Self Directing Your Retirement Funds OUTSIDE Of Wall Street With Kaaren Hall

 

You can have full control over your retirement funds with a self-directed IRA. Lisa Hylton’s guest today is Kaaren Hall, Founder of uDirect IRA Services, LLC. In this episode, Kaaren gives essential tips on using your retirement accounts to invest in. The number one thing is to do your due diligence. No one is going to dictate your investments for you; you’re the one pulling the trigger. That’s why you need to learn the rules and check your assets. Want to learn more about self-directing your retirement funds outside of wall street? Join in the conversation and learn how!

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Self Directing Your Retirement Funds OUTSIDE Of Wall Street With Kaaren Hall

On this episode, I have Kaaren Hall. 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 strategy to put her over twenty years of experience in mortgage banking, real estate and property management businesses to use. The solution was an untapped market for both her skills and for 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 $600 million under management. I’m super excited to have you on the show. Welcome to the show, Kaaren.

Thank you so much.

You’ve been around for quite a long time. I remember going down to San Diego for real estate events, and I remember you presenting at different events that were down there. I was learning about how to use my retirement accounts to tap into investing in real estate. The first time I’d heard about it, I was blown away. I’m excited to have you on to share your story a bit about it and to educate readers about how it’s possible, and the pros and cons and what they need to be concerned about and the green lights as well as the things that work well. My readers know my show is broken into three parts. There’s a little bit of background so people can get to know who you are. We’ll get into the IRAs and then we’ll wrap it up with some level-up questions that I ask all my guests. Where do you live?

I live in Rancho Santa Margarita, California, Orange County. It’s cozy. I love it and great weather. We keep thinking, “Let’s move out of California because of taxes.” It’s like, “No. It’s pretty great here. There are no bugs, no humidity.”

Did you start your firm after the Great Recession in 2008 or 2010, or was it before that?

It was during.

Prior to that, as I read in your bio, you were involved in everything from mortgage brokers to real estate. When you made the decisions that this was something you wanted to do, was it immediately? Was it a process of discovering and then realizing, “This is something I want to do?”

Growing and finding new things is part of the discovery process. Share on X

Thank you so much for sharing your story. For me, one of the favorite podcasts I like to listen to is How I Built This, primarily because it’s fascinating how entrepreneurs and business owners get started. You see the end product of their business, which we’re going to talk about in this episode. Many times, you don’t even realize how the beginning even began. To be able to give people that perspective of where you came from is beneficial to be able to relate and resonate.

A lot of the people who are reading are in 1 of 2 camps. They’re either working a W-2 with a retirement account primarily from an old employer, that’s somewhere out there in the abyss. They have no idea whether they could invest in real estate using it. This show is going to talk about that. There are also business owners out there who are reading and would like to invest in real estate. Probably at one time in the past, they have also worked and have these old retirement accounts or have existing IRA accounts and would like to be able to use them to invest in real estate. What would be the first step in terms of getting prepared in deciding to use your retirement accounts to invest in real estate?

The first thing you want to do is you want to find your asset. You want to decide what your asset class is. You probably have some experience, I assume, because people are reading your podcast that they’re real estate investors. Make sure you know your asset. Make sure you’ve done your due diligence before using something precious like your retirement account. Make sure that you know what you’re doing, you’ve done your homework, checked on the asset sponsors, checked on the asset itself, and looked at the title. A self-directed IRA means we’re not telling you what to invest in. You’re making that decision. You need to make a good decision. Number one is due diligence. Number two, when you say, “I’m going to pull the trigger. I’m going to do this.” Up until that point, you need to learn the rules. That’s what we’ll talk about.

Before we go any further to get into the rules, can we talk about the difference between a self-directed IRA and someone who has a rolled-over plan?

If you have been working somewhere and you’ve got a 401(k), a 457, a 403(b), a TSP plan, there a lot of TIAA craft, you have something from a previous employer, you can move that over. It’s called a rollover. That’s how you get the money from the current account to the self-directed IRA. It’s a custodian-to-custodian transfer, not taxable. You don’t have to worry about paying taxes on that transfer of money. If you have an IRA account and you move an existing IRA account to a self-directed IRA account, that process is called transfer. By the way, you can also write a check and contribute to your IRA.

Are there rules around contributing to that IRA as well? I’m talking about the self-directed IRA.

Understand that whether it’s a self-directed IRA or a typical IRA, the rules are the same. If you look in the IRS, Internal Revenue Code, you’re not going to find a self-directed IRA. It’s just IRA but it’s called self-directed because you can invest outside of the stock market. What it’s talking about is that you can invest in alternative assets. A typical IRA, like TD Ameritrade or Charles Schwab or something, is going to have you invest in stocks, bonds and mutual funds because that’s what those advisors are licensed to help you with.

 

With a self-directed IRA, you’re your own advisor in this case. You can even be working with an advisor to help you find the right asset but you’re going to invest outside the stock. Understand that all IRA rules are IRA rules, self-directed or not. You can find them at IRS.gov, the website, and look up Publication 590, that talks about traditional IRAs and Roth IRAs. There are other kinds of IRAs too but that’s a good place to get started.

Talking about the rules, outside of the real estate, can people invest in things other than real estate and stocks?

Yes. Real estate has many different forms. It could be raw land, notes and apartment buildings. Your IRA could invest in syndication and that syndication can be a Reg D offering. It could be investing in real estate. You can buy performing and non-performing debt and get it performing and build that up. You can invest in mobile home parks or self-storage. All those are real estate and your self-directed IRA can invest in all those things.

Also, things like precious metals. The precious metals have to have a certain level of purity. We describe that on our website. It can’t be collectibles or numismatics they’re called. It can’t be that. We store the metal at a depository. It’s physically stored metal for you. People like that having the actual metal. If you want to have personal possession of that metal, you can. You have to withdraw it and you can have personal possession. Those are some of the assets a self-directed IRA can invest in.

You brought out a couple of things. Did you mention Bitcoin? That’s all the craze these days. Can self-directed IRAs invest in Bitcoin?

Yes, they can. I’m super conservative. You do you. That’s all self-directed IRAs. I own some Bitcoin. Here’s what I know. This is what I’m concerned about. First off, the SEC came out with a warning about cryptocurrency. The reason is that there are a lot of ICOs, Initial Coin Offerings. Some of them are real, some of them are not. You want to do your due diligence. You can go on our website and you can find that SEC alert. The other thing is when you’re investing in cryptocurrency, you have this ten-digit key. If you’re investing in cryptocurrency, somebody is pulling in that key into a device, which is about the size of a television channel changer. What if they make a mistake?

I was doing my due diligence in crypto and I’d find out if they have errors and omissions insurance. Number one, it’s all about due diligence and hanging on to the precious retirement dollars that you have saved. It’s hard to save money because you’re putting it away and you could probably use it. Precious dollars, make sure that you do your due diligence. Crypto is exploding. The blockchain concept is exploding and it’s great. Everybody wants to get on the ground floor. Can you do it? Yes. However, you need an IRA-owned LLC to accomplish that.

It's all about due diligence and hanging on to the precious retirement dollars that you have saved. Share on X

For people who want to learn more about the IRA LLC, they can call you to learn more about that. This topic is deep. There’s so much that is here. One thing I wanted to touch on before going into the syndications is the Roth IRA. For people who have a Roth IRA or Roth 401(k), can they move that into a self-directed IRA?

Yes. You can self-direct a traditional, a Roth, a SEP, a simple, a spousal or an inherited IRA. You can self-direct a solo 401(k). You can even self-direct an HSA, Health Savings Account. If you have a high deductible health plan at your work, you can self-direct an HSA. You can do all of those.

I had no idea that even the HSA as well. That’s awesome. Talking about syndications and investing in real estate a little bit with your IRA. The first question I want to know is can you use your self-directed IRA to buy a real estate property that you are going to live in?

No. That goes to the rules. The IRS, they’re going to give you these tax benefits. The tax benefits are that the assets that you invest in, in a self-directed IRA are going to be tax-free in a Roth as long as you qualify and tax-deferred in a different account. That’s what you get. In exchange, you have to give out some stuff and that is the ability to do whatever you feel like. There are rules and they’re called prohibited transactions.

Back to investing in real estate. For people who are in the business of putting deals together, they too can’t necessarily use their self-directed IRA money. Let’s say you are a syndicator, you can’t use your self-directed IRA money to invest in deals that you are a general partner on.

That’s right. Let’s talk about prohibited transactions. There’s no personal benefit allowed, no present benefit, indirect benefit. A self-directed IRA is all about later. It’s about when you retire. It’s about using that money for retirement, not for the present. That’s some of the rules. Another thing is that some people are disallowed. You’ve probably heard this before. The lineal ascendants and descendants of the parents and grandparents and their spouses, you, your spouse, your children, grandchildren and their spouses are disallowed to the IRA. None of those people can benefit from the IRA either.

That’s why if you are the asset sponsor of a syndication, this is another prohibited transaction that you’re not allowed to offer services to the plan. If you are the asset sponsor, you’re certainly offering services to the IRA asset or to the asset, which would be servicing to the plan. That’s prohibited. It’s self-dealing. It’s a lot of things. You have to keep things at arm’s length. One of the things we do here is we talk to people about their deal. We listen for any cues that sound like prohibited transactions. If we hear that, our account holder or whoever’s calling us, we let them know, “You might want to look into that.”

 

Moving on to taxes. Are there instances where you can incur taxes in your self-directed retirement account?

Yes. I’m glad you mentioned that. The point of an IRA is tax-free, tax-deferred investing. There are two kinds of taxes IRA can have. One is called UDFI, Unrelated Debt-Financed Income tax. If your IRA borrows money, first off, it must be a non-recourse loan. If you need a list of non-recourse lenders, I have a list. I’m happy to share it with you. For example, your IRA is going to buy a house and it borrows 30% of non-recourse money to close the deal. Here come the proceeds, 30% of those proceeds were earned because of leverage. That means that 30% of that money that came in is subject to tax.

The other kind of twin tax here is called a UBIT, Unrelated Business Income Tax. That is for when an IRA is investing in an active business. Here’s where you can read about it. If you want to go deep on this, you can look at IRS.gov. It’s not that bad. You might think, “That sounds so boring.” It’s okay. It’s IRS.gov Publication 598. You can read about it. Both these taxes are filed on a 990-T. You and I do our taxes on 1040. IRA files are on 990-T. That’s fine and the IRA is going to pay any taxes that are due. Don’t let this stop you from doing your deal. Pencil it out. Stephen Covey used to say, “Begin with the end in mind.” Pencil it out because maybe you’re not even going to pay any tax because you do get to take deductions and things. Your tax person should be able to help you with that. If they can’t, if they don’t know what you’re talking about, then you need to shop around for a tax professional who does understand that.

That brings me perfectly into the next question, which is are there any filing requirements? You mentioned the first one there. Are there any others?

We do the tax reporting and record-keeping on the IRA. We file 1099, we file the 5498. A 1099, you get when you make a disbursement out or you take a withdrawal and it’s a taxable event. We issue a 1099 one to you and one to the IRS. The IRS knows that you don’t owe tax and you know that you don’t owe tax. We do that. A 5498 talks about contributions and value reporting. Those are some things we do. If you have a Solo 401(k), it’s a little different. The 401(k) world is different from the IRA world with different rules. If you have a Solo 401(k), you’re the plan trustee. You are filing. A 401(k) file is 5500. If you need to file a 5500 or 5500-EZ, then you and your tax person would do that filing. If you take any disbursements for your 401(k) as trustee, you and your tax person would issue the 1099 and know that you have to pay tax. It’s a little more involved when you are a trustee of your Solo 401(k).

I’m glad you brought up this Solo 401(k). Can you talk about the primary difference between the Solo 401(k) and the self-directed IRA if there any?

You can self-direct in both accounts. A 401(k) is a different animal. Normally a 401(k) is for a business, and you may have worked for companies, I’m sure you have, that had a 401(k). It’s the same thing but it’s for an individual. You can have a Solo 401(k) if you have no full-time employees in any of the companies that you own. You can have some part-time employees as long as they don’t work a certain amount of hours. That’s one barrier to entry. Understand that a Solo 401(k) has two parts. It has the employee portion and the employer portion.

Make sure you contribute to your retirement plan as much as you can because you are definitely going to need that money later. Share on X

For the employee portion, you can contribute $19,500 to the employee portion of a 401(k). If you’re 50-plus, then it goes up. You get a catch-up contribution. Now your total is $26,000 a year that you can contribute to the employee portion. Remember, it’s two buckets, employer and employee. The overall contribution is the lesser of 25% of your income or $58,000 for 2021. The cap is $57,000 for 2020. Your tax person would help you calculate what your max contribution is. Your tax person would then help you to deduct that so that if you qualify, you get a tax deduction, which is the goal.

Is that different on the IRA? I’m guessing the IRA, you can have that contribution too or not?

An IRA is one thing. That’s a nice thing. It’s an individual retirement account. There are employer accounts like a SEP, which is an acronym for Simplified Employee Pension, or SIMPLE IRA, which is a big acronym. If something says simple and it’s the government, it’s not simple. It’s the Savings Incentive Match Plan for Employees. The SIMPLE, the SEP, and the 401(k) are all for employers. Traditional and Roth IRA are for individuals. Those have different contribution limits and different rules. If you make a certain amount of money, you can even contribute to a Roth. That’s why you might have heard of the backdoor Roth. The way you do that is if you can’t get in the front door by contributing because you make too much, you contribute to a traditional IRA and do a conversion and convert to Roth. You get in the backdoor and then you have money that can grow tax-free for life.

For readers who are interested in that backdoor Roth, does your company help with that? Are there places that they can go to?

Yes. It’s a fancy term for open a traditional and Roth, contribute to the traditional, convert to Roth.

This was good. Are there any other things in terms of rules or prohibited things that we didn’t touch on that we should share with our readers?

We’ve covered a lot of things. We covered 410(k)s, prohibited transactions, non-recourse lending tax on the IRA. The real takeaway is you’ve got to be safe for retirement. Even if it’s your employer plan or if it’s a Solo 401(k) or if it’s a self-directed IRA, make sure you contribute to your retirement plan as much as you can because you’re going to need that money later. You don’t want to come up with a big shortfall. That would be a good takeaway. We’re here to help you. Take the money and grow those funds using alternative assets. That’s what we help people do.

 

Thank you so much, Kaaren. I appreciate it. If my readers want to learn more about you and your business, where is the best place they can go?

Go to our website, UDirectIRA.com. You can send us an email. We’d be happy to help, whatever question you might have. A lot of the answers are already on our site. You could read some blog articles or whatever. We are here to help. That’s what we do.

Thank you.

Important Links:

• uDirect IRA Services
• How I Built This
• IRS.gov

About Kaaren Hall