What is a Self-Directed IRA?
Getting Started (Episode 1)
Hosts and Tax Lawyers Mat Sorensen and Mark Kohler answer the most common questions about self-directed IRAs (SDIRA) and explain the account set-up and transfer process. They also explain common permissible assets for SDIRAs such as real estate, LLCs, notes, private funds, IRA/LLCs (aka, checkbook IRAs), start-ups, pre-IPO stock. They introduce the rules every investor should know before they self-direct an IRA. Mat and Mark both self-direct their own retirement accounts and co-founded Directed IRA, where they have assisted thousands of clients with their self-directed accounts. Their law firm KKOS Lawyers has worked with over 10,000 self-directed IRA clients and has two decades of experience.
Mat Sorensen: [00:00:06] All right, welcome, everyone, to the inaugural directed IRA podcast. These are two experienced broadcasters, Mat Sorenson of Mark Kohler here, excited for this new podcast.
Mark Kohler: [00:00:18] It has taken us four-hundredth podcast to get it right. So now we finally said, let’s start a good podcast.
Mat Sorensen: [00:00:25] Yeah, so we’ve had the refresh your wealth the podcast, which is now the Main Street business podcast, 400 episodes, as Mark talked about, and we are self-directed geeks ourselves. We self-direct our own retirement accounts we’re both tax lawyers. We’ve been helping clients for over 15 years, 20 years, almost do this with their retirement account. We have a trust company directed IRA and Direct trust company at directedira.com, where we help and set up subtractive accounts, all types of accounts.
Mark Kohler: [00:00:52] And so and the law firm, I mean, from where, you know, it was the year 2000 when I had a client walk into my office and say, I’m self-directing my IRA. And I said, what in the heck are you talking about? And I guess that’s what this first shows about. We’re going to answer that question. I mean, I had a client explain it to me 20 years ago, literally. It’s kind of like a free podcast.
Mat Sorensen: [00:01:18] And then Mark explained it to me in 2006. And I was like, they didn’t teach this in law school. And there’s there back then there were no good books on it now.
Mark Kohler: [00:01:29] Yeah. And let me tell everybody I created Frankenstein or a monster because Mat Sorenson came to join the firm. He was an associate. I was running a solo practice at the time and took this leap of faith to hire an associate. And I couldn’t have been luckier. The awesomest guy, Mat Sorenson and our producer just went, oh, OK. So that was a special moment here in the studio. And when Mat joined the firm, we ultimately became partners in the law firm. And when I taught him about these self-directed IRAs, here’s the Frankenstein that occurred. He took up and ran. I mean, since then, Mat has become the foremost expert in the country who’s written two best-selling books on it. And I just think he’s pretty awesome. So I still know more than Mat generally. But on this topic, you know, this is one you would give it up.
Mat Sorensen: [00:02:20] I always tell people you don’t want to know what I think about everything in general. But this I do know. And if you’re on this, you probably thought about self-directing your IRA or maybe you already are doing it and you’re geeking out on it. And so we’re going to break it down through the podcast. We’ll be updating on new things, talking about specific topics, different assets. You might be interested in cool things. We’re seeing clients do want cool things about being here at directed IRA. I mean, this is I mean, if you’re watching the video version of this, I’m like the corporate office of Directed IRA, I’m seeing the transactions coming through and what are we processing and what are people investing with their accounts. And it’s just interesting to see the different things clients are putting their money into. So very cool.
Mark Kohler: [00:03:10] And from an education standpoint, I’m here in the studio, as you can see, where we’ve shot hundreds of videos between us over the years, teaching people about small business and retirement accounts and self-directing. And we feel that if your accountant or your lawyer isn’t teaching you these strategies, why are you using them for your general consultations? I mean, seriously, we have clients that come to us and then go teach their professional about it. And I thought that was supposed to be the other way around. So. Or thei financial advisor. Yeah. Yeah. So we think we believe strongly in our weekly newsletter, our podcast, we both written several books. And if we’re not out educating, we’re not doing our job because you can’t pay your consultant every hour to learn every little thing. And so we want to provide information that’s affordable or free.
Mat Sorensen: [00:04:10] All right. Well, I just want you guys to know who we are. If you’re going to do this. Maybe you’ve been on our Main Street business podcast. Refresh your Ferney. Four hundred episodes. You’re like, I get it. I know you guys are. Just start talking. OK, sorry. Today we’re going to keep it simple. And I want this to be for someone who is like I’ve heard about this or someone told me about it, but I don’t even know what the heck it is. Break it down for me. What is a self-directed IRA.
Mark Kohler: [00:04:38] Yeah. And for those of you that already know what a self-directed IRA is and you’re listening going, all right, this guy is going to tell me something new. No, probably not. But this is a great podcast to share because you may be trying to explain it to your business partner, your significant other, a child, a parent spouse. And they and you’re like stumbling through it. And they don’t they don’t believe you. They think you’re crazy. So this is a great podcast that you can familiarize yourself with this, and yet you don’t just go listen to these guys, listen to their first podcast if they don’t blow your mind with the potential of what you do with a directed IRA, them who no one else will. I mean, we’ve got some great stories and examples to share today.
Mat Sorensen: [00:05:20] Yeah. All right. Well, let’s just break it down. What the heck is a self-directed IRA? And then Mark and I will volley back, you know, maybe get up into the net.
Mark Kohler: [00:05:31] And, you know, since you’re the expert, I’m going to let you take a stab at. I had kind of a take I was going to say initially if you’re an audible, I’m calling an audible.
Mat Sorensen: [00:05:41] All right. All right. I’m like calling my heart the line.
Mark Kohler: [00:05:46] Omaha, Omaha. Yeah. Let’s go over to what is the NFL?
Mark Kohler: [00:05:52] OK, here’s the deal. Here’s what I would say right out of the gate. When we say self-directed IRA, we’re not just talking about IRAs. I think that’s one of the first points that you’ve got to know. I mean that, I think people need to know any sort of retirement account that’s tax-preferred, a traditional IRA, a Roth, a 401k, 401k Roth, a defined benefit plan, a SEP, and even a Coverdale education account or health savings account. When we say self-directed IRA, we mean a self-directed retirement account of any of those. It’s just easier to say, IRA, is that a fair starting point?
Mat Sorensen: [00:06:40] Now, that’s great. And I think we do them all at directed IRA, by the way, Mark and I self-direct Roth IRA and a 401K and Mark self directs a Roth IRA and an HSA. Just to give you an example, and there’s a lot of people that sell their traditional IRA and have solo(k)s. And so everyone’s a little different. And what accounts sometimes that you already have or what accounts you want to start a brand new with? And so and we’ll get to that on how where are you sitting now with what account you have and how do you get to a subject? That’s an important topic, too, in this. So let’s say what a self dictionary is. And then like Mark said, this could be any of those accounts that Mark rattled off. But basically, it’s an account that can invest in any asset allowed by law. And a lot of people think, OK, like stocks, bonds, and mutual funds. Those are assets allowed by law, but they’re not the only ones. Right. And the only restrictions that you have that you can’t buy with an IRA, there’s only three of my people are shocked. The only three things you cannot buy with an IRA is life insurance, s corporation stock, and certain collectible items. That’s it. Yeah, that’s it.
Mark Kohler: [00:07:50] It’s crazy. Now, some of you may go, well, these guys are crazy. And if you remember back at the beginning, I said 20 years ago I heard about this. They had already been around for ten years before I heard about these. Institutions like Directed IRA that started out in the back room of someone’s house, you know, three years ago were up against Wall Street, Wall Street does not like this. They created a system where their structure is based on commissions in the trade or management of Wall Street assets, stocks, bonds, ETFs, mutual funds, all those goodies. And so their people and their institutions make money off of those types of investments. But when you get into this other area of, oh, I want my IRA to invest in a restaurant down the street or a landscaping company or a rental property, they’re like, hold it, we don’t make money on that. We’re not going to tell people that they can actually do that, right?
Mat Sorensen: [00:08:54] Yeah. And it’s kind of like what some people do is they’re like, aren’t I? Hey, Mat, I have an IRA at Merrill Lynch and I called them and I said, I want to buy this rental property down the street because I heard you said I could buy real estate with an IRA. Yeah, you could. You could buy it. But Merrill Lynch said I can’t do that. No, it’s not because your IRA can’t do that. It’s because your IRA at Merrill Lynch can’t do that. All right. So the first thing to understand is retirement accounts can invest in any asset allowed by this could be rental, real estate, a private company, a fund, an LLC, crypto, precious metals. I mean, there’s all these assets are allowed and notes. These are common things people invest in with software to. The problem is you’ve got to get to a custodian or provider of the IRA or whatever the account is who allows you to do it. And most of the broker-dealers, like Mark was saying, you know, you call your financial adviser a broker-dealer, well, what do they sell? Financial products, yeah, it’s like going to Taco Bell and asking for a roast beef sandwich, OK, you can eat roast beef sandwiches, you just don’t get them at Taco Bell. And if you keep asking Taco Bell for a roast beef sandwich, they’re going to be given chalupas and burritos, you know what I mean? And so that’s like.
Mat Sorensen: [00:10:09] By the way, that Taco Bell is Merrill Lynch and the example and yes, the roast beef sandwiches would be affected by would soundtrack to the count, I think I prefer Taco Bell over Arby’s, so I screwed that one up, but you know what I mean?
Mat Sorensen: [00:10:23] So you got to get to a place whose accounts let you self direct and invest in these types of non publicly traded assets.
Mark Kohler: [00:10:32] Now, I just pulled it up on my phone. So you’re like, why is Kolar texting his wife? He’s on this podcast. I wanted to pull up the current value of what is become known. Now, we’re going to come back into more details here. But if someone were like, hold it, I don’t get it yet. Hang tight. Let’s give a couple of examples to put some flavor to this, which I think helps. Every year this year, you can put $6,000 in a Roth or traditional IRA or $1,000 more if you’re 50 or older. So if you’re age 50 or older, you could do $7,000 and then you think like a Monopoly board, oh, I’ll invest in some stock. And then next year it might be worth a thousand dollars more if I’m lucky and I’ll put in another thousand. And then in about five years maybe it’ll be worth thirty or forty thousand dollars. That’s great. That’s a Roth IRA. Thank you. No, no, no, no, no. Here’s the real vision you want to think about is that if you’re not just going to buy stocks and ETFs, that might get a six to eight or nine percent return if you’re lucky, but you could invest in startups or again, real estate or notes or wholesales or cryptocurrency when you’re going around the Monopoly board if you hit Boardwalk and quadruple or 10 times your money, that’s OK. When you pass go, you get another two hundred bucks.
Mat Sorensen: [00:11:50] Yeah. So but you can grow the account as large as you want. And so one of the best examples was Peter Thiel, who was a PayPal founder, actually had his Roth IRA invested in PayPal as an investor with other people. But the biggest investment he made that really hit was he was the first outside investor in Facebook, if you know that movie, The Social Network, right. Where they’re like getting their first outside investor.
Mat Sorensen: [00:12:15] And it’s Justin Timberlake here. Yeah, Justin Timberlake there. And I think he’s the one that made the connection. He was Sean Parker, I think was the character he played the music guy started Napster. Napster. Yeah. And he makes this connection. And Peter Thiel saw the vision of what social media could be and Facebook. And he’s a, you know, a very savvy investor, tech guy. And so he’s like, I’m going to put money in for my Roth IRA. So he bought this stock and invested in Facebook with the Roth IRA.
Mat Sorensen: [00:12:47] Well, his Roth IRA is now worth a billion dollars. You know, he’s one of the largest shareholders of Facebook outside of Mark Zuckerberg. And so he’s sold his shares over time. But he’s on the board still, I think, of Facebook. But that’s a classic example of using a Roth IRA to invest in what you know because that’s another topic we want to hit today. Why do people self direct? We like people to invest in what they know and Peter Thiel will be a good example. Another high profile person would be Mitt Romney, right. He was like a consultant for kind of turnarounds and private equity deals and capital. Yeah. With his company, Bain Capital. And he’s his self directed IRA came all out during his presidential run and how he invested his IRA because he had like a 30 million dollar IRA. And they’re like, how do we even have that much in an IRA. Again, you can only put $6,000 a year. And how do you even how did you do? Well, he invested in what he knew. He didn’t just go buy a mutual fund. He invested in the deals and the stuff that he saw in his business and took advantage of opportunities and what he knew. And that’s how he’s able to grow and have a large account.
Mark Kohler: [00:13:53] Ok, now I’m going to two points. I’m going to keep it basic for my next step. I would suggest if any of you are already a little fascinated by this going, hold it, I can take a retirement account like a Roth the gross tax-free and comes out tax-free and any of these other accounts. With us at the top of the hour here. I’ll talk about my HSA here in a minute, but you can invest in those and get a better return than Wall Street because you invest in what you know. So I have a video out on YouTube I’d suggest you look up just type million-dollar Roth, or million-dollar Roth should come up as close to a million views now. And when you get on that video, I use the example that Dave Ramsey uses. Dave Ramsey says, hey if you start now and just start saving a few thousand dollars a year, he gives an example of how important savings are. And I love Dave Ramsey for that.
Mark Kohler: [00:14:47] But he uses a model of about a 10% return and he gets hate mail for that. People like where are you getting a 10% return? He’s like, it’s just an example. Chillout, right. Well, I start using an example of 15 or 20 percent, and it’s like it’s the Salem witch trials. I’m going to get Lynch because. And so I get burned at the stake because I proposed that someone might get 20 percent. We have seen it every day. Clients that are doing 20 percent or more every year in their Roth accounts, if not sometimes doubling them in a year’s time easily. Yeah. And that’s the power of self-directing. Yeah.
Mat Sorensen: [00:15:33] And it’s think of what you already know. What are you good at? Where do you see opportunity? A lot of self-directed investors are frankly in the real estate industry, a lot of our clients and they just know it better. They find deals better when they’re picking a mutual fund. But that’s their accountant in. They don’t know how many of you know. Think right now if you’re listening, what’s a good mutual fund to go invest into? You don’t know. You know, and you don’t know what stock is good to invest in until you hear the news that Tesla stock is now great. You know, it’s like, oh, well, don’t invest in it now. It’s already gone up, you know, so. So you got to invest and try to beat Wall Street. Well, you’re not plugged in like Wall Street, but where are you plugged in? What do you know? And have a competitive advantage on maybe the real estate in your community? Maybe it’s like you’re like a Peter Thiel and you see businesses you can invest in startups or maybe you come across pilot funds or deals or you do private lending. That’s another big category of software accounts. People do private lending.
Mat Sorensen: [00:16:27] So we got a lot of crypto clients, too, that have had made a lot of money on cryptocurrency with their accounts. So all these things are available and we’re not here to tell you what to invest in. We’re just here to say you can take control and you can take control of your retirement and invest in the things you know. You’re not just stuck to Wall Street. Now, if you want to invest in Wall Street, cool. And maybe you do a little bit of that and you self-direct, I don’t know, everyone’s different. We want to let people know you can do this. It’s possible. And we’ll break down the rules throughout the history of this podcast. But want to give a good intro.
Mark Kohler: [00:16:58] And that’s I was just going to say that, Mat, it’s funny you said that is that someone listening is probably going well, that sounds too good to be true. There’s got to be some rules. And there are there’s surprisingly not that hard. But heaven forbid you listen to Jim Cramer on Mad Money or you go see your Merrill Lynch adviser. They’re going to go, oh, my gosh, you’re going to have a prohibitive transaction and you’re going to have this thing distributed and the penalties and the taxes. You’re going to screw this up and you’re playing with a loaded gun. You don’t know what you’re doing. And they’re going to try to scare you out of doing this because they want to manage your money. You have to remember where you’re getting that advice. And when we help clients, it directed IRA self direct. We’re not getting a fee to manage your money. We’re not getting a brokerage fee to help you sell it. In fact, many, many people are refreshed to see that the fees that could be buried in a 401k are all eliminated. You can even manage your own 401k. And so there are all these opportunities. But there are rules. And as Mat said in some you’ll see in the podcast history, there it as it comes out as a regular listener will be soon to be shooting a prohibited transaction podcast. It’ll tell you what the rules are, but you can easily live with them.
Mat Sorensen: [00:18:15] Yeah, and I always tell clients when you start self-directing your IRA, it’s like playing a new board game. You’ve never done it before and you can’t just, like, open up and start moving the pieces and playing cards. You don’t know what the heck you’re doing. You’ve got to read the rulebook or you got to play with someone who’s done it before or maybe listen to a podcast that teaches the game. OK, now, the rule book, of course, is the self-directed IRA handbook by yours truly. It’s nineteen chapters, about 330 pages on self-directed IRAs. It’s like everything you need to know, but everybody doesn’t need to read every chapter, like if you just want to do real estate. There are about six chapters to read. If you want to learn everything, read all 19. But it’s a comprehensive book that I wrote. It’s got over one hundred citations that teach you. That’s the rule book or you can play with someone you know, another investor, hire an attorney, one of our people at KKOS lawyers, you know, just get educated yourself. But the thing is, it’s also like a board game because once you’ve played it once or twice, it’s the same thing over and over again, you’ve learned it.
Mark Kohler: [00:19:16] Now, I want to take a turn here with another analogy. If some of you are still here saying, OK, hold it, tell us you still really haven’t explained what self-directed IRA per se. What we’re trying to do is kind of tricky. It still is a retirement account. It still follows the same rules that upon retirement and penalties and this and that, and you want to build this money for the future. Very. Dave Ramsey, we’re not going to play with this money now. We want it to be there for the future. Yeah, but the analogy I like is that the self-directed IRA is like a vehicle. It’s like a sports car. In fact, I’m going to say this. An IRA is like a vehicle, an IRA to be a truck. It should be a sports car or a delivery truck. It’s a vehicle. Now, who’s going to drive your vehicle? Are you going to get Charles Schwab to drive your vehicle, TD Ameritrade to drive your vehicle, or Merrill Lynch? That’s what the name on the side of the vehicle is going to be. Or it could be a brand. Well, what’s nice about the self-directed IRA vehicle is that you kick out the driver and you sit in the driver’s seat and you get to decide who’s in the back seat. It could be stock. It could be an ETF, it could be a cryptocurrency, it could be a rental property. So now you’re driving the car and deciding who’s in the back seat rather than letting your stockbroker, for lack of a better word, or this institution with an app on your phone, they’re deciding as the driver of the car, you’re just in the front seat going, oh, this is nice. And you’re looking out the window, but you have no control. They’re choosing who’s in the back seat. So it’s the same type of IRA or 401k that you would see anywhere which people generally equate. Well, a 401(k) is a stockbroker’s account. No, no, no, no. 401(k) is the vehicle. What you put it in the back seat is up to you.
Mat Sorensen: [00:21:07] Yeah. And of course, you want to put the best assets in the back seat that are going to grow in value. And so and that’s where self-directing comes in, is a lot of people pursue a self-directed IRA because they think, oh, I can get a better return if I do a private money loan at 10% and two points secured on real estate, then I can owning a mutual fund or having a CD that my IRA owns. I can do better with real estate or a startup or whatever or the private company, whatever it is. So, so, so that’s how the account grows now. I think a lot of people approach it differently. Some people come to a self-directed IRA because they want hard assets. You know, I don’t want to buy a piece of paper that’s something electronic. I don’t even know what the stock is or what mutual fund it is. I want a piece of real estate I can look at or I can go see that’s tangible or I want a small company I can understand. So you get a lot of that was self-directed IRAs. Two are more tangible assets.
Mark Kohler: [00:22:14] Yeah. Let me ask you this, Mat because someone’s going to say, well, this has got to be hard. There’s probably a penalty or there’s probably taxes to take my money from Merrill Lynch and go to directed IRA. Right. Come on, Mat, where’s the cost in the transfer?
Mat Sorensen: [00:22:27] Yeah, well, you have an account fee. All right. That’s pretty much it. So it’s kind of like going from Merrill Lynch to Charles Schwab. You’re going to go from Merrill Lynch to direct an IRA. And if you have a traditional IRA, let’s say at Merrill Lynch, you’re going to roll it over to a traditional IRA at directed IRA. We just have self-directed accounts. We’ll let you buy these alternative assets in so there’s no tax or penalty. You’re just changing the custodian of the account. That’s what we’re called. And so we’re a trust company. We’re like a regulated financial institution, at Directed IRA. You want whatever stuff like the custodian. If you don’t pick us, just make sure you’re using someone that’s regulated. They have bank examiners and auditors that come in and their stuff. Not all companies are unfortunately in the space, but there’s no penalty or fee. You’re just moving from one provider of accounts to another who actually lets you buy these assets.
Mark Kohler: [00:23:18] And when you get your money there on day two or three and a directed IRA, you can open up your accounts online in the middle of the night sitting in your underwear. It’s that simple. You get your account set up, the money gets there, by the way. But that’s not required. Required. That’s an optional option. Yeah. You mean the clothing-optional or you mean you don’t have to do it that way. Right. Anyway, however, you want to sit in your chair and open up your account, you don’t have to call or it’s not a pain in the butt.
Mark Kohler: [00:23:47] And once the money gets transferred over there, then on day two or three, whatever that is, they’ll call and go, or you’re going to call them and say, OK, now I want to invest it. OK, what do you want to do? And there’s by directional letters and some procedures. Maybe you do go to the law firm and set up an LLC, maybe it’s a transaction that can be directly done by submitting paperwork to the custodian or the trust company and directed IRA. And you can do that again online almost seamlessly without calling anyone. So there are some procedures and we’re going to have more podcasts on how you invest in certain things and what those steps are. But what is a Self-Directed IRA?
Mat Sorensen: [00:24:27] Let me hit a couple of examples, I think, just to illustrate what people can invest in.
Mark Kohler: [00:24:33] This is like Breakfast Club. Who am I? What is a self-directed IRA? I mean, it’s got to there’s got to be something deeper here. Yeah, it’s freedom. Freedom.
Mat Sorensen: [00:24:44] It is freedom. It’s what I love about it. And one of the things I love about it is the satisfaction that if you invest well and do well, you did it for yourself. I feel like when you just buy a mutual fund and you’re in the market, you just kind of go on with the flow. The market’s up, the market’s down your accounts up to your accounts down. When you’re self-directing, it’s like, no, I am charting my own path. I’m making my own course and I get to have a sense of accomplishment when I do well, I also have to bear the burden if I fail at it.
Mark Kohler: [00:25:18] But that is cool that I love that that that’s the American way. It’s on now. Here what, another one. You’re a rebel. You’ve got this, you’ve got a badge. You’re saying, you know what? I am not going to do what freakin Wall Street says I’m going to do what I say is best. And you know what’s interesting as we Mat and I travel from East Coast to West Coast, that does tend to be more of the west of the Mississippi attitude that I’m going to be a little more free-range, I’m going to be a little more independent. I’m going to be more of a cowboy. Now, we have plenty of East Coast client’s self-directing. Oh, my gosh. And there you go Mat. Examples. Give us some good ones. I didn’t mean to cut you off with my philosophical approach, but yeah, I was deep.
Mat Sorensen: [00:26:05] I was deep. I liked it, but I sort of had some easy ones, like, OK, well, why don’t we did today? I just funded today or funded by signing off on a client’s deals. I’m helping process the deals to come through with our team. So we had a client just doing a secured note. They lent about $50,000. Pretty straightforward, nothing. rocket science, about twelve percent interest in two points. It was secured, went through a title company, and in fact they’re getting like 2.75% points on it. And that’s a great little deal, right? It’s a loan. It’s a three-year term. And they just loan the money out. They’re going to get two percent interest and 2.75 points on the 50,000 loan. So that’s a common thing. Private money lending. So that’s one example. OK, another one was a client actually just bought real estate directly in there. The IRA is going to be on title and own it. They have a property manager. It’s a rental in Tennessee and the IRA owns it. They have a property manager that gets the income and pays the expenses and sends the cash bill back to their IRA.
Mat Sorensen: [00:27:07] So their IRA’s building up the IRA spent the money to buy the property, but it gets all the rental income, you know, minus expenses. The property manager is going to handle those in this instance. And then when they sell the property, all that proceeds come back into the IRA. And that’s what things we had mentioned. When you’re buying, let’s say, real estate, let’s just go with that example. Let’s say you buy a property for one hundred grand, you get ten thousand a rental income and you sell it for one hundred and fifty grand a few years later, that ten thousand a rental income, that fifty thousand of gain when you sell it goes all back into the account you don’t pay tax on. It’s just like when you bought Facebook stock at one hundred bucks a share and sold at one hundred fifty, one hundred fifty goes back and the same thing doing real estate or private company stock or notes or things like that.
Mark Kohler: [00:27:51] Yeah, a couple of other examples. I was just on a phone call last week with a client of mine back east, lives in New Jersey, New Jersey, recently relocated to Florida. He got sick of paying. I’ve known this kind of good for almost 10 years. He moved from New York to New Jersey, save taxes, getting out of the five boroughs. And then he’s like the sucks and moved to Florida and now he’s paying zero state tax. I love this guy. Anyway, he’s doing Amazon reselling is an Amazon affiliate and an Amazon.
Mark Kohler: [00:28:22] They’ve got all the different acronyms. When you’re selling on Amazon, he’ll make a million bucks this year or more. Well, he called me because he goes now that he’s in that industry, he has other people. And you get to know people just like that. So you get to know an industry and you want to invest in what you know best. So this guy has got all these connections. He’s like, I’m going to start another product. I don’t even want to disclose the product. He’s doing attorney-client privilege, but he’s making great money on Amazon, selling it. Blow your mind, just dumb stuff. And it’s legit. But just how household goods. So he’s got another product and he wants to set up a page, set up the relationships. And once you’ve done it, it’s always easier to do it the second and third time, right? Yeah. So he said, Mark, I’ve been listening to you and you told me not to make another investment. That’s right. I told him not to. I told him, let your Roth IRA do it. So there’s a difference called opportunity shifting, I told him the next opportunity, you have stopped, drop and roll, call me and let’s see if your retirement account can do it. That’s what our phone call was about, restructuring the entity with a partner that’s going to be providing the labor and services because we’ve got to be careful. You can’t set up a business with your Roth to just pay yourself or you can’t run it with equity or sweat equity. We’ll talk about that in the prohibited transaction podcast. But anyway, we are structuring it so that his Roth is going to partner with a service type partner that’s going to do all the legwork on the web design and fulfillment and yadda, yadda, in his Roth IRA is it’s going to be off the chart of the top 10, 10 times return per year. And it’s just it’s crazy.
Mat Sorensen: [00:30:07] Now, that’s how you grow a retirement account is investing in the things that you know and being strategic about the opportunities that you find. So I love that. Another one that I just funded that we helped with that came through was a client that invested in a. This one we’ve had a few clients go into this fund and it’s kind of it’s a let’s just call it a men’s health company that’s doing some scientific research and and and having a therapeutic drug. It’s not for it’s not for covid-19. It has to it’s to help men with certain performance issues in the bedroom. And they are throwing a lot of money in this because you know what? If they get a pill for that or whatever, people buy it. Yeah, it’ll sell quagga because they’re like crazy. Now, I’m serious. We see stuff like this that this could have been someone investing in Viagra back in the day and no one knew about it. It was like no work done there.
Mark Kohler: [00:31:10] Now, what’s fun is some of these topics are hilarious and it is fun. But, you know, this is a good transitionary point. At the very beginning, Matt said anything allowed under the law. Now, this is interesting because we’ve had to put the brakes on the marijuana industry or certain aspects of it now know it’s not federally allowed. Can you comment on that? Where that where your IRA might have a problem with that industry?
Mat Sorensen: [00:31:38] Yeah, and so, I mean, states have essentially legalized it, but it’s still federally illegal, you know, and it’s this weird state of affairs right now where it’s still federally illegal and it’s still a controlled substance. So because of that, IRAs are federally chartered accounts. There’s still an issue with them owning it. You know, it’s a retirement account created by federal law. So that’s where the issue is, we have had clients that own the retirement accounts, own the real estate that leases to a cannabis company, whether it’s a grower or a retailer. And that’s OK. You’re your own real estate. You’re just leasing. But we don’t want your IRA to own a company that actually owns the illegal product that’s federally illegal. So that’s the distinction we’ve drawn.
Mark Kohler: [00:32:28] And and and this is the depth of knowledge and experience after 20 years of doing this, that we want you, our customer in the law firm or in the trust company to feel confident and be careful as you now are exposed to this, to going out on the Web and trying to find the cheapest place to put yourself, Director IRA, and the cheapest place to get documents you can print out on the Web because there are risks and you want to be educated on this. And I hate to use the loaded gun analogy because guns are can be a very contentious topic. But forgive me and I’m not saying this to try to be litigious, but it’s true that if you take a hunter safety course or a gun self-defense safety course, you’re going to be more responsible with the gun. Well, the Wall Street mentality is if we let you self direct your IRA or any type of those accounts, we’re giving you a loaded gun and there’s no instruction manual. You’re going to hurt somebody. And that’s not true. You can do it safely. And so that’s why we do challenge you that this is not one where for the turnkey type mentality where you’re just going to say, oh, I’m just going to self-direct. And I find the website that lets me do whatever I want. That’s not smart. And I want to be cautious with that.
Mat Sorensen: [00:33:52] And unfortunately, there’s a lot of, like, bad information out there on the Web. Like when I heard about it in 2006 from Mark, I was like, this is freaking awesome. I can’t wait on the web to learn more about this. And I was like, that doesn’t make sense. That doesn’t make sense. I actually read the code and that I know that doesn’t make sense. And so, so it took years to figure this out. And so we’re trying to educate with our newsletter and our videos and books and everything in this podcast to let you know what you can do. But like we said, it’s also not rocket science. You just need to learn what you need to know for your deals every different. Just learn what you know for your deals. I don’t think it takes more than two or three hours of commitment of time to learn that much. And then you do the same thing over and over again.
Mark Kohler: [00:34:34] I think that here’s a good point to interject if you allow me. I think there’s another fallacy out there. Well, this is all nice and fine and dandy, guys, but I’ve only got $2,000 in my Roth IRA, so this isn’t for me to slow down, first of all. There’s a difference between saving and investing, we want you to and this is where the other aspects of our firm and our education come into play. We want you to get out of debt. We want you to build a side hustle or side gig.
Mark Kohler: [00:35:06] If you already are a small business owner, let’s be more efficient and our tax write-offs in our marketing and business and start planning. We teach a lot of business strategies and plan because we want you to make more money so you can fund and save more. So that’s point number one. We want you to save so that you do have that little nest egg to start self-directing with. What’s cool is we have a lot of clients that just with a few thousand dollars, use strategies that don’t require a lot of money initially.
Mark Kohler: [00:35:38] Wholesaling is one you may buy low-income housing or mobile homes. You might trade or flip vehicles or RVs or again, you could be in a scenario where just a few thousand dollars can be partnered with someone else. You don’t have to be all on your own. So don’t be dismayed. You don’t have to be rich to do this.
Mat Sorensen: [00:36:00] And one of my clients, I still have today, back in 2006 when I really started getting into this, this is the first deal I saw where I was like, whoa, this is cool. All he did was he had a Roth IRA. He put $10,000 down on a piece of property, got an option for this just raw land as agricultural next to the highway. He got a contract to purchase where he had like three to five years to buy it and at a purchase price, about four hundred five hundred grand. And he gave the owner of the property ten thousand bucks, said, here are ten thousand bucks. I have an option to buy it for four hundred. I think it’s four fifty within the next five years. And the seller is like cool, it’s not even worth three hundred right now and I’ll take your ten thousand bucks. You want to buy it from a cool buyer. Agriculture probably right next door for cheaper. What my client knew is there’s a freeway exit going in there. He’s a real estate developer. This is what he knows. A couple of years later, a freeway exit comes in there. This agricultural property went from agricultural to highway commercial. It was now worth over one and a half million dollars. So all he was in his $10,000 Roth IRA. He sells the option to another developer for over a million bucks who are ready to pay one point five for the property.
Mat Sorensen: [00:37:09] And he has over a million dollars return. And this happened over four years, of course, is now over a million dollars returns Roth IRA. That was the moment I was like, this is what I’m doing is a Roth IRA. This was always cool for him, was tax-free, and his Roth IRA. If he did that personally, he would have kept half of the money. He would have paid tax to the IRS. He had to pay tax to the state and he got to keep all of it in his Roth IRA. And what was cool about this with this client? I mean, was it was cool in the sense that he had a cool deal, but I remember him being really pissed off like he was excited about how this worked. And he’s done amazing sense as well. He was also pissed off at all the advisors that never told him he could do this because this is a guy who was a real estate developer. He made a lot of money had a pretty hefty tax return, had financial advisors, had a big CPA firm, a big law firm. He’s like all these people knew I had retirement accounts, told me to save a max amount every year, which I did. And they knew I made money doing real estate and no one connected the dots for me. He’s like, I had to figure this out on myself. No one else connected the dots for me.
Mark Kohler: [00:38:16] I love that last point you made because. Sometimes I do feel like we’re a maverick and I get accused of being on the fringes at times, but the people that are making that accusation are so far on the other extreme that I look crazy where the reality is there are millions of dollars, trillions of dollars in retirement accounts, 30 trillion, 30 trillion in retirement accounts in the US. And there this concept of self-directing has been around since when Arissa and IRAs and four one case were created. That was in the initial law. They said we don’t want to restrict it to just Wall Street, let anybody invest in any of these things. But Wall Street created a financial model that worked for them and then just dominated the airwaves and it’s sad. So this is not a fringe deal. Mat and I are legitimately licensed lawyers. I’m a CPA and at least five states, a lawyer in two. And we’re in a legitimate law firm accounting firm with malpractice insurance authors. We don’t have a target on our back with the IRS or we hope not. No one’s ever knocked on our door and said we’re crazy or this is legitimate, mainstream stuff. And so don’t be like, you know, it’s an odd common reaction to, like, try to find a fault in someone when you don’t have all the secret sauce. Well, the reality is you’ve had some bad advisors. If you’re just hearing about this now if you’re that successful and you’re a listener and you’re a little ticked off right now. Call your adviser and go What the freak?
Mat Sorensen: [00:40:02] Yeah, you’re also not alone. And I’ll say this, there have been a lot more advisers over the years, particularly as the IRA model has come about. And they’re not making money on trading your account. They’re making money on just managing no matter what it’s in. We’ve seen a lot more IRAs be much we’ve got a lot of clients that are themselves or financial advisors. I’ve got a number and a number that refer to us for people who self-direct their accounts because they really grasp this subject. I want to make just a couple of other points and then I’m done.
Mark Kohler: [00:40:31] You can all think I think I’ll think deep here if there’s anything else to help on. What is yours? Oh, I got one. OK, and we’re going to have details on this.
Mat Sorensen: [00:40:40] Of course, we’re going to have all the rules and stuff. But I just want to make the initial point. When you’re talking about your IRA buying something like an asset and we’re talking about investments, your IRA does not buy personal assets. So when we say real estate, we’re not talking about your IRA buying real estate you live in. Retirement accounts have to own investment assets. But it could buy a rental. It could buy a property you flip, it can invest in a startup or a private company. Like I had another client around covid that loan money on a bunch of bars that shut down. And he took I did a loan that he could convert to stock. He said you know what, these bars have been around for years. They’re all shut down because of covid. But these were vibrant, successful businesses. And I wanted to help them get through this time when they had to shut down, they still got lease expenses and other costs on to help them get through it. But I want to convert this to equity later. And so that’s an investment. You can be creative on the deals that you see in your community or just in your area of expertise. So but we’re talking about investment assets, not personal assets.
Mark Kohler: [00:41:42] And the last point for me, keep in mind, I’m going to go full circle to my very first comment, and that is this is not just an IRA or a Roth.
Mat Sorensen: [00:41:53] For example, my health savings account is self-directed. Now, think about that for a minute. Well, I get a write-off to put money in my health savings account on the front page of my tax return. I have the right type of health insurance. I can build the HSA, take out money at any time for qualified medical expenses. I don’t have to wait till I’m 59 1/2. I could put money in right now at age 22 and take it out three months later. Three days later, no taxes, no penalty. I get a write-off and any money I earn in that HSA is tax-free. Now Mat and I will get in debates on who thinks what’s cooler, a Roth or an HSA. And we usually come to a truce because they’re so both free and cool. But I’m a huge HSA fan. And it was about eight years ago, I opened up a health savings account, self-directed, put in about four or five grand. That was how much you could put in it back then. Now, as a family and in 2020 you can put in $7,100. I put it around four grand found a contact that we’d been working with for years out in Chicago, a low-income housing project. It was 40,000. The seller would carry the note. I put down 10 percent, four thousand and cash flows a couple hundred a month ever since then it’s section eight rental federally subsidized rent from the government. And it’s just it’s a cute little meth lab. I mean, everybody I mean, it’s adorable. And these guys are great. They pay rent in a paper bag and some call them drug dealers. I call them entrepreneurs. They’re just great guys. Pharmaceutical sells pharmaceuticals. But it is a cute little grandma on the street that spending our lives with bars on the windows.
Mark Kohler: [00:43:42] But anyway, I have that rental ever since. I still do pay for my kid’s braces tax-free.
Mat Sorensen: [00:43:47] Yeah, that’s cool. So you can see the complexity of this and Mark actually has an LLC with that and I have my 401(k) account actually owns an LLC that owns a rental property. It’s a single-family rental. Well so what you can talk about some much stuff we have to that I think just helps illustrate how it works. That’s the best way I think to learn is just here are some examples. We’re going to go through these in the different investment types to the podcast. But now, of course, I want to say where you can go for info. You MarkJKohler.com. He’s got tons of articles and YouTube videos, too. You can find them on YouTube, SDIRAHandbook.com.
Mark Kohler: [00:44:27] Start there, people get the book SDIRAHandbook.com. Mat doesn’t say it forcefully, I will. I make no money off you buying his dumb book. I will sign it for you. But you want to start with his book because it will be a desktop reference and it’ll be a huge resource to you as you get more and more.
Mat Sorensen: [00:44:50] It literally is. It’s the number one book in the film that sold 25,000 copies. Everyone who buys it loves it. I’m just saying that if you’re interested in this subject, sometimes my friends are like, you wrote a book, should I buy your book? And I’m like, Are you interested in self-directing your IRA? Nope, don’t buy my book. But it’s like it’s kind of like the best book on karate, you know if you’re into karate when you find the best book on karate, you love the book. If you’re not into karate, the best book on karate sucks. You don’t care. So that’s what my book is. You’re into this. You’ll like it. I think it’s not fair.
Mark Kohler: [00:45:23] That’s the best book on vampires. Eclipse. Fair enough. I don’t know Stephanie Myers, so that is the Stephanie Myers of self-directed IRAs. I’m just going to go there.
Mat Sorensen: [00:45:40] That, of course, directedIRA.com, where this podcast you will find directedIRA.com Podcast for other shows and episodes. We’re going to put more content on there. And of course, directedIRA.com is our company where we set up all these different suffocated accounts where you can actually get the account going and start actually doing this.
Mark Kohler: [00:45:58] Mat, thanks for I’m going to say thanks to you on behalf of all of our listeners. If it wasn’t for Mat Sorenson spearheading and the creation of directed IRA, he’s the CEO. He’s amazing. I’m just the lowly CFO at the end of the table and all with the glasses and a pencil. But Mat Sorenson is the captain of the ship. He’s awesome. And he’s done so much to help people take control of their own retirement, take control of their future, teach their children about this. We’re going to have a show on Acorns and Mat’s going to hate it but we will on how you save and then transition to self-directing. It’s going to be awesome. You can have it. ACORN’s Roth account start now saving because when you start saving, you’re going to want to start self-directing. ACORN’s is ACORN is a gateway drug to self-directing. There you go, Penn drop.
Mat Sorensen: [00:46:54] So let’s start pushing that. Well, thanks, everyone, for being here. We’re going to be back again. Keep listening. We’re gonna start breaking down what are prohibited transactions? Which are some of these rules that talk about who can your IRA transact with? We’ll talk about IRA/LLC some people come checkbook IRAs. We’ll talk about solo 401(k)s. Some of the tax issues you can run into called UBIT/UBI tax. So there’s a little rule here. I got a chapter in my book on each of these Mark’s written on all that stuff, too. But we’re really going to break it down and hopefully do it in a fun, easy to understand way, keep it light, because we know what it’s like to learn these types of topics when we got into it, too.
Mark Kohler: [00:47:32] So thanks. We’ll see you next episode.
Mat Sorensen: [00:47:37] Until then, self-direct on.