[00:00:01] Speaker A: You're listening to PTC point of view brought to you by preferred trust company, the preferred custodian for all alternative investments. We're here to provide retirement savers like you with the tools you need to succeed. Need a confidence boost when it comes to investing outside of the stock market. Do you want the power to build a tax sheltered nest egg that will last through your golden years? You've come to the right place. Turn up your speakers and turn off cruise control because we're taking you on the alternate route to investing with your IRA.
[00:00:40] Speaker B: Good morning, everybody. So let's go ahead and get started. We're going to start with our first segment, which is a self directed IRA equals a real estate investment opportunity.
Well, let's talk about why. Let's talk about why we would want an IRA to begin with. I know a lot of us already have an IRA, but some of us may not have an IRA. So why would you want one? Well, there's very few gifts that the government gives us. I hope you would all agree with me. And one of them is a tax deferred opportunity or a tax free income opportunity for you to participate in. So why wouldn't you take the government up on that option? So let's talk about that for just a little bit. When I say tax deferred income, what I mean by that is you are able to contribute to an IRA and defer paying taxes on that income until later on when you take your distributions once you retire, in theory.
So you can make tax deferred income contributions to three types of iras. A traditional ira, a sep ira, and a simple ira.
These are three distinctly different types of iras, primarily because of the contribution levels. Just real quickly, if I have individuals that are out there that are still working, if you have the opportunity to contribute to a 401K, do so and also contribute to an IRA while you're contributing to a 401K. Please know this when you do retire. If your 401K has a traditional option available to it, chances are you will roll out that 401K into a traditional IRA. If your 401K has the option of a Roth IRA contained inside of it, which a lot of them do, now, you'll roll that out into a Roth IRA potentially upon retirement. If I have an IRA, can I invest in real estate? Of course you can. But your traditional IRA that you currently have at your TD, Ameritrade, Schwab Fidelity, et cetera, is not going to allow you to invest in alternative investments. Most alternative investments. Why? Because they offer traditional investments, and when they offer traditional investments, that's typically your stocks, bonds and mutual funds.
If you want to get outside of that box, you're going to need to move to a self directed IRA, or at least a portion of your IRA to a self directed IRA to provide you the option of investing in real estate within your IRA. Now let's look at all the options that you have. Today we're going to focus on two of the most popular real estate options, and that is rental property and trustee investments.
That's what we see about 90% of our clients investing in when they invest in real estate through their IRA.
That doesn't mean that's your only option. There are three items that the IR's does not allow a self directed IRA to invest in.
Life insurance policies, all your collectibles. I like to laugh at this one when I see alcohol because I think to myself, that wine collection, yeah, that would be pretty hard for us to prove whether or not you drank it or not.
And then s corps investing in S corp stock because there's already a tax benefit to s corporations. And so those three items are limited. Everything else is a go. All real estate transactions allow in a self directed IRA. And I like to joke about this one because I always say I've never met a real estate transaction that could not be funded by a self directed IRA. Now, I'm not trying to be funny. I'm just trying to say to you that why not ask? Why not try?
Real estate comes in so many different forms and fashions that I think it's worth at least asking your self directed custodian if that real estate transaction is something that they will allow. Now, I just said something they will allow. Not all self directed custodians will allow all types of real estate transactions. That doesn't mean that they're not allowed. It means that they may not allow. It could be because they don't understand the transaction. It could mean because it's too much work. It could mean because they don't have pricing set up to determine those types of real estate transactions for the long haul. But that's okay. Bring it to preferred trust. We'll evaluate that real estate transaction and determine if we can hold it in your IRA for you. Let's move on to segment two.
Start an IRA now or diversify your current Ira.
Well, that's an interesting concept, Carrie, because I already have an IRA. Why are you talking to me about starting an IRA, Kerry? There is no real estate transaction that I can invest in for $12,000. Well, I'm here to tell you there is. There absolutely is. You have to think outside the box. There are trustee companies that do allow investments for as little as $10,000.
So if you think your $12,000 isn't going to get you very far in real estate, think again, because it will. And for those of you that are sitting with iras out there, isn't it time to diversify out of the market a little bit? So what are the necessary steps and documentation to set up a self directed IRa?
A lot of people think this is a lot of work, and it can be a lot of work, but that's why self directed custodians exist. We're here to help you through that process. Step one, you need to determine the IRA type that you want to open.
Now, if you're moving a traditional, you typically would move into a traditional IRA. It doesn't mean, however, that you can't convert from a traditional to a Roth IRA. But typically we see like minded to like minded transactions. So from your TD ameritrade, your schwab, your fidelity account, you're moving your traditional IRA, or a portion thereof to a traditional IRA. With a self directed custodian.
It's held exactly the same way. It's reported exactly the same way to the IR's. It just gives you the opportunity to invest in alternative assets where your TD ameritrades, your schwabs, your fidelities may not allow.
So the first thing you need to do is determine the type.
After you've determined the type, you're going to fill out an application online.
It literally takes about five minutes to fill out the application. As long as you know all your benefactors, Social Security numbers and birth dates and addresses and phone numbers and emails, that tends to take the longest, so be prepared for that.
But literally takes about five to ten minutes to fill that out. Once you've completed the application, we need to determine where the funds are coming from. That moves us into step two.
You'll be completing a transfer or rollover form to move the funds from a qualified plan. That's what keeps it taxed, sheltered from a qualified plan at the current financial institution over to preferred trust or a qualified custodian. Once that transfer has been sent to the financial institution where the funds are coming from, then we wait.
And I know nobody likes to wait for their funds to be transferred. We all think they should be readily available to us, but the reality is, is that we need to transfer the funds from where they're at. To us. That could mean two days two weeks, two months. It just depends on where it's coming from and their transaction timelines.
Once we have the funds here, we could move on to step three, and that's identifying the investment.
Now, you know, we have a lot of options, but we're going to focus on real estate today. So the most important option when you're identifying an investment with real estate is getting all the necessary documentation put together and secured so that you can complete an investment authorization direction form.
That investment authorization and direction form, along with the documentation, will allow you to invest in real estate. We're going to go into more details about that here shortly. And then the fourth step in this process is you get to benefit from the income in a tax sheltered or tax free environment.
Now, I know this seems super simple, but that's what we're here for. We're here to help. So if you have questions you don't know how to fill out a form, you're not sure about where your funds are coming from or what type of account they're in, just call us. We could help you through that process. Now here's the loaded question, Kerry. What is this going to cost me? Because as we know, nothing's for free. And you're exactly right, nothing is for free. So let's think about for just a second that IRA that's sitting at a big box financial institution right now. Do you have it invested? Maybe not. Maybe you do. Either way, your IRA right now is probably free and they've probably sold you on the fact that your IRA is free. But I think we all know nothing in life is free.
And those financial institutions make money off your money, just like the bank. You know how your savings account only moves by one 10th of 1% and you feel so proud to get that $0.10 added to your savings account. The same rules apply to banks as big financial institutions when it pertains to your IRA and the cash that's held.
They are making somewhere in the neighborhood of three to 7% on your money. All the while while they pay you ten cents. At some point you're going to get tired of it. And when you do, alternative investments may be an option you want to consider.
Roll out a percentage of that, put it into alternatives and see what can happen. So let's talk about our fees. The cost of a self directed ira specifically related to real estate comes in two forms. One is the account administration fee. Preferred trust company, unlike a bank or a financial institution, does not make money off your money.
We make money off our service.
We determine this fee based on the account value.
Now, our fees are all inclusive fees. So if you need to make contributions or distributions throughout the year, we're not going to nickel and dime you. We're going to talk about the two real estate transactions today of trustee investments and real estate investments. Trustee investments are going to require you pay a dollar 20 investment transaction fee. Let's think about that a second. $20 is going to cover potentially twelve months worth of interest payments coming in and posted to your account.
Twelve transactions for $20.
Now that I'm saying that out loud, I should probably increase the fees. I'm just kidding.
But that's quite a savings. The real estate investment if you are buying a rental property, I am here to tell you that it's no cakewalk and your real estate investment is going to require a lot of handholding. Not only are you going to have income coming in every month, well, we hope anyways, right? We have a renter in place for twelve months. I would hope that they're paying rent every month. But you're also going to have expenses, taxes, insurance, the leaky pipe. Got to pay a plumber.
Property management fees. All of these things are associated in the fee for real estate asset administration. Annually $300. I don't care how many transactions you have with that property, it's $300.
We will make sure to remind you every time your taxes are due, every time the insurance is due. That's what we're here for. So let's break this down a little further. I call this do the math. Let's look at an account value of $40,000. Remember, we charge our account administration fee based on the value. So that's going to cost $300 a year. All inclusive transactions, $300 a year. So now you're going to make an investment in a trusted investment for $39,500. Now it's $39,500 because we do require a $500 minimum account balance.
The reason we do that is because every year you're going to have fees.
We want to make sure that we're not working for free.
So a lot of custodians do have an account balance that must be maintained in the account in order for the account to remain here.
So now let's look at the trustee investment transaction fee. Dollar 20.
So now we're up to $320.
The annual income of 10% from a trustee investment is going to garner you $3,950.
The annual income to the IRA minus your $320 fees is $3,630 annually.
You have to ask yourself is the month that you're earning in your IRA a whole whopping dollar, 20 to the $3,630 that you could be making worth making the move.
Only you can do the math.
[00:14:31] Speaker A: You're listening to PTC point of view brought to you by preferred trust company.
[00:14:44] Speaker B: Let's move on to segment four, investing in real estate with your IRA. Let's break this down a little bit further.
But before we do that, I have to say to you, the last thing I want to see you do is move your funds from where they're at to a self directed IRA to invest in real estate. If you do not have the willingness to take the responsibility to do the work and the due diligence of where you're investing or what you're investing in, I have to stop for just a second and make you think about that. Because a self directed IRA and the investments you choose are your responsibility. They are your risk to burden.
So do the due diligence on the companies you're investing with. Do the due diligence on the property that you're buying.
Make sure that it's right for your retirement account. Because as a self directed IRA, I can't give you investment advice.
What I can do is I can guide you and make sure that your IRA stays compliant with whatever type of investment you want to make using the funds in your self directed IRA. Okay, I'm gonna get off my soapbox, but please, please, please do your due diligence.
So, what is required for a trustee investment? I've got my account open, we've moved the funds ready to go. Chances are you are gonna do one of two things. You're gonna either work with a licensed mortgage broker or you're going to personally do a trustee investment with somebody making sure that there is collateral securing your investment. And typically that comes in the form of real estate.
So the first thing that we're going to need to do is some pre investment documentation. Now, if you're working with a licensed mortgage broker, the licensed mortgage broker will complete a mortgage broker private debt representation. Acknowledgement, that's a mouthful.
But what that is is it's a mortgage broker telling us what the investment is, how the investment breaks down. Is it a first trustee? Is it a second trustee? God forbid it's a third trustee. Either way, it's going to let us know the name, the intent of the investment, what the investment's going to earn, and what we should expect from the mortgage broker. After the investment is funded, you'll be completing an investment authorization and direction form which gives preferred trust the authority you giving preferred trust, excuse me, the authority to make that investment by moving your funds from your self directed IRA to either the mortgage broker that you have selected or to the individual that you are sending the funds to that you are later going to secure with a deed of trust.
So those couple of things need to be completed pre investment documentation.
Now, preferred trusts may ask for additional information depending upon whom you're working with or what company you're working with, so we can establish a relationship. But once we have that, we will fund the investment once the investment is funded. Now there's some post investment documentation because with real estate, we can't put the cart before the horse. You have to fund it before you can get a recorded deed. You have to fund it before a borrower is going to execute a promissory note. And you have to fund it before the insurance can be put into place on the property. But after you fund it, it is our expectation at Preferred trust and we will chase it down to get those three items, the recorded deed, the executed promissory note, and ensuring that there is insurance on that property. Now, you may not be paying for the insurance, but we want to make sure you as the investor because remember, you don't own the property yet. It's in a trustee that you are endorsed on that insurance should something happen to that property. And then the income processing, that's when you sit back, you wait for that income to come in, we'll post it to your account.
That's it. That's trusteed investment.
Not too difficult, right? Hope you're all still with me because now we're going to move on to rental property.
And who are we kidding?
Buying a property means a lot of paperwork. Remember when you bought your house?
How many initials and signatures? Probably didn't read most of the paperwork, but the reality is it was a lot. It was a lot of paperwork. And maybe you weren't involved in the entire process, but when you acquire a rental property in your self directed IRA, it is like a fire hose.
There is a lot of agreements. There's a lot of things that need to be completed before the property can be part of your IRA. We need a contract and a purchase agreement, and we're going to want to make sure that it's titled correctly in the name of your IRA. Why would we want to do that? Because we don't want to disqualify your IRA. We want to make sure that it's titled properly for the purchase and the potential infinite sale. Right?
We need to know what the value of the property is, much like buying a property of your own. Why would you buy it for more than it's worth? Maybe there is a reason, but does it really make sense to put in your retirement account if you're buying a property for more than it's worth? So we do require an appraisal or BPO because we need to know what the value of that property is to report properly to the IR's.
You need to have liability insurance on the property because now you're the owner. Unlike a trustee investment.
Right, trustee investments, you're not the owner unless the borrower defaults and you take it back through foreclosure with a rental property, you immediately are the owner.
So you're going to have to put insurance on the property.
You will need a property management agreement. Somebody is going to have to collect these rents. We're going to talk about that a little bit later because it cannot be you.
We'll need a title commitment and make sure we have the insurance, the title policy insurance I'm speaking of. We're going to want to see a draft of the deed to make sure it is titled properly. We're going to need to see a settlement and closing statement. We're going to need wire instructions.
And if you choose to have a non recourse loan associated with your purchase, we're also going to need that loan agreement. Now, not all rental properties have a non recourse loan, but some do. And when they do, we need to evaluate that non recourse loan agreement not only to find out if it is an interest, only if it's an amortized loan with principal and interest, but we also need to make sure that you're reporting taxes properly. Wait a second, Kerry, you told me that this is tax deferred or tax free. Well, not in all situations. We're going to talk about that later because most custodians don't talk about it, but it's something we need to talk about. And then, and only then after we have all of this information.
And yes, is preferred trust company involved throughout this process? Yes, we are. Are we talking with the title companies? Yes, we are. But it is your responsibility to make sure all of this information is provided to us, will help you along the way. But all of this is going to be required. And then you can fill out your investment authorization direction form and provide us the authorization to send the funds to acquire the rental property post investment documentation. Well, I want to see that recorded deed. We're going to want to make sure that that property is in your name.
Let's talk about a 5% hold back in an IRA.
When you have a rental property, just like your home, there's costs involved in owning a home, just like there's costs involved with having a rental property. At preferred trust, we do require a 5% hold back in your IRA. Now, we talked about trustees with a dollar 500 minimum. Rental properties are different.
Rental properties have a lot more expenses than a trustee.
Rental properties have taxes that need to be paid. You know, those timeframes, they vary in accordance with the county, but you're either paying them quarterly or annually, and taxes cannot go unpaid.
Same with insurance. An insurance policy typically renews annually.
It has to be paid through your IRA.
Remember, all income and expenses for your rental property have to go through your IRA.
And third, all the unknown costs that pop up with property ownership, that 03:00 a.m. call that plumbing, leaky faucets, whatever it happens to be. That 5% hold back is intended to cover these costs annually.
And then after all of that, you get to reap the benefits of the income.
The income is posted to the IRA as it's received.
So just like the income coming in and the expenses going out, everything is circular in the IRA. It's not you paying it, it's not you spotting it personally with your own money. That's a disqualifying event. So please don't do that.
All of these things are gonna be required for rental property.
So let's move on to segment five. Watch out. When investing in real estate with an IRA, I think it's important because as a custodian, if we're not talking about this, then we're not providing a benefit to you as a client.
So let's go over the common mistakes that are made when investing in real estate with an IRA.
The first topic that we're going to cover is prohibited transactions and then the possible tax implications.
Now, this is a topic that really does not get discussed enough.
But if you're listening to this and you're a fix and flipper, you're going to want to listen to what I have to say about your ordinary tax income that may be generated off of your real estate investments, because this is very important and it's missed a lot. So let's get into the prohibited transactions.
We talked about disqualifying persons. What does that mean? In an IRA, your mom and your dad cannot be your real estate agent. Your spouse cannot be your real estate agent.
Your son in law cannot be your plumber.
Does that make sense to everybody?
Those individuals cannot make money off of your IRA, like your brother, your sister.
They can participate and be your real estate agent, your plumber, your property manager.
And when we say they're prohibited parties, what we mean by that is if they participate and earning income off of your IRA, you are disqualifying your IRA. What that means, as the custodian is if that information is divulged to us or we find out about it, we have to distribute your entire IRA to you. That is a huge tax consequence, and we will report it to the IRA in that IR's, excuse me, in that way. Prohibited transaction types with self dealing. What does that mean?
Self dealing means you personally are benefiting from your IRA, using your IRA as security for a personal loan. Cannot do that. Transferring retirement account income or assets to a disqualified person. We just talked about that. Cannot do that.
Lending your IRA money to a disqualified person. Cannot do that.
Extending credit based on the IRA to a disqualified person, furnishing goods, services, all the things that we just talked about. Don't do it. Indirect benefits.
You know, sometimes we buy a rental property and it happens to be sitting on a beach, and it happens to be the same place that we take family vacations every year. Why not use it for that week? That year?
Nope. That is an indirect benefit to you.
Don't do it. Let's talk about these tax implications. Now, I'm not a tax professional. Don't claim to be, but I don't give investment advice. I don't give tax advice, but I do need to let you know that there are tax implications, potentially, when investing in real estate. I also need to let you know when there are not. So we're going to do that. So let's talk about what does UbIT mean? Commonly referred to as ubit, it is unrelated business income tax.
Now, what would create UbiT, Carrie? Well, ubit tax typically applies to the ordinary income as opposed to the passive income. Now, passive income with investments is typically your rental income, your interest income, dividends, those sorts of things. But let's say that you acquired the property and within three months you flip it and you make $100,000 on the investment. Is that passive income? No, it's not. It's ordinary income. Right. If it was outside of an IRA, would it not be a capital gain to you? Absolutely. Just because it's inside the IRA doesn't make it non taxable. So if you are going to fix and flip property inside an IRA, you need to know that you will also be required to file taxes on your IRA in the form of a 990 t form. So please keep that in mind now, as it pertains to UDFI, the unrelated debt financing income. Remember a few slides ago, we talked about non recourse loans.
Those non recourse loans are the debt associated with the property.
There is tax implications to the IRA when you leverage your IRA. So if you acquire a property by using $100,000 of your IRA funds and $200,000 of a non recourse loan, the $200,000 of the non recourse loan, the income generated off of that minus the expenses, requires you to file a 990 t tax return on your IRA. So keep that in mind when you are investing in real estate. Also keep in mind that passive income is not taxable. That's where the tax sheltered and tax free option in an IRA is used best. So that rental income, the interest income that you're earning or dividends off of your trustee investments, that is not subject. I wanted to just briefly go over this because it's one thing that is not discussed a lot, but needs to be so, geez, Kerry, that was a lot.
That was a lot.
Is it worth it? Is all of this worth it? Is it worth moving my IRA? That's free to me that I'm earning ten cents a month on?
Is it worth moving some of those funds into a self directed IRA and investing in alternative assets? I mean, only you can answer that question. Tax deferred or tax free income?
I mean, to me, it's a no brainer. To others, it may be too much work, but you have to ask yourself, how much more are you willing to pay in taxes? If you want to buy that rental property, not using your qualified funds to do so, and you want to pay 30% in taxes on that each year, by all means, go ahead. It's okay. It's got to be right for you. But if you have the option of tax deferred or tax free income, why not utilize it?
And then what is the cost of the IRA to the income ratio?
Remember what we did? We did that analogy. That $39,500 investment made you $3,600 a year. Well, I'm pretty sure the $320 that it cost you was probably worth it.
And then have you done your due diligence on your real estate investment?
I'm sorry I keep harping on this, but unfortunately, there are a lot of companies out there that want to take advantage of your retirement funds. Don't let them.
There's one thing that I'll leave you with, there is trillions of dollars in alternative assets that are held in self directed iras right now. There's a reason why there is so much money held in alternative assets. It's because you control your destiny, and that's something that we want to be able to do as it pertains to our retirement accounts. So control your destiny. Don't let the volatility of the market control your retirement account. Take charge. What I would leave you with is you have our contact information.
We are here to help, but we want to make sure that we're able to address all of your questions, that you have one on one. It gives you more opportunity to talk about these things and your unique situation. So we're here to help. I hope that you guys will reach out to us if you have questions, and I hope everybody has a fabulous day. Thank you so much for joining.
[00:33:02] Speaker A: Thanks for joining us for another episode of PTC Point of View, where retirement savers meet alternative investments. Know someone who's struggling with a retirement strategy? Tell them about our show. Can't wait for the next episode. To learn more, visit our
[email protected], or give us a call at 888-990-7892.
