after paying that tax.
• 18:57
  Now, to get to your actual question, Vicki, I know that was a long explanation, but I think it's important for folks to kind of understand that Ira, how that works under a qualified employer plan, like a401k or an E, P or a solo 401k, those are really, for all intents and purposes, all the same thing.
• 19:19
  It falls under a little bit different rules and under under the tax code it's actually 511 to 514 514 specifically, there's specific exceptions for that unrelated business income tax with debt leverage, real estate.
• 19:36
  When you're using a qualified retirement plan like a401k and in most instances, if you're investing in a multifamily real estate project or it's an individual property that you're buying with the 401k and you're borrowing from a non recourse lender, as long as the loan is structured properly, then the 401k would be exempt from unrelated business income tax, which makes the solo 41ka very attractive investment vehicle for people that want to invest in multifamily real estate.
• 20:08
  Now, there's always caveats to this, and this is really, really important because a lot of people in the industry aren't talking about this.
• 20:15
  There's a lot of bad information out there.
• 20:17
  Not every debt financed arrangement is going to be exempt from you bit under a solo for one K.
• 20:24
  Here's one example. Seller financing.
• 20:27
  So let's say I go out and buy a multifamily property or a storage facility and the seller carries back financing.
• 20:35
  I am not exempt from you bit under a solo 401k The tax code is very clear in that let's say that I invest in a partnership and that partnership is buying a self-storage facility or multifamily property and they're buying it on sell or financing.
• 20:50
  My solo for one K is not going to be exempt from You bet.
• 20:53
  So you have to be careful with little nuances like that.
• 20:57
  And then lastly, there's also unrelated business income tax.
• 21:01
  If you start running your retirement plan like it's a business, for example, let's say I invest, I wanted to buy a car dealership or a laundromat or a car wash with my IRA.
• 21:14
  I'm going to have Yuba City.
• 21:16
  I'm going to have Yuba City under solar 401k The only exemption to that you bet is under the debt finance type arrangement that we talked about.
• 21:26
  I interesting. Thanks for sharing that.
• 21:28
  I didn't know.
• 21:30
  The one thing I didn't know about was I earlier.
• 21:32
  You mention that you can offset the position against your self-directed IRA.
• 21:37
  I told you cannot use a deposition for your retirement plan or you cannot offset that.
• 21:42
  Yeah, that's a good question.
• 21:43
  So when you have a debt financed piece of real estate, you then have the UBI exposure.
• 21:49
  So that's the instance where you can offset, depreciate, you can use depreciation to offset your gains because you have a taxable situation.
• 21:57
  But let's say I own a property with my IRA free and clear.
• 22:00
  I bought it as a cash buyer.
• 22:02
  All of my profits that go back into that.
• 22:05
  Ira, I don't have to worry about paying taxes on that profit, therefore I don't have any depreciation write off because there's no actual taxable income to write off.
• 22:15
  So you can't depreciate income that's not otherwise being taxable.
• 22:21
  So whether you are B or the sale of or one K where we're not paying and you bet, I mean, we are taking into account that we're just getting a loan from the lender and that is not a seller involved in there.
• 22:32
  Right.
• 22:33
  So in that in that scenario, there's a you but there's no you bet.
• 22:38
  And you cannot utilize 0k1 or the depreciation at that point.
• 22:43
  But if you're using your self directed I.R.A.
• 22:46
  at that point you're liable for the you it and you can use your deposition or the K one to offset that.
• 22:52
  That's that is right.
• 22:54
  And I'm really glad you brought this up because you're going to hear people on you know, I'm not going to mention any specific names, but there's all kinds of podcasts out there.
• 23:04
  And, you know, not this podcast, because you're obviously come in with a lot of factual information, which that's what I love about your podcast then is, you know, the people you bring on and the great content you provide.
• 23:16
  But there's there's bad information out there.
• 23:18
  You know, I've heard people say, well, don't buy real estate with your IRA or invest in partnerships because you're going to lose depreciation.
• 23:28
  Well, you really have to look at it as your IRA and your non IRA money.
• 23:33
  They're two totally separate entities.
• 23:35
  And the IRS isn't going to allow you to double dip, so to speak.
• 23:40
  So they're not going to give you the tax exempt nature of the IRA over here and then allow you to take depreciation to offset your personal income.
• 23:48
  There are two totally separate entities.
• 23:50
  So what you have to do is really analyze a transaction and say, okay, should I do this investment with my IRA because it's to benefit the IRA and grow the IRA in a tax deferred or tax free fashion, or do I want to buy this property with non IRA money?
• 24:06
  And then yes, maybe take take advantage of some depreciation, but it's not a one against the other.
• 24:12
  It's really a rising tide.
• 24:14
  As a real estate investor myself, we buy real estate outside of our IRAs and we buy real estate inside of our IRA, as if, for instance, I bought a property in May of March of 2020.
• 24:28
  This was right in the beginning of the pandemic, and it was a double right outside of Cleveland, Ohio.
• 24:35
  I bought this house for $63,000 and I partnered my traditional in my Roth together to buy the property.
• 24:42
  And then over two years, we put about$15,000 of the work into the property.
• 24:47
  There was a lot of deferred maintenance.
• 24:49
  We bought it from the motivated landlord, and over the course of those two years we did have some cash flow coming in.
• 24:55
  We had to evict one of the tenants.
• 24:58
  We got a new tenant in the one tenant we were able to stabilize.
• 25:01
  We got good leases in place and then two years later, May of 2022, last year we sold that property for $150,000 and we made a 32% annualized cash on cash return.
• 25:15
  We made a $35,000 profit back to our traditional and Roth, and we paid no taxes.
• 25:21
  So there was no depreciation because there was no taxable income.
• 25:24
  We paid no long term capital gains tax, no recapture depreciation, and we saved about $5,000 in taxes on the sale of that property.
• 25:33
  Had we done that deal outside of our IRA, we would have paid about $5,000 in taxes.
• 25:38
  So that's that's one example of I'd call it a single family rental.
• 25:42
  It's actually two family, but a two family rental type opportunity with with profits going back into the account.
• 25:49
  So just really important for folks to kind of distinguish the difference between IRA investing and non IRA investing.
• 25:55
  And I always emphasize that recapture depreciation.
• 25:58
  Yes, you can use a 1031 exchange strategy, but that doesn't always work out if you can't find a new deal to step up into the IRA, you're exempt from paying long term capital gains tax and you don't have to worry about any recapture depreciation.
• 26:14
  So since we're talking about the taxes here, so let's talk about the overall tax treatment for the self-directed IRA in the real estate are different from any other type of investments.
• 26:26
  Yeah.
• 26:26
  So IRAs are they have tax exempt status.
• 26:29
  So as long as you follow the rules and you don't do something that's prohibited, you carry tax exempt status.
• 26:35
  And it's really no different than when your IRA is investing in the stock market.
• 26:38
  So a lot of people are familiar with their IRA investing in Apple, Google, whatever, and they get dividends or maybe they're investing in a mutual fund and they have dividend income coming in.
• 26:49
  Well, with an IRA that's passive income, you're not paying taxes on any of those dividends.
• 26:54
  And that's why people have been investing in the stock market with their retirement plans for years and years.
• 26:58
  And when they file their tax return, nowhere are they asked, you know, where's the income that went back into your IRA?
• 27:02
  You don't have to report any of that because you're in a tax exempt environment.
• 27:07
  So it really works the same way when you own a rental property with your IRA or if you do a private money loan or you sell a property.
• 27:15
  So you have instead of dividend income, you have rental income coming back in your IRA, you're not paying taxes on that.
• 27:21
  So as long as you're following all the rules, if you make a loan to a real estate investor and you have interest income coming back in, you're not paying any taxes.
• 27:30
  Whereas if you made a loan outside of your IRA, you'd have to pay taxes based on your ordinary income tax rate because that's interest income.
• 27:38
  So the IRA is our tax exempt.
• 27:41
  That's the first thing to understand.
• 27:43
  There is a difference in account types.
• 27:46
  So some people might have a traditional IRA, some people might have a Roth IRA, some people might have both.
• 27:51
  So a traditional IRA is tax deferred, meaning when money is going into the account, you're getting a tax deduction, it grows tax deferred.
• 27:59
  And then when you take the money out after 59 and a half, that's when you have to pay taxes.
• 28:03
  The analogy that we use is you either pay taxes on the seed or you pay taxes on the crop.
• 28:08
  In contrast to a traditional IRA, you have a Roth IRA, which you fund with after tax dollars, it grows tax free.
• 28:15
  And then when you take the money out after the age of 59 and a half, you pay 0% tax.
• 28:20
  So with the with the Roth account, you're not paying taxes on the seed.
• 28:24
  So I'm sorry, you pay taxes on the seed so you don't have to pay it on the much larger crop.
• 28:29
  And a lot of people ask me, well, if I have all my money in tax deferred accounts and I really want to get into a Roth IRA environment, how can I do that?
• 28:37
  You could actually convert money from your traditional IRA in your Roth.
• 28:41
  You got to pay taxes, but you pay your taxes and then all of your growth going forward is 100% tax free.
• 28:48
  So let me ask you here.
• 28:49
  So what are some of the risks associated with the self-directed IRA that people need to worry about?
• 28:56
  They need to figure out some kind of solution to mitigate that.
• 29:00
  So there's there's three risks or three things that I talk to investors about always before they start self directing their IRA so they understand what they're getting themselves into.
• 29:11
  The first is that the investor has to be willing to be involved.
• 29:16
  So we have been conditioned.
• 29:19
  I was conditioned going back academically.
• 29:21
  I talked about at the beginning, you know, being in finance school and investment school.
• 29:26
  And, you know, I learned about the stock market and that was it.
• 29:30
  And really what I learned about and what I was conditioned to think is that the only way to invest was to put my money with someone, put my money with an advisor and someone that was going to advise me on where to put my money.
• 29:45
  Yet that advisor can really only advise me on putting my money into certain products that never made sense to me.
• 29:52
  To me, that doesn't seem like real advice to me, that sounds like biased direction or biased guidance.
• 30:00
  That's what I'll call it.
• 30:02
  Because in my mind when I think advice, I think like we're looking at everything and we're really putting together a plan that makes sense for me and makes sense for what I know, like and trust.
• 30:13
  I grew up around real estate.
• 30:15
  I'm good at real estate.
• 30:16
  I know how to invest in real estate.
• 30:18
  It's Main Street, not Wall Street.
• 30:20
  That's what I'm most comfortable with.
• 30:22
  And so that that was always a head scratcher for me.
• 30:25
  And so the first thing I always talk to investors about is like, are you willing to be involved?
• 30:30
  Are you willing to take action and manage your money on your own instead of relying on a third party?
• 30:36
  And if someone says, you know what, that's not for me, I'd rather just put my money with a financial advisor, put it in the stock market and hope everything works out or put it in a CD or a money market account or keep it in cash and hope everything works out, you know?
• 30:51
  And if that's if that's someone's stance or position, that's absolutely okay.
• 30:55
  That's the first thing that I always let people know.
• 30:58
  But I will say that most of the people that attend podcast like this come to my seminars, interact with me.
• 31:04
  Usually those are people that they are either disenfranchized with how their money has been managed in the past or they know that in order to get to their financial goals and their personal goals in the shortest period of time possible, they have to be involved in the management of their own money.
• 31:20
  So that's the first thing.
• 31:21
  The second thing that folks need to understand as a as a risk factor, so to speak, is prohibited transactions and we talked a little bit about that.
• 31:31
  So your IRA cannot transact in certain ways.
• 31:34
  The good news is, is the tax code going back to 1974 when they wrote the tax code, it was the RSA Act is what that's called.
• 31:43
  The government was exclusive rather than being inclusive.
• 31:46
  So they tell us what we can't do now, what we can do so we can invest in collectibles.
• 31:51
  So rare coins are off limits.
• 31:53
  Artwork is off limits.
• 31:55
  You can't invest in life insurance policies and your IRA cannot transact with a disqualified person.
• 32:01
  Disqualified persons to your IRA would be you, your spouse, your children, your grandchildren, your parents, your grandparents.
• 32:07
  The tax code refers to those individuals as lineal descendants and descendants, and then any business that you own and operate, for all intents and purposes is also a disqualified person.
• 32:17
  So when we say transaction, what we're talking about is you can't buy a property from your spouse, you can't lend money to yourself, you can't do sweat equity on homes that your IRA owns.
• 32:28
  So you can't be there swinging the hammer to the nail.
• 32:30
  So those are prohibited transactions.
• 32:32
  So you want to stay away from those.
• 32:34
  The good news is there's information out there about this.
• 32:38
  We have an entire YouTube channel dedicated to educating investors on these rules, so you can check that out as a resource.
• 32:46
  We encourage folks to, of course, talk to their CPA as well if they feel necessary.
• 32:50
  But there's more than enough information out there on what you can't do.
• 32:54
  Good news is a lot of what you can't do is pretty common sense.
• 32:58
  You know, it's common sense that these IRAs are really tax privileged.
• 33:02
  So obviously, the IRS, the government's not going to allow us to just borrow from our IRA and be able to take advantage of all of that, that tax exempt money.
• 33:10
  So we have to be going out.
• 33:12
  And in using that money, moving that money, investing that money into assets, whether real estate, golden silver or cryptocurrency, whatever it is that you want to invest in.
• 33:21
  Again, there's only a few types of things you can't invest in, and then everything else you have the opportunity to be able to go out and take advantage of.
• 33:29
  Yeah, thank you.
• 33:30
  And then you said it very well.
• 33:31
  It's all common sense, but common sense is not common.
• 33:34
  I'm not going to comment on that.
• 33:38
  That's a good one.
• 33:39
  I'm going to have to list that one from.
• 33:41
  Yes, that's a good one.
• 33:42
  And then I wanted to ask one last question.
• 33:44
  I know we are out of time.
• 33:44
  We are waiting for what time limit?
• 33:47
  I might want to have you back and ask the follow up questions because I have tons of questions, but I get this question all the time from my investors.
• 33:55
  Why can't I invest on my 401k directly?
• 33:59
  If you can give me one brief answer and then we can do a whole episode of that, maybe.
• 34:04
  Yeah.
• 34:04
  So really it's because of the financial institution.
• 34:07
  So most financial institutions don't have the infrastructure and the capability to allow you to invest in real estate.
• 34:14
  They only have the infrastructure set up and the systems are set up in order for you to invest in mutual funds in stocks.
• 34:22
  Thank you.
• 34:23
  So share one Golden Nugget with my audience.
• 34:25
  One quick tip that works for all your clients, especially who are self-directed IRA account and they're investing in real estate.
• 34:34
  Yeah.
• 34:35
  So the Roth IRA exploring the options that you have with tax free money I think is really, really important.
• 34:43
  So if you don't have a Roth IRA now, I'd encourage you to take a look at that type of account.
• 34:49
  Even if you don't have a Roth IRA now, as long as you have tax deferred money, you can convert the money into the Roth IRA.
• 34:57
  If you have earned income, you can make contributions.
• 35:00
  And there's lots of information that we can share with you on how you do that.
• 35:03
  And The reason why I say that is because a Roth IRA can be an incredible hedge against tax rates or increasing, which there's a lot of folks out there that are concerned about that.
• 35:13
  And then also, of course, hedge against inflation.
• 35:16
  If you have the ability to be able to produce above market returns, above what the inflation rate is, you're going to put yourself in a much better situation.
• 35:25
  I like to call it compounding interest in the absence of taxation.
• 35:29
  Oh great.
• 35:30
  Okay, so this moves us to a lot of people on my own.
• 35:33
  I'm going to ask you five questions.
• 35:34
  I'm going to answer it in one word or one sentence only.
• 35:37
  Are you ready? Yep.
• 35:39
  Okay.
• 35:39
  So what is one of the most important things that you've learned in your life, and how did it change your life after learning it?
• 35:46
  The most important thing that I learned in life was 15 years ago when I when I came into this business, of course, I learned about self-directed IRAs and I learned about how you could use those to invest in real estate.
• 36:01
  But more importantly, what I learned is that if I don't take action on managing my own money, that I'm never going to get to my retirement goals and my financial goals.
• 36:11
  It's just in my mind.
• 36:13
  And maybe that's not for everybody out there, but in my mind, I'll never reach I'll never reach the goals that I want to reach.
• 36:19
  If I rely on a third party to do, I need to do it myself.
• 36:23
  I love that it's your money and you should be the decision maker.
• 36:26
  What you should be doing.
• 36:26
  It all depend on others.
• 36:29
  So what is the best book that job that I recommend to my audience.
• 36:33
  Best book?
• 36:34
  Oh, I love this one.
• 36:35
  So there's a book.
• 36:36
  It's written by a gentleman by the name of David McKnight.
• 36:39
  David McKnight is his name, and it's called The Power of Zero, The Power of Zero.
• 36:45
  And it's all about being in a 0% tax environment.
• 36:49
  And it talks a lot about Roth IRAs, obviously, which I'm incredibly passionate about.
• 36:53
  But it it just really makes it easy to understand the different buckets.
• 36:58
  Taxable tax deferred and tax free known as Roth.
• 37:02
  And it really when I read it over ten years ago and sort of changed my perspective on the way that folks manage their different savings accounts.
• 37:11
  Hey, I got that one, too, because I was thinking he might be talking about, you know, they put the zero and the right or left know, it's it's not political.
• 37:22
  He adds in one word.
• 37:25
  What does life mean to you?
• 37:29
  I would say comfort, being comfortable.
• 37:33
  What is your biggest passion?
• 37:36
  The biggest passion is, well, of course, what I do here.
• 37:42
  But but outside of that, in ad one is woodworking.
• 37:48
  Good one. Passion of mine. Yeah.
• 37:50
  If you could go back in time and talk to your younger self, what would that be and why so younger self?
• 38:00
  Absolutely, 100%.
• 38:02
  I would have started I would have started investing earlier.
• 38:06
  I would have started buying real estate and B, I'm a private money lender as well.
• 38:10
  So I would have started lending money to a real estate investor sooner, buying property sooner. Right?
• 38:17
  So how can people reach out to you real easy.
• 38:20
  Our website is trust, etsy.com like trust, etc.
• 38:24
  dot com.
• 38:26
  And I also encourage folks, if they want more information about how does this work.
• 38:30
  You know, some people aren't ready to talk to one of our representatives just yet if they want to, they can go to our website and call us directly.
• 38:38
  And one of our associates can answer your questions and provide more information.
• 38:43
  But if they're not ready to do, they can go to YouTube and just search Equity Trust Company.
• 38:49
  We have tons of video content on all different types of self-directed IRA topics from real estate, real estate partnerships and such.
• 38:57
  So that's another great resource.
• 38:59
  Thank you so much, John.
• 39:00
  I really appreciate it. Our conversation today.
• 39:03
  Appreciate it. Thank you.