Investing your hard-earned money can be a daunting task, especially if you are investing for retirement. With many kinds of assets available on the market, you will need every bit of information you can get before making the big decision. Dale Corpus takes aim at IRAs and other assets in a conversation with Kaaren Hall, CEO of uDirect IRA Services. Kaaren discusses the several types of IRAs you can invest in and their pros and cons. We also hear about 401Ks and several other investment assets that you can look into.
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Investing For Retirement With An IRA: A Conversation With Kaaren Hall
I had a busy time in real estate. I always had something that has never happened to me before. I almost had three closings in one day. Two of them closed. Unfortunately, the third one didn’t close because the buyer’s wire from the lender didn’t hit escrow’s account in time but the third one is already closed now. Hopefully, I’ll have the chance to hit that three-closing milestone sometime again later on. My point in saying all that is not to be talking about real estate sales on this show but it’s great to be selling real estate when it’s hot and strong. I love working with my clients but there’s one thing that I wanted to stress about being a realtor in this business. You don’t get rich in real estate by only selling real estate. You get rich in real estate by buying and investing in it.
A sales career in real estate or any career for that matter helps you get that nest egg started but it’s what you do with your earnings that helps build that wealth. It’s more about what you keep and grow in your investments versus what you make annually. Growing wealth doesn’t happen overnight. It’s a long-term play. This segues me into my guest. We have Kaaren Hall from uDirect IRA. We’re going to be talking about investing in your future using self-directed retirement accounts. It’s something that I personally got involved with since 2014. You’ll learn things about these accounts that you can’t typically do with a regular IRA that you get set up with a big bank.
I’m very excited to have Kaaren. Despite being in the midst of a recession and mortgage market collapse, Kaaren founded and made a resounding success of uDirect IRA Services. She discovered a strategic way to put her many years in mortgage banking, real estate and property management to use. The solution was an untapped market for both her skills and for her investors’ self-directed IRAs. Through uDirect IRA, she has guided tens of thousands of Americans through the process of diversifying their investments using self-directed IRAs with over $600 million under management.
Kaaren, thanks so much for being on this episode.
Thank you, Dale. It’s great to see you.
How are you?
I’m doing great. It’s a beautiful day.A self-directed IRA lets you invest in alternative assets. It lets you put different assets in your bucket, but all the rules are the same. Click To Tweet
For my people that don’t know who you are yet where are you based out of?
uDirect is based in Irvine, California. It’s smack in the middle of Jamboree and Barranca. If you know Irvine, we’re about 10 miles south of Disneyland. We have account holders in every state. We help people all over the country.
I know I gave you this long intro. Is there anything else that I didn’t include that you wanted to mention about yourself or your company?
That bio sums it up. We have helped so many people to take the money that they have that’s in the stock market, invested in stocks, bonds and mutual funds and then invest outside to break the wall past Wall Street and get out into the world of real estate, notes and precious metals. It’s called alternative assets as an asset class. That’s what self-directed IRAs let you do is invest in alternative assets.
When I was at the bank, for example, one of the financial advisors looking at my account was even talking to me about IRAs. I said, “I have a self-directed IRA.” They were like, “We have self-directed IRAs.” I said, “I don’t think your self-directed IRA is the same as my self-directed IRA because I buy real estate with my self-directed IRA. I think your self-directed IRA is probably I could self-direct with things that you have available for me to choose from but I truly can’t have full flexibility.” Can we talk about that? Sometimes people get confused about what self-directed means.
To back up a little history, IRAs were created in 1975. That’s when they came out through the ERISA Act, which is the Employee Retirement Income Security Act. They didn’t create a normal IRA and a self-directed IRA at that time. It’s just IRAs. IRA is an IRA. It’s just one thing but what makes it self-directed is that you can invest outside of Wall Street. It’s not a different IRA. An IRA is a bucket that holds assets. A self-directed IRA is the IRA that lets you invest in alternative assets and put different assets in your bucket but all the rules are the same. The rules for contributing and distributions. An IRA is an IRA in all its rules. What makes it self-directed is being able to use it to invest in alternative assets. Here come self-directed IRAs and all of the big money warehouses get together. They all, “We have a self-directed IRA.” It’s true. You can invest in a new stock you want but we call ours a truly self-directed IRA where you can invest outside Wall Street.
When did self-directed IRAs become a thing? I got involved myself in 2014. Have they been around since the inception of IRAs in general?
They have. You’ve always been able to invest in alternative assets and there are only two things you can’t. It’s IRAs in general. We’re talking about IRAs as one vanilla thing. You can invest in anything except life insurance, contracts and collectibles. You’ve always been able to, for example, buy a house with your IRA but you just didn’t know that. For a long time, it has been the best-kept secret. I got started in 2007 but during the recession when people couldn’t get money from banks and they were, “How am I going to find some capital from my deals? The banks aren’t going to lend me any money.” That’s when they realized that they could tap into this huge pool of retirement funds. I’m not even joking. That pool is $35 trillion and is about what Americans have in retirement. A lot of that can be diverted into a self-directed IRA and use to invest outside of Wall Street.
Why is it that most people don’t even know what a self-directed IRA such as the ones that you have that you offer your clients?
I think that because we all are busy doing our jobs. Everyone has got blinders on. “I’ve got so many things I have to do. I’ve got kids. I’ve got this and that. I go on vacation. I’ve got so many things to think about.” Self-directed IRAs don’t hit your radar. “I’ve got a 401(k).” A lot of people think a 401(k) is an asset. It’s not. It’s like an IRA, a container for assets. Unless you’re in the finance industry, your attention probably isn’t drawn to it. For example, you’ve been working somewhere and you have a 401(k), 457(b) or 403(b) and you want to roll it over, you’ve always been able to roll it over into a self-directed IRA and invest in other assets. It’s just that people have been too busy to know but the more it comes to the forefront and the more people become aware of it from things like your show, you’re creating awareness and helping to push the message which is great.
I myself didn’t learn about self-directed IRAs. I had a business partner that sold mortgage notes. He was the one that told me about self-directed IRAs and that’s how I got into it. If I didn’t meet that person, I wouldn’t have known about this. Maybe later on I’m reading to a similar type of podcast but I wish the information was more readily available. We’re trying to do that through the show.
That’s what I’m doing with my life and my company is pushing the word.
A lot of the people here are interested in doing real estate investing. How does an IRA invest in real estate work?
We know how to invest in a stock. Go online and you just, “I want this stock.” You go to your E-Trade account and buy a stock. That’s how you get stock in an IRA. With a self-directed IRA, it’s a three-step process. First, you open an account because you have to have the IRA to invest then you fund the account. How do you get money in the IRA? You can move it from a previous employer’s retirement plan or another IRA could do an IRA-to-IRA transfer or you can contribute. The amount of money you contribute is based on your income, account type and age. You can contribute, transfer and rollover. You’ve got the account open. You put money in it and now you choose an investment. Let’s say it’s a house. It’s like buying a house. You certainly know how to do that. You’re just helping three people do it. Except now, the buyer isn’t the individual. The buyer is the IRA account. The account is buying the asset. The name of the account goes on the offer to purchase.A lot of people think a 401k is an asset. It's just like an IRA – a container for assets. Click To Tweet
The vesting on the title is the actual legal name of the IRA. I know for a lot of people, that’s a new thing for them. I’ve seen people buy houses directly with their IRA and it’s amazing that you can do that. In terms of buying real estate with an IRA, if somebody had an IRA and they ended up buying a house with that IRA, talk to me about who could live in the house. Can they live in that house?
As a self-directed IRA, there are rules you have to follow. You don’t get this tax protection and tax advantage without some IRS rules. Those rules are called prohibited transactions. The self-directed IRA game is a game of keeping away from prohibited transactions. You know real estate so you know arm’s length. You want to keep everything arm’s length. That’s what you do in a self-directed IRA. Your IRA first off only buys non-owner-occupied properties, number one. If you want to take a non-owner-occupied property and rent it out to people, that’s fine but it’s not your personal vacation home and primary residence. That’s good to know.
First off, non-owner occupied, you can’t have any personal use of it. You can select the property but you’re technically not supposed to even spend one night in the property. There are other people who are disallowed with the IRA which is unusual. You tell me if you’ve heard anywhere else that they have these rules. A lineal ascendant and descendant can’t play ball. They can’t play the game. Your IRA buys a house. Your parents and grandparents, you and your spouse, children and grandchildren could never rent that property. You could never sell it to them. They’re disallowed but the people who are allowed are out to the sides on your family tree.
It’s not enough to say a family member can’t play the self-directed IRA game with you. For example, your IRA owns a condo. Your nephew can stay there but not your dad. Your mom couldn’t stay there but your aunt could. It’s who is out to the side of the family tree. Your brothers and sisters could stay there but not you. This is what we do all day long. People are calling us, saying, “I would like to self-direct my IRA.” We say, “First, tell me about your deal or the players in this deal.” We’re listening for the prohibited transaction so that we can steer people in the right direction.
There are so many different types of IRAs out there. You got traditional, SEP and SIMPLE. Why are there many?
The traditional was the first one. It’s because there’s a great need for retirement and being able to take personal responsibility as opposed to waiting for the government to give you some retirement money that you put into a savings account and wait maybe you’ll get it back or you won’t. How much of your paycheck is taken out for that? You could take personal responsibility. It started with the traditional. As years went by, different accounts were added. The solo 401(k) is pretty new but the Roth IRA is the newest IRA. It’s a traditional, Roth and SEP. It’s an acronym for Simplified Employee Pension. There’s a SIMPLE IRA. If the government calls something simple, it’s not. SIMPLE is Savings Incentive Match Plan for Employees. It doesn’t have as many advantages as a SEP. It’s not very popular.
There’s the inherited IRA. If someone passes away, you’re their beneficiary then you inherit their IRA. That’s awesome because an IRA is like a trust that goes straight to you in the form of an inherited IRA. There’s even a spousal IRA. It’s not a special IRA but it’s just to say that if you’re going to contribute to an IRA, you must have earned active income from a job. If you’re the non-working spouse, your partner, husband or wife is working and you’re not and you’re staying home, you can still have an IRA and contribute to it even without active income. We call it a spousal IRA but normally it would be a traditional one.
Of all the types of IRAs out there, my understanding that the one that is tax-free when you’re coming to retirement age that you’re able to pull tax-free money out is only the Roth IRA.
I had lunch with some friends and he brought his eighteen-year-old son. His son is about to go to Santa Barbara at UCSB. He asked me this brilliant question about Roth and wanted to know about pulling the money out tax-free. This is true. With all the other IRAs, you put the money in and you can get a tax deduction depending upon your income and stuff working. Your tax person can tell you. With a Roth, you put the money in after-tax. It’s a special account. It was created in 1997. It grows tax-deferred or tax-free. If you meet certain qualifying conditions, like being 59.5 and having the Roth for five years then the money can come out tax-free.
With a Roth, there are some conditions. One is you can’t make too much money. If you make over around $130,000 as a single person, you cannot contribute to a Roth. I’m sure that your audience here is pretty sophisticated and have probably heard about the backdoor Roth. Here’s what that is. You put money into a pre-tax account, like a SEP or a traditional IRA and then you do a conversion. You can’t contribute to a Roth but you can contribute to one of these other accounts. When you convert from pre-tax to Roth, it’s taxable. You get 1099 but now you’ve got that money in your Roth bucket growing tax-free. You can still do that now. Take advantage of it while you can.
That has no bearing on somebody making more than $130,000 or whatever that limit was. They could still do something like that.
In 2010, there was this ruling that passed called TIPRA, Tax Increase Prevention and Reconciliation Act. TIPRA says that in 2010 and thereafter, you can convert regardless of your income to Roth. In 2010, it took off the barrier to entry for the Roth IRA. Therefore, it created the backdoor Roth.
The solo 401(k) was more of the latest thing compared to the other IRAs that we’re talking about. When did the solo 401(k) come about? What’s so different about it?
I don’t know the exact year on this one. Sorry, I failed my History test. We’ve had 401(k)s but now it’s like, “What about the self-employed people?” The way to have a solo 401(k) is that you have no full-time employees in any of the businesses that you own. That is a real big if because maybe you’re a dentist and you’ve got a medical billing practice. One full-time employee in any of your companies blows it and now you have to have a full-blown 401(k) which is sometimes called a Safe Harbor Plan. With a self-directed solo 401(k), it could be you and your spouse as co-owners of a company but there will be one company that sponsors a solo 401(k) plan. It’s like a control group. If you owned a lot of companies but it’s just you running them then that plan is for all your companies combined.The SEC has come out with a warning about cryptocurrency, mostly about initial coin offerings, because they're so risky. Click To Tweet
Of all the types of IRAs that you could self-direct, are some more popular than others? What are you seeing there?
The traditional IRA blows any other IRA out of the water. It’s because it’s the easiest maybe or most of the money that comes into IRAs flows from employer plans into an IRA. Most employer plans are pre-taxed. If you own a business, a SIMPLE, SEP and solo 401(k) are all options for you. If you’re not self-employed and you have pre-tax money, the traditional is the only retirement bucket you can move that money into. We probably have twice the number of traditional IRAs than we have anything else.
What assets can a self-directed IRA invest? Can they invest in things like even a business?
Yes. For example you tell me, “I’m going to be a travel agent,” now that you travel the world. I think, “That’s great. I know Dale knows a lot about travel. I want to invest in his business.” I’ll take my IRA. I can invest in your new travel company in a debt or equity position. Because we’re not disallowed to each other, my IRA can invest in your business. Let’s say my IRA makes a loan to your business. It will have terms and then your business needs to follow those terms, honor the terms and pay according to those terms back. If I invest in your business like it’s an LLC so I become a member and I’ve got an equity share, you’ll kick out a K-1 to my IRA every year. Any proceeds that come out will go straight to the IRA. That’s how it goes.
Speaking of K-1s and tax issues in generals, do self-directed IRAs have to file tax returns on an annual basis?
Typically no because all of the money in an IRA and a solo 401(k) are all tax-free or tax-deferred but there are exceptions. There are two times when an IRA would have to pay tax. Like you and I, we file 1040 for ourselves. An IRA would file what’s called a 990-T. An IRA pays tax when one of two things happens. One, your IRA borrows money. Being in the residential real estate world like I was for a great number of years and you certainly are as well, we know all about Fannie, Freddie, conventional and conforming but when an IRA borrows money, it is none of those things.
Here comes your first rent check for $1,000. In $300 of it, 30% of your IRA earned because of leverage. The other 70%, your IRA earned because you saved. It’s the 30% that your IRA earned because of leverage that’s taxable or pro-rata, whatever percentage you borrowed will be taxable. That’s when your IRA files a 990-T. There’s the other time when an IRA pays tax. The first one described is UDFI, Unrelated Debt-Financed Income Tax. The other one is UBIT, Unrelated Business Income Tax. That is typically when an IRA invests in an active business. You can read about these taxes on the IRS’s website. It’s IRS.gov and it’s Publication 598. That will tell you all about two times that an IRA does file a tax return.
Going back to the types of investments you could have in a self-directed IRA, cryptocurrency is such a big topic and a lot of people are trying to invest in it. How does that work in the self-directed IRA world? Can you invest in crypto?
The answer is yes. It’s just how are you going to do it? The way our customers do it is they will use an IRA-owned LLC and the LLC will invest in crypto. Being a conservative person and this is retirement so you have to be careful, I always recommend caution. The SEC has come out with a warning about cryptocurrency, mostly about ICOs, Initial Coin Offerings because they’re so risky and so many people are doing them. You can read the SEC’s bulletin or advisory on cryptocurrency to get a heads-up on your due diligence.
When you’re investing in cryptocurrency, you’ve got to have a wallet. Somebody is going to be entering your numbers into a wallet. If you’re investing with somebody, the number one due diligence tip you want to take away is to find out if that cryptocurrency wallet has errors and omissions insurance because if somebody is going to type ten digits and get one wrong, that’s game over because I don’t think you can retrieve that in the blockchain. You want to find out how that works. It all sounds great. Everybody is jumping on the bandwagon. I get it. We want to get in on a ground-level opportunity and it’s wonderful but make sure you do your homework and you know what you’re doing. You’re asking good questions and making a smart investment decision. When it comes to your retirement account, if you lose money, you don’t get a write-off.
Let’s talk about COVID. What has COVID done, if anything? Has it affected at all anyway in which people are participating with their self-directed IRAs?
It did in 2020 because there was a time when you could withdraw money from your 401(k) or IRA and have the tax consequences delayed. In 2020, especially in March and April when COVID was new, we were all afraid. Nobody knew what was ahead. We didn’t see the future straightaway. There were special rules but after 2020 was over, you didn’t have those special COVID situations where you had any special thing. It did die down when there was all this uncertainty, “What should I do with my retirement? Maybe I should keep it.” In 2021, there’s so much pent-up demand. It’s just we’re having the best year we’ve ever had. It’s lots of pent-up demand of people that are investing.
At 59.5 is which somebody has a required minimum distribution in their IRA.
59.5 is when you can take money out of your retirement account without a penalty. When you have to take the money out, it was 70.5 but during COVID, the SECURE Act 1.0 changed that age. That is one thing that changed during the COVID year was that it went from 70.5 to 72. Now, we’re looking at SECURE Act 2.0. That is a bill before Congress that will probably be looked at or passed somewhere around October 2021. SECURE Act 2.0 wants to raise that age even higher to 75. We’re living longer, where 65 used to be when people retired and that used to be old. The IRA rules are changing to keep up with us.If you lose money, you don't get a write-off, so make sure that you really know what you're doing. Click To Tweet
Can someone ever access the funds in their IRA or a solo 401(k) without getting penalized?
In an IRA, if you’re under 59.5 and you take money out, you can always take it. It’s not that you can’t have it. If you’re under 59.5, you will get a 10% penalty for early withdrawal. After 59.5, in most accounts, you’re still going to pay tax, except the Roth like we discussed. Solo 401(k) is a different animal. It’s not an IRA. It’s a 401(k) and it has a special thing. If you’ve ever worked anywhere with a 401(k), you can borrow money personally from your 401(k), the same thing with a solo 401(k). You can take a loan of up to $50,000 or 50% of the account value whichever is less but you have to repay it back to your solo 401(k) over a five-year period either in monthly or quarterly payments. Otherwise, it’s a prohibited transaction. You can take it right out, borrow it and pay it back.
What are the most popular types of investments that you see clients investing in with their SDIRAs?
I sit on a national board of self-directed IRA companies. It’s called RITA, the Retirement Industry Trust Association. We look into these statistics. This is how we nerd out, “What are people doing with their IRAs?” It’s a huge area. Usually, you have to be an accredited investor. Is it a Reg A, B, C or D? That will tell you what the rules are. Private equity is the number one asset class followed by notes, lending money out of your IRA when your IRA is the bank. Real estate is in there in so many different forms either buying brick and mortar or raw land.
What advice do you have for somebody that is new to this and they’re thinking of considering an SDIRA to invest in real estate?
If you are new to this, first off, you want to get an idea of how to invest in real estate. You’re going to make sure that you’re an expert at that and that you understand it. We’ll start there and then you need to say, “How much money do I need to do this?” You need to weigh in. You can partner with people. Dale, your IRA and my IRA, we could partner together on a deal. No problem except I’m disallowed to your IRA because you have your IRA. As a custodian or as an administrator, were disallowed to your IRA. Otherwise, we could invest together. If you don’t have enough money to do a deal, you can partner with other people.
Look and see if you’ve got the capital to do it. You’re going to want to have a 10% pad for real estate because real estate always has expenses. Even in new construction, something is going to happen. You need to put in landscaping because understand that 100% of the expenses of an IRA are paid for by the IRA. It’s closing costs, landscaping and property tax bills. You need a new roof. It’s everything. All expenses have to be paid for by the IRA.
Somebody in that situation sends uDirect the bills and then somehow the accounting for that works internally with you.
We have a bill pay system. You give us the invoice and direction of investment like a permission slip saying that we can disperse the funds. We disperse the funds as long as they’re tied to that asset.
Any mistakes that you see people make when using their SDIRAs?
We don’t like this. We hate it when people do this because it can be game over for your IRA. Long ago, we could buy property on tape and you buy 50 houses on tape. We had some clients. It’s funny. Two attorneys at the same time both did the same thing. I don’t know what the odds of that are. What they both did separately, they didn’t know each other, is they had these rental properties that are IRAs. They got the rent check and they didn’t send it back to the IRA. They put it in their pockets.
One attorney went, “What’s the problem? I paid tax on it.” I was like, “You took constructive use of your IRA. You acted as the custodian by taking possession of that money so game over.” It’s not good. You don’t put your personal money into a deal. You never take personal possession of the money because all the income from that asset due to your IRA has to go back to the IRA that owns the asset. That’s another mistake. We’ve had people get proceeds from their IRA and send it over to Merrill Lynch, TD Ameritrade or Fidelity across the street. That’s also taking constructive use. Don’t do that.
What happens in those situations? Does the IRA become null and void? Do they have to pay taxes on everything? I wanted to learn what happens in those situations.
Being called on a prohibited transaction is something that the IRS would declare, not us. We’re not regulatory. We’re not going to say that.
What’s the best way for somebody to learn about you and your company?
It’s uDirectIRA.com. We’re all over social media. We’ve got a free report on our website. If you want to find out more, you can click and get a free report and learn about all the different asset classes. Also, you can schedule a consultation and talk to us about what deals you’re looking to do and any questions that you have that you would like to hash out. Email us at Info@uDirectIRA.com. We’ll be happy to take any questions.
Those are all the questions I had for this episode. If any of my readers have any more questions for Kaaren, feel free to check out our website, email or contact her office directly. Thanks Kaaren for coming on this episode. I appreciate your time in providing all that value to my readers. To my readers, thank you for checking out this episode of the show. See you next episode. Until then, live life abundantly.
About Kaaren Hall
irect IRA Services has helped thousands of Americans invest their IRA outside of the stock market into real estate, land, private notes & more to improve their financial future. Educating individual investors and professionals is the cornerstone of uDirect IRA. We have events right here in Southern California geared toward self-directed investing. We also offer webinars so no matter where you are you can “Learn to Earn”. uDirect IRA is a third-party administrator providing complete and accurate information on self-directed IRAs so you can make the most of your retirement funds. We do not promote any investments. Rather, we provide the knowledge, tools and information you need to make self-direction easy. At uDirect, we help you get started quickly and easily, and stay with you every step of the way.
Despite being in the midst of a recession and mortgage market collapse, Kaaren Hall founded and made a resounding success of uDirect IRA Services. The single mom discovered a strategic way to put her 20+ years in mortgage banking, real estate and property management to use. The solution was an untapped market for both her skills and for investors – self-directed IRAs.