How to FIRE Faster with a Self-Directed IRA

How can you use your retirement accounts to reachAre you ready to take charge of your financial future and avoid the middle class trap? Today we’re going to discuss the secret weapon for real estate investors, the self-directed IRA. If you are looking to keep more of what you earn, build a real estate portfolio and surpass your retirement goals, self-directed IRAs could be your key to success. Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen and with me as always is my self-directed co-host Scott Trench.That was a 4 0 1 Okay intro. Mindy, this didn’t quite work out. We’ll try it again next time. BiggerPockets is a goal of creating 1 million millionaires. You’re in the right place if you want, get your financial house in order because we truly believe financial freedom is attainable for everyone no matter when or where you’re starting or how much of your wealth is trapped in your retirement accounts in that classic middle class trap. We are so excited to be joined by Kaaren Hall today. She’s the new author of Self-Directed IRA investing. I’m not sure exactly what that book will be about and we are really looking forward to getting into this. Kaaren, thank you so much for joining us.Thank you so much. I’ve been looking forward to this.I am going to just ooze excitement when we’re talking about IRAs. Woo. But wait, this is a really, really, really fun episode. I promise you because we are talking about ways that you can make more money and who doesn’t want that, right? So Kaaren, let’s jump off the deep end and start with what is a self-directed IRA and how does it differ from a regular IRA?Right. That’s such a good question. A lot of people just get confused about that, but IRAs were created in 1975, so you figure 50 years of the IRA and when it was created, there wasn’t a difference between a self-directed IRA and a typical IRA. It’s one thing, it’s always been one thing. In a way, all the rules are the same. When you go to the IRS’s website, irs.gov, you look traditional IRA, it’s the same thing. The difference between a typical IRA and a self-directed IRA is the asset class that you can put into that account. So the typical I RRA is in the stock market, right? Like mutual funds and stocks and all that and all that fun stuff. But the self-directed IRA is alternative assets, which BiggerPockets is all about notes, real estate, syndications, all these beautiful things. So passive income and so an IRA is an IRA is the answer. What makes it self-directed IRA is the asset you put in it, but not every custodian will allow alternative assets. Like you go to Charles Schwab and you say, Hey, I want to take my Charles Schwab IRA and I want to invest in a property. Can you help me? And they might even tell you, oh, you can’t do that, but we know you can. I know, right? We know that you can. It’s just that you need a different kind of custodian. You need a self-directed custodian.You just used a key phrase that I want to highlight. You said passive income. So when I’m putting assets into my self-directed IRA, I can’t have anything to do with them, right? I can’t manage them, I can’t be involved.You can a little bit, but what you can’t do is what’s called offer services to the plan. But let’s talk about that. So your IRA buys a property, you got a house, we got a little SFR right here, single family house going on. So your IRA just invested in this. Now what can you do? What you can do is you can screen tenants, you can pick up and collect the rent check made payable to the IRA and then send it into your account to be deposited so you can go to your tenant and pick that up if you want and you can hire third party vendors to do the work. So in a way you can kind of property manage, but what you really can’t do is take a fee as a property manager. That’s called a prohibited transaction and we can go deep on that later if you want, but you stay away from actually offering services to the plan. But you can do those three things like screen tenants, pick up the rent, check and hire third party vendors.As long as I’m not taking money for any of that action.No personal acceptance of money, right? Exactly. Yeah.So many people might have a balanced portfolio, some wealth in their home, some after tax cash and something in a 401k. In that situation, I would not be encouraging that person to use their 401k wealth. Their IRA wealth, take it out of Schwab, which does not mechanically allow them an easy route to purchase a property and to buy a rental property with it because I’d use my after tax portfolio for that. There are great tax advantages for that and if I want a balance portfolio with stocks and real estate, I might get the growth in the stock market inside of my IRA in my real estate outside of the IRA. However, if I was thinking about buying a private note for example, I would do that in my IRA all day and I’d put the wealth outside of the IRA into the stock market for example, because I’m going to get a clear tax advantage.
I’m not going to pay tax. I’m what will be simple interest. Similarly, if I’m thinking about syndications and I want to be in a preferred equity tranche or I’m going to be an income fund or something like that, that’s where I want to use the IRA instead of the after tax brokerage condition. We use the real estate example to illustrate one of the shortcomings of traditional IRA custodians like a Schwab for example. By the way, I love Schwab, I use Schwab, but I have an account with them. I have nothing against. It’s just the mechanics of facilitating an investment in a note or a rental property are not readily available through my Schwab account. How am I doing in articulating the problem here in some use cases at the strategic level? Do you agree with those?I do. I mean you’re straight up, right? A hundred percent and I’m going to add something to that too. Everything you said is a hundred percent correct, but there’s another thing to think about. Just take a step out and say, okay, maybe you just left this job and you’ve got maybe a hundred K that you saved in your employer’s retirement account. Now you get to move that money. So your question is what am I going to do with that money? Maybe you don’t have a hundred thousand personal to invest in real estate, but you have a hundred thousand from this old retirement account. So what are you going to do with that money? So you could take that money, put it in a self-directed IRA and invest in real estate in some form or invest in an asset class that you know best. I think that’s when real estate makes a lot of sense. You’re right, real estate has just awesome tax benefits. I mean just ask our friend Amanda Hahn, right? She’ll go on for days. I love her and that’s the best thing about real estate is the tax benefits. But if the question is, Hey, I just found this awesome deal, this piece of property I really want to take down, I’ve got this old retirement plan and I don’t have the cash, how am I going to do this? Well, maybe you can take your IRA, maybe in that case it makes a lot of sense.Okay, going off of this a hundred thousand dollars myth mythical a hundred thousand dollars we just discussed, I had it in my 401k, I separated from my company and now I’ve rolled it over into an IRAA self-directed IRA. But in my area of the world, houses don’t cost a hundred thousand dollars. How do I cover, let’s say it’s a $500,000 house. Where can I get that other $400,000? Can I get a loan with my a hundred thousand dollars down payment?Yeah, excellent question. You can get a loan and I think one of the biggest misunderstandings about what you just asked is people think that they can go to their bank and get a home loan just like when they bought their primary residence. It’s different. You can get a loan, but your IRA isn’t a down payment on a Freddie Fanny F-H-A-V-A kind of loan. Your IRA would have to take on a non-recourse loan, which is a special kind of a loan. So your I A can do that and then when your IRA does that, I mean, so here’s what happens. Say your i a has is a hundred thousand dollars property, okay, so your I a has 70 grand and your I a borrows 30 grand of non-recourse debt. Okay, so beautiful. So now you 30% leveraged 70% IRA. So here comes your first rent check for a thousand dollars, right? It comes back to your IRA. Well 70% yearned because of savings. 30% you yearned because of leverage. And then that 30% is subject to this wacky tax, which you may have heard of called UDFI, unrelated debt financed income tax. So yes, your IRA can borrow money. We all know the power of leverage. It’s awesome, but in a self-directed IRA, even a Roth, it can be subject to this special tax nuts, not an income tax, right? It’s a special tax.What is this tax rate that we’re talking about this UDFI approximately?Yeah, it’s like 37%. It’s the same rate usually as a trust rate. Yeah, it’s nuts, but it’s not on a hundred percent of the proceeds. Like in this case it would be on 30% of the proceeds would be subject to that tax. Now it blows your mind, I get it. I see your mouth, you’re a gave up here, but you can take deductions so your tax professional is going to complete a document called A nine 90 T. When you and I, when we do our taxes, it’s a 10 40 when your IRA does its taxes, it’s a nine 90 T because an IRA is tax exempt. So say for example there were expenses, your IRA can deduct those expenses from the amount of tax out and your tax professional. Well dig into the weeds on that one because I don’t really offer tax advice. So you can take deductions and another time that this UDFI comes into play is when you invest in private equity syndication, say it’s a big multifamily building and that asset sponsor is got a capital stack and some of it includes leverage, right? Borrowed money obviously. Well same thing. Your IRA is going to owe the UDFI tax on the syndication investment too, but say that Syndicator did a cost segregation, that can pass through to your IRA on the nine 90 T. So we’re going deep in the weeds, but just to say that if one of our listeners isn’t tracking, I mean we’re available to go deep on this and we don’t have to start in the deep end. We can start in the shallow.All right, it’s time for a break. As you know, Kaaren’s new book, Self-Directed IRA investing is a brand new book to the BiggerPockets bookstore and we’re offering BP money listeners 10% off. Go to biggerpockets.com/sdra and use the code SD IRA 10 to score your copy today.Welcome back to the show with Kaaren Hall.Let’s say that I’ll use a specific example here. This is not something I’m investing in, but we had a contributor, Matt Faircloth do a little pitch for his income fund, a debt fund that he did at BP Con. It was a pretty fun little segment. They actually had three different funds presented and let’s say I wanted to put 50 grand into that fund through my IRA, but I have an IRA of 114,000 or whatever it is from my previous employer. Can I do this with a specific amount for a single purpose like that and create an A self-directed IRA for each one of these investments? Do I have to fund it? How are the mechanics of setting this up? Does it have to be a rollover from another one or can I just do this for a single investment at any time with any part of my IRA holdings?I have three different answers in my head for what you just said. One of ’em is if you want to have a different IRA for every asset you can because the IRS does not limit how many IRAs you can have. They only limit the contribution amount that you can contribute. You could have a million IRAs, but you can only contribute x of course you have to pay the account fees, which with us aren’t that bad, but there you go. So that’s one thing. Number two is you’ve got 140,000. You want to invest in Matt’s 50 K investment, so you can move all the money over. You can do a rollover from a previous employer into a self-directed IRA do the 50 K investment. Then you’ve got the delta sitting there and you’ve got that going on. So an IRA can have also an unlimited number of assets inside of it.
So your IRA could have just, yeah, there’s no stop to how many assets can be in an IRA. We charge a flat fee regardless of the number of assets. So it’s not going to cost you extra to have extra assets in there. So the mechanics of it is you open the account, you fund it by contributing from your own pocket and every account is different. It has its own contribution limit. It has different little teeny variations of rules. You can do an IRA to IRA transfer or you can roll over a previous employer account. So those are three ways of getting the money in and that’s how that’s done.Awesome. So the mechanics are much easier than I think most people imagine than to be in this world of real estate investing. And again, I am using the case of an income fund, a debt fund because that is exactly the type of thing that I would be thinking about using an IRA for first, right? I mean all of my wealth is in an IRA and I only know I want to be in real estate. Okay, maybe I’m buying a rental property with it and thinking about these things, but even in your example you’re like, oh, you’re going to have to use a nonrecourse load. Well that sounds great in theory except for those are going to be much lower LTV, they’re going to be much higher interest. They’re going to have a balloon payment typically that are associated with them. They’re just not as good as the 30 year fixed rate mortgages you can buy as a regular what we’re used to calling a real estate investor and single family. These other assets, I would say even specifically syndications are what I would imagine are a primary use case for a lot of IRA investors. And you don’t have to roll over your entire fund, your entire stock portfolio. You can do it in chunks here and that is going to be what I think a big chunk of the capital that has invests in syndications will be coming from is these IRAs out there maybe as much as 40 to 50% of that capital.Yeah, syndications is the number one asset class for our industry.So let’s about, we often talk about this concept called the middle class trap and we define the middle class trap is this let’s create a family of 1,000,005 in net worth with 500 K in their primary residence, 500 K in three rental properties that are kind of break even cash flow and 500 K in a 401k. So they’re producing essentially no cash flow from their portfolio and they can’t actually harvest any of that money. The playbook here has to be about their real estate and their home. We’ve talked about those at length on BiggerPockets money, but how can I use this tool, this notion of the self-directed IRA to give me some creative options that I might not be thinking about if I’m in this position, how can I use that to actually begin thinking about creative ways to generate income I can spend after tax today?Yeah, I think, well first off, I love the term middle class trap because that true a trap is something that you don’t know. You walked into it until you’re there and it’s like, oh wait, it’s a trap. You wouldn’t have walked into it if you knew it was a trap. So you find yourself there and you’re following the rules, right? You’re playing by the book. You’ve got this nice little sweet little portfolio going on and that’s beautiful, but what you want is real wealth and you want to be truly wealthy. So what do you do? I think that’s what you’re asking. And I think with a self-directed IRA, it’s not going to give you cash today. It isn’t an IRAA retirement account is all about later any retirement account is about saving for the future. And that’s why the IRS gives us tax benefits because I think we know social security, it’s always iffy my whole life.
I’ve heard, well, it may not be there when you reach that age. So like 75 we came up, they came up with IRA so that we could prepare for our own retirement so we could be responsible for ourselves and our own future. So what self-directed IRAs can do is help you prepare for that long-term eventuality of being retired and doing it in style. You don’t want to be that old person at the grocery store buying a banana for 15 cents all you can afford. But I know I’ve seen that. I know I literally saw that. I thought this is something, I don’t want to be like a cautionary tale, right? So what we have to do is help ourselves by investing today in all different kinds of asset classes that come with risk, but a self-directed IRA lets you choose different asset classes, not market correlated assets, and a self-directed IRA also helps you have more of what you’ve earned.
You get to keep more of it because when you invest, we’re not going to beat up on Charlotte Schwab. Let’s beat up on TD Ameritrade for a second. I have an account with them. So with TD Ameritrade, I mean the same thing they’re going to take whether I make money or not, they’re going to get a percentage of my assets under management, aren’t they? Whether I make a profit or not. And they’re going to make a little fee on every trade and every deal with a self-directed IRA. We’re not doing that. When you make a deal, we might charge a $35 transaction fee, but we’re not taking a percentage. We’re not taking your earnings away to a great extent. And by the way, if you want to go deep on this, there’s a great John Oliver, the comedian, he has a great segment. So look up John Oliver and teacup pigs and he breaks it down how market correlated advisors, how they’re taking money off the back end and you put in all this money, again, the middle class trap, you’re following the rules, you’re putting money in your 401k, but John Oliver brilliantly lays out that it’s a trap.
How much are they taking and how much are you keeping? Well within self-directed IRA, you’re keeping more of it. So I’d say that’s the advantage to self-directed.Okay. Scott just shared a scenario where real estate investments might not actually be so great for your self-directed IRA with the non-recourse loads, the higher interest, the balloon payments and all of that. Are there any other investments that aren’t so suited for self-directed IRA investing?I don’t think there’s any asset class that offers as many personal tax benefits as real estate. So I would say no. I would say real estate is the one, but I think when I started direct I a services in 2009, it was really the golden years of real estate investing where you were buying properties on tape. Remember that you could get 50 properties on tape sight unseen and how could you lose because you’re buying the pennies on the dollar? Well, obviously the market shifted, so it made sense at one time.I think I want to push back a little bit on that because aren’t there a lot of big rules related to IRA investing and your direct ability to make changes to the business? So for example, in real estate, I don’t think you can manage the property directly if you buy a property inside of your IRA, right? You have to hire an outsource management. You cannot be a self, it certainly can’t be an owner occupant and you probably, I don’t believe also can be the property manager.Well, you can be though. If I could jump in there, like I mentioned, you can pick up and collect the rent checks, you can hire third party vendors and you can just hire third party vendors to do the work. So everything that you would do as a property manager, you can do with a self-directed IRA. What you can do is do the work yourself.Got it. Yeah. I think the more, the broader umbrella here is that the investments inside of your self-directed IRA can’t benefit you. It can’t be your home, it can’t be a second home. You can’t manage the property and charge your IRA fee for that. There has to be a distance. The intent is to create a distance between you, your wealth today and the benefit of the investment is broadly how I’m interpreting that. And that’s where I’m going with this is those rules can be constraining or you’ll have to educate yourself on those because there are deep intricacies that you have to follow if you’re going to invest with your ira. So for example, you buying a business that you are hoping to generate income from and spend in any way or benefit you in any way credit card points, those would all be problems to have your IRA, your self-directed IRA participating in. Is that a better way to phrase it?You got it straight up, right? Yep.Yeah. And that’s a big piece of this that I think folks need to consider is like, Hey, this is not something you mesh your life and your business and all this stuff with. This has to be a separate set of investments. And that’s another pain point with real estate.Yeah, with an i a keep it arms length, I mean, I always say that when I do a presentation, I like that’s a number one rule, keep it arms length. Now there are these tiny, they’re not really exceptions, but it’s insight into how you can manage your property, but you still keep it arm’s length. What if your tenant doesn’t pay their rent? Then you have a third party go in and do the loan servicing part of it, whatever it may be.And on the flip side of that, Kaaren, you mentioned that syndications are the most common investment in IRAs. So what are some other investment vehicles that are great within the IRA?Yeah, I think one thing that may be overlooked is performing a non-performing debt. When you can buy debt pennies on the dollar and turn a non-performing loan, for example, into a performing loan. And this may take some, like a loan servicer, you may have to keep an arm’s length and all this, but there are companies that do this and you can invest with them, but your I A can also be the bank and lend money to people. I’ve seen a lot of people do this in real estate investment groups. They’ll say somebody will come up and say, Hey, I’ve got this rehab I’m doing. I’m looking for somebody with a self-directed IRA, I need another 20 K to finish the kitchen. Your IRA can come in and be that lender with points and fees and all this, and then say for example, they sell the property and at closing here comes your money back and hopefully with monthly payments in the interim, or it could be interest only. You can set the terms as long as they’re legal.Yeah, I do that. We have to take our final break, but more with current after this.Thanks for sticking with us. Back to Kain. I love the idea of hard money lending within the 401k, right? That’s a great option for somebody. I think that’s maybe getting closer to retirement age and wants to get that practice of generating that income there. I mean, you know that that’s going to be fairly safe and you’re going to foreclose on an asset if in the worst case, that’s your bread and butter and real estate around there. I’ve done a few hard money loans outside of the 401k, and the issue is it’s all simple interest, so it’s just there’s no tax advantage whatsoever, but inside the IRA, that problem goes away and it becomes a really powerful wealth builder. You can compound wealth at somewhere close to 10, to 12 to 14% depending on what you’re charging for these loans. That’s really interesting. And a way to use that real estate skillset in there, and that’s before we even talk about performing versus non-performing. That’s just a straight vanilla hard money loan that is used every day by flippers around the country. If you start talking about getting non-performing loads performing, I mean, you can make serious money inside this thing in a way that’s really tax efficient.To that point, I have to say, I know somebody here in Southern California, real estate investment community, I was talking with him. He built up a million dollar Roth portfolio. Of course, he worked his buns off by making these micro loans to people for mobile homes, and he just kept going and churning and churning this money over and over and built up a million dollar Roth. Long story short, so what you said is, I mean, I see examples of that all the time.Yeah, that’s how I use some of my IRA money is to make micro loans to make hard money loans to flippers that I know very well I know are going to pay me back. I think that’s really important to note that you want to be paid back, so don’t just randomly make these loans, but you can make a really, really great return if you do it right. Scott, you just said 401k and IRA. You were kind of flipping back and forth. I am under the impression that the rules are essentially the same with regards to a 401k and an IRA. Kaaren. Can you clarify? You could do all of these things in your, well, I’m talking about a self-directed 401k.Yeah, so a 401k if it’s with your current employer, no, because then it’s going to be tied to the market correlated assets, but you can absolutely have a self-directed 401k, and I think that’s what Scott’s talking about, like a solo 401k,I’m incorrectly using the term 401k to describe the vehicle we would be lending.Well, no, I mean that’s what it’s called. It is a 401k. It’s just for an individual. But I mean, yeah, there’s a delineation there, but absolutely, you guys got it right. I mean, you’re on the right page.There’s a lot of phrases that we’re throwing out here. I want to throw another one out there called RMDs required minimum distributions. And for somebody like Scott that’s not really so close to his horizon, but for somebody like me, it’s a little closer or a lot closer. I think Scott’s 50 years away from RMDs, whereas I am only 25 years away from RMDs. Is there anything I could do to reduce my RMDs or now that I can do that will help reduce myRMDs down the road? I mean, RMDs are a great problem to have, don’t get me wrong, but I’d rather not pay it if I don’t have to.Right, right. Because well, a required minimum distribution, right? This is an RMD one piece of good news is that right now the age is 73. Your RMD age is 73, used to be 70 and a half. Now it’s 73, it’s going to shoot up in the year 2033 to 75. So one way you can do it is just live longer. So you won’t even have to start taking it until you’re, you’re 75 in the future. So that’s cool. But the purpose of the RMD, it’s kind of like the IRS is making a little deal with you. Hey, take this money, contribute it to your IRA, and assuming your income isn’t too high, you’re not a super high net worth wage earner, we’ll give you a tax break. Alright? So we’ll give you this now while you’re young and you’re building your retirement, but later on it’s a pre-tax account like a traditional or maybe a SEP or something or 401k like with your employer, but later on when you’re older, you’re going to be required to take the money out. So we’re not going to hit yet for the tax now we’re going to hit yet for the tax later, and that’s what an RMD is about. So they really want to tax you. So getting away from an RMD, that’s not the way it’s set up. The game isn’t set up to be played that way, but it doesn’t mean that there’s nothing you can do.And the RMD does not apply to the Roth IRA, right? So this is only for the 401k, another vote in favor of the Roth for all those listening. If you’re unsure if it’s close, there’s certainly scenarios where it’s 401k all day. We’ve discussed at length in previous episodes, but I think that the goal here is I have a bunch of money in a 401k, I move it into an IRA at 73, I’m going to be forced to withdraw to some degree. And a strategy that we should be thinking about, whether we’re talking about a self-directed or a traditional 401k is how do I move that money into the Roth way in advance of that point? That’s a 50 year problem. One of those years you’re going to have a loss as an entrepreneur, right? And that $500,000 loss year is the year. Yeah, roll it all over into the IRA in there.Yeah. And then one offsets the other. Yeah, right. Because a Roth, when you do a Roth conversion, it’s taxable to you. You’re going to get a 10 99. But like you said, if you have a loss one year and then you’ve got this extra gain of a Roth conversion, they may equal each other out. This is when you work with your competent tax professional to kind of time that for you.So my question is, let’s say I am not willing to ever bet on a loss. I’m going to be super, super rich the whole way and never have a loss, never have a bad year of income, whatever. Never have a chance to roll this over because my career is so stable and so high income earning around there. We’ve talked in the past about a number of strategies to withdraw early from a 401k to fund early retirement, which include things like substantially equal periodic payments or a Roth conversion ladder. Are those concepts all still applicable, at least in theory to the self-directed IRA world?They are the first one you described. We call it. It’s a 72 T, and just know that once you commit to a 72 T, you’re committed to the 72 T. You have to see it through. So that’s the equal periodic payments where you get to take them out. That’s absolutely true. Another thing you can do is we’ll make a qualified charitable distribution A QCD. So if you are in your RMD phase and you don’t want to pay tax, but you have to take a distribution, what you can do is take that money from the pre-tax account contributed to a charity, and it’s a charitable contribution that you don’t ever pay tax on. It just goes straight from your IRA to the charity. And you don’t pay the income tax on that. I mean, you didn’t get the personal benefit of it either, but you did get to make a charitable contribution.We have some use cases that pop up here that I haven’t explored. We would love if you’re listening and you have explored one of these for you to come on and share these stories, but in theory, for example, we could play out the debt fund concept or hard money. Let’s say you say, I’m going to take some few hundred thousand dollars out of my 401k and I’m going to start substantially equal periodic payments using the 72 T, and I’m going to take out 20 grand a year, and I have to commit to that forever in perpetuity essentially. But I want to make sure that that pool of assets is going to clear way more than that. So I put it into a debt fund that’s conservative and it’s generating an 8% prep or something like that, and hopefully that’ll go well or in several that will give me that on average or whatever it is. That would be one way to use the money in a 401k to provide current income, and then the rest would stay in the IRA and continue to get reinvested and compound or invest. But those are things that are accessible to someone with a self-directed IRA that might make them feel more comfortable harvesting a portion of their 401k millionaire wealth middle class trap wealth to fund early retirement. How am I doing? Are these the types of options that begin to present themselves when we start going down the deep rabbit hole of S-D-I-R-A?No, you’re right. Yes it is. And another thing to know is that with an IRA, you can’t take a loan from it. You can have it personally for 60 days, but then it has to go back in another retirement account so you can have personal use of it for 60 days. I did that one time when I was buying a primary residence. I was waiting for some money to cut a commission to come in, and so I took my IRA and I took it out. I withdrew it, used it for the down payment on the house, but then here comes a commission and I took the same exact amount, put it back into a retirement account and it was not taxable to me. So I did that long ago.Hold on. Is there a cap on this 60 day usage? I could take the 100% of my IRA and borrow it for 60 days. Do I have to pay interest back? Do I have to?It’s not a loan. You just have to return the entire amount to a retirement account within 60 days. And mind you, you can only do that once in a 12 month period for all your IRAs combined once in a 12 month period. That’s a cap. But you can have that money for 60 days.I could take a hundred percent. Let’s say back to this a hundred thousand dollars. I have a hundred thousand dollars in my IRAI can for two months, borrow that, pay it back, and that’s not a taxable event.That’s correct. I’d leave a couple bucks in the account so you don’t close the other account if you want to move it back, just saying. But yes, what you said is correct. You can move it out, have it for 60 days as long as it gets back into the account within the 60th day, you’re fine.Mindy, what possible application besides a one-off short? I need a 30 day bridge in terms of getting bridging a commission.I need a short-term loan.I’ve got an IRA. My husband has an IRA since they’re two separate accounts for two separate people. I could take my money out, put it back in, then he could take his money out and put it back in. This is just, it’s Scott, it’s just another idea. Remember when we were talking about talking to Tony Robinson and he said, oh yeah, I took a loan against my stocks. And I was like, wait, what? Essentially he takes out a heloc, but it’s against his stocks and he can use that for things. I bought a whole house with that, Scott. I had never even heard of that.It is great. There’s probably an application for this. Now you have to take the money out of the account. So if you’ve put this into a Vanguard fund or whatever, you will sell the ETF, put it into cash, pull it out of the account and give it to somebody. Whereas that same mechanic happen actually in a 401k loan. Or am I borrowing against the value of the portfolio?Yeah, if you’re going to take cash out, you have to liquidate. Sorry to interrupt, but yeah. Yes, the answer is yes. You have to liquidate to take the cash out, correct.So yeah, I don’t have any cash sitting in my 401k. I don’t know if I would in a self-directed IRA except for as various private loans or funds liquidated. So yeah. But yes, I think there’s an application there that’d be interesting.There’s an application there. I think it’s interesting just to have more information. There wasn’t one point, Scott, I don’t know if you remember this. Carl and I borrowed against our stock portfolio and we had a margin and then it was reduced a little bit because we borrowed the money and then we watched it get smaller and smaller and smaller and we’re like, oh no, what are we going to do? So we actually took out a HELOC against our primary residents and threw that into there and grew a little bit of margin. It actually, if we wouldn’t have done that, we would’ve been called out of some of our stocks and we would prefer to sell them on our terms, not have somebody else choose which stocks they’re going to sell for us. And because the margin was going down, because the stock market was going down, I think this was the end of 2022 when the market was down a whole lot. So just having another option now all of a sudden I have a whole lot more money at my disposal to throw into a short-term solution if I need to. So I just like having lots of options, Scott, and knowing about the options.Kaaren, how does this work with a health savings account? Is there a self-directed health savings account option?Yeah, I mean, if you play the game correctly, you can really win the prize here. Okay, so an HSA, you’ve either got individual contributions or family contributions, and we’ve got all the contribution limits on our website, so you can go look ’em up. So you make the contribution and that is like, well, you get a tax deduction for making that contribution. So then you invest that money, it grows tax free and it comes out tax free as long as you’re using the money for medical expenses, qualified medical expenses, which are on the IRS’s website. There’s a giant list. It even includes things like band-aids. You just have to have the, it might even include if your doctor says you have to have a jacuzzi for your health if you get a prescription, but it has to be health related expenses. Okay, so then you save your receipts because you’re going to probably get audited. So you save your receipts. So you can tell the IRS, I took all this money out, here are the receipts to substantiate the money I took out. That happens, but what are you going to invest your HSA in? And then that’s when we get to things like loans and usually smaller things because with the HSA, it’s got a smaller contribution limit.You could make loans in your HSA account.Yes.What’s it called? Is it called a self-directed HSA? Is thatStraight up? Yep.Okay. Okay.How do I get thisAccount? Well, there is a caveat. Okay, if you work somewhere and you’ve got health insurance, you have to have the high deductible health plan, the HDHP, high deductible health plan, that’s the first barrier to entry. So if you have the HDHP, then you can have the special kind of HSA savings account or medical.Does every provider of the HSA accounts have the self-directed option or is that more through the self-directed companies?Self-directed company? We offer it, yeah. Self-directed companies. Yeah.Okay. I’m super excited.Is it fair to say that if I’m 23 in listening to this podcast, I have probably next enough and M-I-H-S-A, my 401k or a Roth IRM, just getting started on all that front and those are probably offered through my employer and most of this discussion doesn’t really apply except in this kind of abstract sense that 20 years down the road there’ll be some options available to me. But I find 45 and I’m a 401k millionaire in this middle class trap thing that all of these options apply, but really they begin to apply the moment I leave my job and I can begin making other moves at these. And that’s when I got to think about moving the IRA, the HSA and or a Roth whatever is provided by that employer into these new categories. And that can be at the change of my current employment or if I started a new business or have several of these accounts, but am I really kind of locked into my employer’s one until that event takes place?You can always have an individual retirement account at the same time that you have an employer account. So you can still have a Roth account say for if your income doesn’t exceed the cap, which is around about 140 K as an individual, something around there. So yeah, you can contribute to these the individual retirement accounts and contribute. And contribute. And I recommend that if you want to get out of the middle class trap, that’s what you have to do. You have to be disciplined. You have to save and squirrel this money away in every tax advantaged way that you can. But so you can, at the same time you’re building a 401k at your company, you could be building an individual retirement account simultaneously,But the material portion of the retirement wealth will likely in this hypothetical scenario be in the employer balance, which for all practical in intents and purposes, can’t be rolled over and begin exploring these things until that job is terminated.Yes, you have to leave the service of the employer before you can roll over a plan typically. Now there’s an exception to that. Say you’re working for company A and company B buys them, so company B just bought company A, but you want to take the four one K money you used to have under company A. You can move that into an IRA. Alright, so that money you can roll over, but you want to call your plan administrator from company B and say, Hey, this is what I want to do, and make sure that their plan document allows it.Okay? So when I’m preparing to fire, which is what most people listening to BiggerPockets money are trying to do in some form, I got a million bucks across a sprawling set of 4 0 1 Ks. Two of them are from my employer. I had for two years. They swelled to like 70 K, but really I got 800 grand and this 401k from this employer I’ve been with for a while and I got a hundred K or 50 K in the HSA because I’ve been listening to Mindy for five years in that front. At that moment that I fire, that’s when I call up someone like you and I say, okay, let’s think about these options because I have a material balance here. I have options. I can self direct it in the HSA, I can self-directed it in the 401k and or the Roth and I should be really thinking about what I want to do there. I can leave whatever I want to keep investing in the stock market in Schwab or whatever my brokerage of choice is I want to roll over to. But the other stuff is where I really begin to have these options and that’s the trigger point. And so the planning and knowledge needs to be developed now, but the action can really only be taken once we have a job change unless your company is purchased or some other kind of weirdo event happen.Yeah, that’s exactly right. I think that you bring up the point that you really do need to plan in advance these things because you don’t just, Hey, well guess what? I’m leaving my company today. Now I’m going to start thinking about it. You have to start planning now because with self-directed IRA assets, you don’t just pull the trigger on these, you do your due diligence and we’re opening you open fund invest to self-direct. That’s easy. But the challenge is the due diligence, learning about the asset class and what are the underlying rules and exceptions. One of the things that I’ve done in my life that gave me such a leg up is getting a real estate license and working in the real estate field, getting a life and health license, learning about those options. And so studying the skeleton of the creature. And so as you’re young and you’re building your wealth and you want to be wealthy, get as much education as you can. So when you’re ready to pull the trigger, you’ve done your due diligence, you’ve done your homework, you get it, the ins and outs of the asset you’re getting into because that money is very precious. You can’t just replace it when an IRA loses money, it is lost. You don’t get to deduct that on your income tax. So you really want to make sure you’re making a smart deal going inCar. Are there any gotchas for 4 0 3 B or thrift savings plan for government, employees, military, anything like that that we should be thinking about?Not that I’m aware of. I mean, same thing. You’ve got to lead the service of the plan to move it over,But you can just do a self-directed IRA with those funds as well.Sure, you can roll ’em right over. Yeah.Is that something that’s recommended? Like if I am separating from service from the military, do I want to keep it in the TSP or do I want to roll it over?Well, you’re going to have to make that decision independently. I mean, again, it’s your risk tolerance. Are you ready to invest in alternative assets? And that’s a whole separate question, but you can, I think the point is that you have the freedom to do that if that’s what you want to do.I don’t know about the military, but most employers have fairly high fee funds inside of the typical corporate 401k. So first thing I did when I left my Fortune 500 company job is I rolled it over to a Fidelity account with much lower fees around there. I would encourage most people when they leave their job, if they have a 401k balance to just look at the fees. And if you’re a believer in index funds, go with a low lower cost index. That 1% a year adds up huge over the next 30 years inside a retirement account. But then after that, if you want to put it into alternatives, you have to use the S-D-I-R-A option. I was just making sure there wasn’t any other kind of weirdo rules associated with the military stuff in there.Yeah, no, it’s treated basically the same as a 401k when it comes to rolling it over.Alright, car, we’ve covered a number of different things here related to self-directed IRAs. Tell us what’s going on, what’s new, what else should we know before we adjourn here?For most of my 17 years in the industry, there’s been, well, it’s not much new, but this year there’s a lot. And just hitting on a couple of highlights. One is, and this doesn’t apply to everybody, but if you happen to be between the ages of 60 and 63, not everybody, but you get this wacky new giant catchup contribution. So in other words, it’s not just being able to contribute to an account, but you get to contribute even more $10,000 more starting January 1st, 2025. So that’s one thing. But another thing that’s really exciting and applies to everyone across the board is thanks to secure Act 2.0, which by the way went into effect December 31st, 2022. It’s taken the IRS away a long time to actually implement this. But you can make a Roth contribution to a separate simple IRA. Well, what does that mean? This means you don’t have to do a backdoor Roth.
So if you are self-employed and you have a simple IRA that stands for savings incentive match plan for employers, so you have to be an employer or a simplified employee pension SEP account, those. So you’re either one of those accounts, you can contribute the lesser of 25% of your income up to say 70 K, and it can be a Roth contribution for a sale. Simple, the contribution isn’t as much. So that is a tremendous big door opening to tax-free savings. And so yay for us, we can have more tax-free dollars, more tax-free gain from our IRA savings. So those are two of the biggest highlights I think in this space.Yeah, so here’s what you do. If you’re the 401k millionaire using this nugget, you retire at 45 or whatever it is and it’s all in the 401k. You go get your real estate license, you become an agent, you make, what is that $280,000 in commissions go. You put 70,000 of that into the Roth. You buy two rental properties outside of your 401k and cost saum, you have a loss. You’re able to put up a nice big loss over overall because you’re depreciating four or 500,000. You roll over $200,000 from your 401k, now you’ve put $270,000 into your Roth and it can be in a debt fund or a hard money note or whatever it is that’s related to what you’re doing there. And now you have an income stream where you can start taking your substantially equal periodic payments. And that’s the holy grail of retirement planning right there I think. Right. Mindy, how are we doing?My attorneys make me say the contents of this podcast are informational in nature and are not legal or tax advice. And if you’d like to follow Scott’s plan, you should really, really, really speak with an actual tax planner to make sure that what he said is true. However, it sounds really good. I just want to make sure that people are, like Scott said,No, that combines everything. That’s rep status and we got the whole jargoning out there. So yeah, that’s not feasible for maybe anyone, probably most on there. But these are the theories that you begin to think about when you start putting together all of these things about real estate and then the retirement accounts and the self-employment and the advantages you get across all of these things and the different asset classes. There’s lots of fun ways to do this and the tools are out there and they’re starting to get a little bit more accessible with each passing year.Yes. And the money that you’re paying your tax planner to confirm that this is actually correct or to correct anything that Scott, who is not a tax planner has said perhaps mistakenly is well above or well below what you’re going to save in taxes. I mean even if Scott is slightly off, that’s the difference between what you’re paying and you still have this giant amount of tax free cash and what kind of cash do we like? Best tax free cash, that’s the best kind.There’s tax deferred and there’s tax free and there’s a whole bunch, what I just kind of threw out there, but options that should be floating out there for folks to begin thinking about that are really interesting and really, really cool.Kaaren, I am so excited about this episode and all the stuff that I just learned. I like to think that I’m fairly knowledgeable about this whole money thing, but you just threw a bunch of stuff out at me that I am going to now have to go and dive deep, like you said, do your due diligence. I need to get a lot more information about this, but I’m really excited, a lot of opportunity that I wasn’t aware of. So the whole point of having you on this show is to plant some seeds so people could be like, oh, I didn’t know about that. Let me go get some more information. I didn’t know about that. Let me go get some more information. And I think you just gave people, a lot of people a lot of homework. So thank you, thank you, thank you. This was super awesome fun. I really appreciate your time today. Where can people find you if they want to chat moreAnd where can people find, is there a body of work that digests all of this research maybe in one text that they can go and kind of study and look up if they’re looking to learn more, that would distill your knowledge into, I don’t know, 250 pagesThat book? Man, it only took me 10 years to write it, but BiggerPockets, I was talking to Katie at a conference back in a few years ago in San Diego and it’s like, Hey, let’s do this. Oh yeah, let’s do it. And we started working on it and it’s had iterations and since then we’ve had secure Act 1.0 come out, secure Act 2.0 come out. So then there’ve been rewrites until finally we have everything digested into a nice how to kind of a handbook, a self-directed IRA handbook about the rules and a lot of things that we covered on this podcast, the basics about self-directed investingKaaren, what is that book called?It’s called Self-Directed IRA Investing and it covers wow soup to nuts about what self-directed IRAs are, how they got started, how you use them. A lot of the things we’ve talked about today here on this podcast. So it’s going to be a great read and a great resource to look back on like, oh, I forgot, how do you do that? And you can pull it out and look it up.I cannot wait to get my copy. I’m super excited about this book, Kaaren Hall from you direct ira.com. Thank you so much your time today. I really appreciate it and we will talk to you soon.Thanks Scott. Thanks Mindy.Scott, I am so excited about all the homework that I have to do after listening to Kaaren and chatting with her. And I am super especially excited about the self-directed HSA plan. So this was awesome. I absolutely loved every minute of this episode. What did you think?I loved every minute of the episode as well and I think that the nugget about the self-directed HSA could be a really interesting one for fire in particular. I need to think more about it, but we were talking right after we recorded about, hey, we’ve long talked about how HSAs should be one of those first accounts people fund, and I think a lot of people are doing that. I certainly am. And it’s kind of unclear exactly how and when to harvest it for early retirement. Maybe there’s an answer here where you spend 10, 15 years contributing the max. Can you build up a couple hundred thousand, a hundred to $250,000 in that account? And then is that where real estate, hard money loans, debt funds, those types of things begin to take place? Where can that simple interest in something that’s a reasonably high yield rate of return be used to pay my healthcare insurance, health insurance premiums, for example, after retirement? That’s a really interesting concept because I know that that’s a big blocker for folks that’s delaying their early retirement. There’s something there we need to noodle on it. I need to model it out, make sure that those things are actually be done. But that was kind of my breakthrough. I know yours was the $60,000, the 60 day bridge loan, and that can be coming out of A IRA.Yeah, I’ve got a lot of options that I am really excited about now. So this is just, like I said, we’re planting seeds to so somebody could listen and say, oh, I don’t have an HSA, I’m not going to pay attention to that part. Or I’m going to focus more on this 60 day free loan from my IRA that I can do once every 12 months. I mean, there’s lots of options that you can play with once you know that they’re there. So I love this episode. I’m really excited to see this HS SD HSA financial modeling that you’re talking about, Scott, because that is one of the biggest questions that we get. How do I pay for health insurance when I am no longer employed? I do encourage anybody who is considering this question to reach out to a health insurance broker and have a conversation. Ask them all the different tips and tricks that they have for reducing your premiums and see if you can’t make it work. Because I think there’s more than one person out there listening who’s like, well, I can’t retire because there’s no way I can pay my health insurance premiums. Hopefully we will get new healthcare soon, but until we do, you got to play with the rules that are in the place right now. Alright, Scott, should we get out of here?Let’s do it.That wraps up this fantastic episode of the BiggerPockets Money podcast. He is Scott Trench. I am Mindy Jensen saying, see you soon, baboon.