Episode 3: Self-Directing Your IRA, What are the Rules?

Tax attorneys Mat Sorensen and Mark Kohler break down the top 10 rules you should know when you self-direct your IRA and explain common structures, strategies, and IRS/legal issues self-directed IRA and solo(k) investors should know. These rules include the prohibited transaction rules, unrelated business income tax (UBIT), documentation requirements, and the investment process.
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Mat Sorensen: [00:00:07] All right, welcome, everyone, to the Directed IRA Podcast with Mat Sorensen and Mark Kohler, this is well, it’s not the only but it’s the best podcast dedicated to helping you self-direct your IRA or other retirement accounts. And I’m, of course, joined with. Mark J Kohler, tax attorney, CPA, author, self-directed investor.

Mark Kohler: [00:00:33] All right, keep going. I’ll just keep saying stop. Just keep going. I mean, keep going to stop, but keep going. Keep going. Well, hopefully you’ve already noticed we do try to keep this light talking about technical tax and legal rules and making money. Making money is fun, but talking about some of the rules and creative ways to do it. How easy button. You don’t just like I wouldn’t have like an easy button. It’s like there’s an easy button. Go push it. You get to learn some stuff and do some stuff and then you get some stuff.

Mark Kohler: [00:01:09] I wish it could be like the Matrix. You just sit down, plugin. You got it. And then you’re fighting Keanu Reeves, you know, just you know, but that’s not how it works. You’ve got to bear with us. We’re going to have a great show today. What are the rules for self-directing IRA? We’ll see how long we go. Maybe it’s a half hour. Maybe it’s forty-five, it’s an hour or whatever it takes just to make sure you have some of the equipment, the tools in the toolbox to really. Make good on your investment.

Mat Sorensen: [00:01:45] We’ll be like Bob Vila. Remember him. You can like do the videos before YouTube. This is like an infomercial. Saturday morning TV show on how to stain your deck. You know how to use the tools in your toolkit. We’re trying to win the popular today for those, you know, Bob Vila. And I don’t even know if I’m saying his name right. Well, you know, not all my examples hit.

Mark Kohler: [00:02:15] I thought it was a good example, but we’re doing exactly OK. Instead of staining your deck here in the fall, you know, using special woodcutters, chipper, mower picking up leaves, we’re going to talk about making money in your Roth or IRA or 401K or SEP simple, but all those goodies and we should say that right off the bat. Why don’t we say that all of these rules? I don’t know. Could we say that? And the word that’s out there is called prohibited transactions. That’s what the gov is. They call it the man. They like to call it prohibited transactions. We’re just going to call it the rules governing those rules. Could we say Mat this is a bold statement right out of the gate that I’m going to deal with the same rules, whether it’s a 401K an IRA, HSA, SEP or even a Roth? For the most part, the Roth might be a little more stringent. But other than that we across the board, same rules across the board, same rules.

Mat Sorensen: [00:03:23] Now there are different prohibited transaction consequences or penalties between IRA or 401K, everything else is the same, whether you’re going to have a privative transaction or not. Same set of rules. So we want to break down the rules for any of you self-directing that are new to it or that have been doing it a while. Make sure you’re implementing this way. And we’ve helped tens of thousands of clients in our law firm KKOS Lawyers. We’ve done we have thousands of accounts already at our company directed IRA, where we handle self-directed accounts and have done over half a billion in transactions in our short time we’ve been operating. So we’re out there like in the trenches getting this stuff done, seeing cool deals, helping people actually self-direct and pull this off. So let me start with rule number one. Maybe we can just go back and forth.

Mark Kohler: [00:04:09] OK, and I want to reiterate caveat since you agreed again, and this happens on a live show all the time or in a webinar class, someone will say, well, what’s the rule for 401K? Again, we’re all we’re talking about today is going to be the same in a self-directed 401k solo 401K group 401K IRA, a Roth, HSA, simple SEPs. I just want to make that clear. So, OK, once I’m self-directing, then all these rules are about the same. You’re rule number one.

Mat Sorensen: [00:04:44] Rule number one. When you’re making a self-directed investment and this is happening every day, we’re doing transactions, we get documents for clients like I want my IRA to invest in this. I’m buying a piece of real estate or investing in this private fund. OK, rule number one, your IRAs making the investment, not you. So when you complete documents for the investment, don’t put on their Mark Kohler as the buyer if the property its directed trust company Mark Kohler was buying real estate with his IRA, it’s not Mark Kohler on the purchase contract. It’s directed Trust Company, FBO, Mark Kohler, Roth IRA, HSA, whatever account he’s using. So the investment rule number one is the investment is in the name of the retirement account, not you. And the retirement account pays for it. The retirement receives the income for it. There’s earnest money when you buy the property. You ain’t cutting the check, you’re not buying it. Your retirement account is. It would pay the earnest money, of course, the funds to buy it. Well, No one.

Mark Kohler: [00:05:45] Yes, no great way. I’m going to stick with Match First Rule and out a couple of examples. Since Mat was mocking me earlier for my shirt today that like I jumped out of back to the future,

Mat Sorensen: [00:05:56] I’d say he looks like he looks like Biff. So if you’re watching the video, he’s the one he looks Biff from back to the future. Marty McFly, who do you want to be? Someone from back to the future, not the star of the show, though. But he’s kind of a jerk that I didn’t look like. Doc, I’d be hard at jokes about my age.

Mark Kohler: [00:06:17] In back to the future, I can’t remember if it was one, two or three. They were in 3-D glasses at some point. I can’t remember where they had those paper glasses. We all kind of remember those. Yeah, that’s what it’s like when you invest with an IRA, what you might normally do in a real estate deal. You might buy this, put your teenagers in there. You’re college students, your grandma, or you might buy a property and get all creative. Cool. Nothing wrong with that. That’s very common. Real estate kind of maneuvers, a very common real estate maneuvers that are never a problem. But once you put on those new glasses, those 3D glasses, you’re looking through the lenses of an IRA in and there could be a problem, you know, things that normally you don’t see without those glasses on in a 3D movie, you’re like, well, that’s how it is with an IRA. You have to remember. And people call our office and we can be jerks sometimes. People come up, I’m buying this property. And who you’re buying the property? The IRA is the IRA is, but it’s me. No, it’s not. As you get into your head that the IRA is doing the deal, then you put on these other set of glasses that have kind of rules that you normally wouldn’t see, and it doesn’t mean they’re bad. It just means you’ve got to be able to dodge that snake or whatever is coming at you. You might see with these glasses. Boy, I’m working that analogy of this thing.

Mat Sorensen: [00:07:39] I loved it. I loved it. OK. If we wait for rule number two, I’m ready. Hit me. All right, rule number two, these are investment assets, not personal assets. It goes along with a couple of comments Mark kind of weaved into those examples there. If you’re buying real estate, you’re not buying it for personal use. You’re buying for investment purposes, long term wealth in your retirement account. If you’re flipping a property or you’re buying some stock or whatever you’re buying, like private company, whatever, you’re not going to buy it and sell it and make the money personally today. This is not for personal use or to make money on today unless you’re already at fifty-nine and a half and you can then pull the money back out of your account. This is for investment purposes and to hold as a long term wealth building strategy to grow a bigger retirement account.

Mark Kohler: [00:08:33] I’m kind of the color commentary to your rules now. We’re not talking about is your ability to make money personally on these deals, I think that’s going to be a different rule, right? Yep. This is the rule that I can’t have personal benefit or use. Yeah, it’s investment. So let me give an example. No 3D glasses from back to the future, but I’ll reference what I just did a minute ago. The college apartment, college duplex, very, very common for many of our clients. And we, like our clients to do both buy real estate in the retirement and personally, there’s benefits and pros and cons to both. Let’s say you buy that duplex down there in North Bend, Indiana, for your kid going to Notre Dame and you want to rent it to your kids, do it all day long. That’s great. South Bend, Indiana. South Bend, North Bend. I don’t know, some bend, South Bend. I don’t I never made it around the corner to get down to the South Bend.

Mark Kohler: [00:09:36] Does this go along with my example? Last week, Barry Sanders versus Bernie Sanders. Bernie Sanders. Mike threw an example of Bernie Sanders.

Mat Sorensen: [00:09:46] I was like, man, how’s he bringing Barry Sanders into this? The of course, one of my favorite running backs, Detroit Lions number twenty. The number twenty the dude had moves anyway. He does back in the day, Bernie Sanders got moves, too, but maybe not on the football, not on the politics.

Mark Kohler: [00:10:03] These types of mistakes are called Kohlerisms, where in my heart, you know what I meant. But you just don’t know that, Bernie. You give me you give me a break because there’s a lot going on in this head here. OK, so anyway, so you buy a duplex in South Bend, Indiana, and your kid goes to college. I love it. Great move. Great investment move, kid can rent from it, you blah, blah, blah. But if your IRA buys a duplex in South Bend. Your kid can’t live there, nor can your mom, your dad. We’re going to come to some of these rules of who these people are, but you can’t have I’m just going to say family for now until we get into these parties. I’m sure Mat’s going to bring up is that your kid can’t live in there and you can’t go turn it into an Airbnb and stay there yourself. You got to let the investment go, which is cool. That’s good. She’s going to make tons of money. It’s just it’s not the one duplex your kid’s going to live in. So that’s the personal use. Yeah,

Mat Sorensen: [00:11:06] OK, I like that. Rule number three.

Mark Kohler: [00:11:11] I’m going to do another example, because I was that was really rude. You know, the North bend mocking. That’s fine. Innocent mistake.

Mat Sorensen: [00:11:19] I was doing it for the listening audience. They like a little bit of Foglia now and then.

Mark Kohler: [00:11:27] At my expense or hurt. It hurts right here.

Mat Sorensen: [00:11:29] You stepped in it. If you do the crime, dude, you got do the time.

Mark Kohler: [00:11:39] I was watching Lincoln Lawyer with my kid my two adult. My daughter and her husband were living with me right now as they’re looking for a house because they’re going to be there doing their little fixer upper. So excited I make them watch Chip and Joanna every day. They hadn’t seen Lincoln Lawyer, so I made him watch Lincoln Lawyer. And I love the part where he comes out of the hospital and his driver goes. Ain’t nobody till someone shot you. Yeah, you’re somebody or somebody, whatever. Shut up. Okay, go ahead. What’s number three? Rule number three.

Mat Sorensen: [00:12:14] OK number three. I don’t know how to say this one. I feel like I’m going to wiff on it. So you might be able make fun of me here, but. It’s a, you know, like scuba self-contained underwater breathing apparatus, like a scuba did you know that scuba diving? I did not know that. Trivial Pursuit, you know, right there. OK, OK. An IRA is like. Scarra, Scarra, self-contained individual retirement account. What I mean, though, is. When your IRA is doing something, it’s doing it OK, like let’s the real estate’s the easiest. We have clients doing lots of other things, but real estate is the easiest example. Everybody can get it and appreciate it if I buy real estate with my IRA. Like I said earlier, it’s making earnest money deposit. It’s put the money down to buy it. He gets the rental income, it pays the expenses. One of the common mistakes is people will say, oh, I just paid the insurance personally. Oh, I just kind of send a check to the property taxes personally. That’s a problem. Whatever the retirement account buys, it’s everything in the deal. You’re only behind the curtain, like orchestrating things, telling your IRA what to do. So don’t mix in personal use, maybe co-mingle might be a good word, don’t just don’t mix in the personal stuff when your retirement account owns an asset entirely.

Mark Kohler: [00:13:38] Well, the more you explain, the more I understood because your example sucked. But of course, I’m not one to judge. So I knew it was going to be even though you were the first one to cast a stone and say how it is. OK, I you’ve got to you got to rule. In other words, that might be helpful is separate accounting. Just like when you have your personal life and your business account, you want to keep them separate. It saves you in an audit and makes your life easier. In fact, it’s less stressful, less stressful rather than throwing everything in one bucket. The other example is some people like bookkeeping such a pain in separate bank accounts. I’m like, hold it. Don’t you have chest of drawers in your bedroom or do you just throw your clothes in the corner? No, I have a drawer for socks, draw for underwear, drawer for shirts. Well, that’s what bookkeeping is. That’s what bank accounts are. They keep the socks separated from the underwear. That makes life easier, less stressful. And that’s how we want your IRA to operate. Let it have its own frickin checkbook, pay its own bills. And I know that made a lot more sense to many of you than some scuba.

Mat Sorensen: [00:14:50] I like the socks and underwear because you don’t want to open up the underwear drawer and start putting those on your feet and then get your shoes on, you know, got to make sure you know where the right drawers are too.

Mark Kohler: [00:15:02] I don’t know what’s in your underwear drawer, but I would agree. I would agree.

Mat Sorensen: [00:15:07] All right. But a better analogy. OK, let’s do. Or one rule for OK, rule four. Now, this is the second because this is a good one for an article for you. Now, I know you’ve got a book on this. Some people are actually dictating. I’ve got a book that is the book on Self-Directed IRAs. But we are actually dictating out. So we’re putting out the text on all these podcasts so you can go to DirectedIRA.com/podcast and you get the full text history of the basically transcribed the whole thing here.

Mat Sorensen: [00:15:50] Number four. Now this is where we’re going start using some technical rules. OK, now before I do that, I just want to say self-directing your IRA is like playing a board game. OK, now this one’s a good analogy. Yes, it is.

Mat Sorensen: [00:16:04] You can’t just open up the damn board game and start moving pieces around and rolling the dice, you’re going to screw it up. You’re not going to play it right. OK, when you do this with your IRA and you start self-directing your IRA, you don’t just start moving the pieces around and filling in forms and saying, do this and do that and go being a cowboy. All right, you’re going to mess it up and you’re going to cause what’s called a prohibited transaction. So you want to read the rulebook, like that’s where we’re giving you these rules. These would be in the rule book. Or you can read my book or you can work with someone who knows what the heck they’re doing. It could be another investor from the self-directed many times or your attorney. We can help you at KKOS lawyers. So you just got to get educated. But it’s not rocket science. It’s the same damn thing over and over again. I just want to get that out there before I drop the word.

Mark Kohler: [00:16:50] So this the rule isn’t. No, the rules. You’ve got a fourth rule out. The fourth rule, just letting people not to let their brains explode. That was your disclaimer. So what’s the fourth rule that so dramatic that you had to use that board game example.

Mat Sorensen: [00:17:04] Well it’s the big one. OK, prohibited transaction rule. OK, you don’t want to violate the prohibited transaction rule. Now some of the rules we already gave the first three, the reason you can’t do that crap is because it would cause a prohibitive transaction. OK, but I think it’s good to know. Let’s just go through the definition of the rule so you can see its application and we’re going to give you some more rules of the road examples, too. But I think we’re at this point, we want to talk about what the heck is that?

Mat Sorensen: [00:17:36] You call it a prohibited transaction rule. What is it? OK, it’s three things. When you have three things aline, you have a prohibitive transaction. Retirement account transacts with a disqualified person. It’s not about what your retirement accounts buy. We don’t care about that. You know, there’s a prior podcast we talked about. What can your retirement account buy the prohibitive transactions have nothing to do with what you’re buying it’s who is the account transacting with? All right, so here’s a common question clients will do and this would be subpart A to the rule. What if I already own an asset? I get clients like, oh, I already own some pre-IPO stock that’s gone up in value big time. But I want it my person I’m can I sell it to my Roth IRA right now and then have a Roth IRA sell it and sock away all my profits in my Roth IRA. That would be pretty sweet, right? I’d be all over that helping you day in and day out. We would be telling you to do that. But you can’t, because if you own that stock or that asset that you think has gone up in value and you don’t want to pay tax on it, you are committing a prohibitive transaction. You are what’s called a disqualified person under the rules, the IRS does not want your IRA transacting with you. And we’ll talk about who’s on this naughty list of disqualified people. But it’s you and your spouse. Kids, parents will go through it. More detail, so.

Mark Kohler: [00:18:58] Can I call this rule is this number four or five? This is four right, if anybody’s making notes, if you allow me to make an amendment. Senator from Arizona. Yes, I would like to call this. You can’t transact with yourself. Or certain family, and that’s that’s going to be number five. We’re going to say, OK. And you cannot transact with certain people and we’re going to go through that list. And number five, I like just a suggestion.

Mark Kohler: [00:19:24] I like that straightforward. OK, so I’ll reiterate this number four thing. And that is you cannot buy an asset from yourself or do business with yourself. We have clients that buy a property and go, well, my S-CORP is going to do the rehab. Nope. Well, it’s not me, it’s my S-Corp. Well, if you own a majority of that S-Corp, it’s the same thing as you. Oh, now you are allowed to be the manager of an LLC. Write checks, make decisions, and but that’s going to podcasts away, maybe you go for that one. We’re going to go over the sweat equity type stuff, but transact. OK, that’s fair. We’re not going to talk about you working in the business. That’s another rule. But this is just transacting. You cannot buy a property with your IRA that you own or this could be gold. It could be bitcoin, it could be cattle, it could be a plane. We’ve had clients do all these things in private shares in a company, all that stuff. Last week, our show, we talked about that only about 40% of our clients are doing real estate with their self-directed IRA. There’s a hundred other things people are doing.

Mat Sorensen: [00:20:38] A lot of the IRA/LLC clients are doing real estate. So that’s yeah, there’s a lot more. So there’s a lot of you know, people just do what they’re good at. And real estate’s the most common, but it’s not the only thing. There’s a lot out there. So, OK, so you’re not able to transact with yourself. You can’t move assets from your personal name over to your IRA and sell it because I know what people think they’re like, oh, I bought this real estate for $100,000 and now it’s worth $500,000. If I sell it, I might have a $400,000 capital gain that would suck. I don’t want to pay capital gains tax on that one. I sell that property $100,000 to my Roth IRA and then I’ll sell it for my Roth IRA for $500,000 to someone else. Pay no tax. That’ll be pretty genius, right. Yeah, IRS thought of that. You can’t do it.

Mark Kohler: [00:21:23] Believe it or not they are kind of smart over there. And this transacting I had a client that said I want to move my secret recipe. I like to think of it as the coke recipe. I wanted to move that to my IRA or a trademark or a patent. And I’m going to lease it back to my business but my IRA owns it. Nope. None of that. So so now if you want to go out and create something, possibly or go buy an idea because they hire the technical people to do it and create it. Yeah, you can do that. Look at what Peter Thiel did, which we’ve talked about before. He developed PayPal in the company, developed the concept of PayPal and all the technical procedures and coding or whatever in his Roth IRA owned the company or his share of the company. So that was great. But he didn’t develop all those ideas and then sell it to his Roth IRA. The Roth formed a company and then they created that technology inside the company once the Roth was already in the mix. OK, rule four, now number five, let’s go to five.

Mat Sorensen: [00:22:32] Ok, the bad guy. Yeah. Your IRA or retirement account cannot transact with certain family. And we’re going to go over who in the family is restricted.

Mark Kohler: [00:22:43] And you don’t want to do business with family anyway, so this is a one. Oh, Mat, you have a funny story on this, if I remember right. With Brooke’s boyfriend. You tell the rule. I have a great examples on this one. Well, I don’t know about a ton, but I do remember one. So two, I’m going to say, Mat Sorenson, tell us the rule and then I give you authority to share that story to everybody else.

Mat Sorensen: [00:23:09] All right. So let’s go over who in the family is on this list. These are the restricted people on the list. Spouse, for those of you in Utah, all spouses count, you know, I’m from Utah. Parents, grandparents, if the word is actually ancestors. So you think of the account owner, their ancestors, parents, grandparents, great grandparents, your IRA cannot transact with them. Also, when you go down your family line, you pick up your kids and spouses of your kids. So your son in law. Daughter in law. So let’s think of my IRA, OK, my IRA cannot transact with my dad. OK, not can’t transacts my grandparents. When I go, but it could transact with my brothers, I have three brothers, siblings are not on the list, OK? I don’t know, maybe they thought siblings. There’s no love there. They’re going to they’ve always had to fight for whatever they got between themselves anyways. They’re going to negotiate the hell out of this deal. It’s going to be a fair straight up thing. They just didn’t make the list.

Mark Kohler: [00:24:18] Let me throw you a curveball. How about your spouses, parents,

Mat Sorensen: [00:24:22] OK, your spouses, parents, now think of your account. OK, let’s think of your account, Mark. Think of your spouse’s parents. Your IRA could transact with your mother in law because your mother in law is not your ancestor. The rule only says the account owner’s ancestors did not say the account owner’s spouse’s ancestors. So I could really stick it to her. Well, you could transact with her. So if I had a client do that, I had a client who bought a used his IRA. He bought a piece of real estate that turn into a rental property. His in-laws sold their house because they were getting elderly. They want to get out of it, get the equity out. They got the sell a home exemption. Great. And then when rented from his IRA that own the property. Totally cool. All right. Now, his wife’s IRA could not have done that because to her, that’s her parents and they’re restricted. But for him, it was OK. You know, this is the freaking tax code. I’m just here to report it.

Mark Kohler: [00:25:18] Now, this is where the tax code does you some favors, because for any of you fathers out there that have a daughter that’s starting to date, seriously, you can quote this tax law. This is great. You can literally quote this tax law to your daughter and her boyfriend, Mat. So you had a chance to use this.

Mat Sorensen: [00:25:41] So I’ve got two daughters in college, kind of great actually. Let me give you an example of Claire, OK? She has a boyfriend. His name is Jacob, OK? He’s in the Navy. Great kid. Let’s say that Jacob comes to me and says, hey, Mat, maybe they’re married at this point and calls me dad, OK? Says, I want to buy this rental property. I’m a fix and flip a property. It’s a fixer-upper. I need like $100,000 for the rehab. I know you like to self direct your IRA. Why don’t you want to loan me the hundred grand from your IRA. And I’ll use that money to rehab the property and I’ll pay you back the hundred grand plus 10 percent interest the point. All right.

Mark Kohler: [00:26:29] Did you just say pay you back? This is good, this is good. I’m loving this. All right. So the son in law says to father in law, can I borrow one hundred grand? I promise to pay you back. OK, this is this. Of course, this is wonderful stuff. All right.

Mat Sorensen: [00:26:44] Now, of course, if I was going to do that, I would get a promissory note and I get a lien and I throw it on title. There’s no way in hell you’re not going to get your payment. Yeah, but now here’s the rule. The rule said, think of the account owner, me. The account owner’s children are disqualified, as are spouses of children. So son in law is going to be a disqualified person. Now, I know that doesn’t make sense to think of yourself. Your son in law and daughter in law are disqualified to your IRA, but your IRA can transact with your mother in law or father in law. You know, whatever. So. There you go, write your congressman if you don’t.

Mark Kohler: [00:27:29] The punch line. Do I have to do the punch line with the punch line? I forgot. OK, so Jason comes to me and says, can I borrow your hundred grand? And deep down, you do not want to do this. Oh yeah. You feel obligated, Mat. Didn’t you feel obligated?

Mat Sorensen: [00:27:45] Yeah, I felt like I want to help, you know. I mean, yeah, that’s a tough spot to be in. But I’m also I want to comply with the tax rules because I’m a law abiding citizen. This is serious.

Mark Kohler: [00:27:56] Yeah, so, Jason, I’m sorry, but I cannot loan to you. My hands are tied. Now, your daughter cannot be mad at you. Claire’s like dad I know you do it if you had. That’s right, Claire, because I love you and I really like Jason. But his name is Jacob. Oh, Jacob. Jason. I was thinking of Friday the 13th and I just wanted some of the fathers think of it that way. My daughter’s dating a serial killer, but so this is a great rule because it gives you a way out. And I know I’m joking here, but it’s not a bad thing when I’m serious. When a family comes to you at the family reunion and saddles up to you with some KFC and some coleslaw and says, I got this deal and you say, oh, sorry, all my money’s tied up in a retirement account and I can’t do a deal with you, you’re prohibited. What? Yeah. Let me give you Mat Sorensen’s book and then you throw down Mat’s book. They’re like, oh my gosh. But then you tell them, go find out, go find some other sucker. I mean, go out and find some other investor that has money in their retirement account. They can do the deal. Yeah. And your brother in law’s like, oh, yeah, I love it. Thanks, Mat. See so, that saved your life. This rule saved your daughter’s relationship.

Mat Sorensen: [00:29:16] Yeah. Yep. And so a lot of family anguish. So that’s the rule. Remember, spouse prohibited obviously you are, but in the family spouse, parents, grandparents and ancestors of the account owner and then children, spouses, children now also. Maybe this is we should hit the next rule.

Mark Kohler: [00:29:36] Well, I’m going to I’m going to throw you a curve ball before you go to number six. OK, here’s the curve ball. Jason Clare, not married, and Jason comes Jacob, Jacob. Whatever, whatever, you know what, screw it. Let’s just see is OK. Jacob comes to Mat and they’re not married yet. And he goes, Hey, Mat, can I borrow $100,000? Because Mat is an honest, truthful guy and he’s going to have to go through the pearly gates someday. Mat cannot pull out the rule that he’s prohibited because his daughter is not married to Jacob yet. So Mat feels obligated. His daughter comes crying to him. Please help Jacob. You’ll provide for me better. Please loan him this money. And Mat, like, well, I don’t have a way out. I’m going to have to do it. So, Mat, you loan him the one hundred grand. Then they get married, do you have a problem?

Mat Sorensen: [00:30:34] No, as long as you carry out the transaction as it was already agreed when you started it, you’re OK. But if you have to amend the deal or Jason, whoever we’re calling him now. And I got to, like, cut a deal to get payment because I need to maybe a short payoff. Maybe he thought he could sell it for more. Now he’s only going to get the 80 grand back instead of one hundred. You know, now I’ve got a derivative transaction issue. Now we’re concerned. We don’t love that. I think you could work it with the IRS if you got audited, but you got some issues there for sure. So you probably still want to stay away from it in a close, serious relationship, certainly the fiance status.

Mark Kohler: [00:31:15] I want to repeat that everybody understands what Mat said. It’s OK because they weren’t prohibited when he loaned the money to Jacob. And so he’s fine. And if they marry, that relationship came after the transaction. So as long as you finish off the deal and everything’s cool, not prohibited. Now, where this I’ve seen this really play out is I have the Kurt Russell and. Oh, my gosh, I can’t believe Goldie Hawn, Kurt Russell and Goldie Hawn story and how many of you may or may not know this, they’ve been together almost 30 years and they’ve never gotten married. They just don’t believe in marriage. That’s cool. That’s their deal. Well, they’re not prohibited because they’ve never gotten married. So Kurt Russell could take his IRA and say, hey, Goldie, I hear you’re producing another show. Let me invest in that show you’re doing. And his IRA. IRAs invest in movies. They do. They do IRAs or investing in documentaries, movies all the time 401ks. So Kurt Russell’s IRA, I hope I don’t get in trouble that they’ve actually done this. I don’t know. But I’m hypothetical. We’re huge. Kurt Russell fans, the good old days Disney movies. But let’s say Kurt Russell, could he loan his money out of his IRA 401K to Goldie Hawn. Now, Goldie and Kurt wake up one day and say, you know what, it’s time to tie the knot. We’re going to get married. Well, he can’t do those deals anymore because they’re married now, but any deals that they did before the marriage are not prohibited as long as they’re carried out. So I think that’s an important thing because I have some couples that are debating getting married and they got a deal going down with iRace and they may hold off.

Mat Sorensen: [00:32:58] So, yeah, the boyfriend girlfriend one comes up once a month. Someone’s in the boyfriend girlfriend scenario. All right. Number six. Don’t transact your IRA with your companies. This one’s quick because it’s basically any company that you or that list of the disqualified family we just talked about own 50 percent or more of it’s not 51 50. Any company you own, 50 percent or more of your IRA is prohibited and cannot transact with that company. So let’s say Mark and I each on an LLC 50 50 that owns real estate. And we have a couple of those. Let’s say we needed $50,000 to do something to it. Whatever we need, we’re going to renovate it or whatever. My IRA cannot loan to that LLC because I already own it 50 percent, I’m disqualified. That LLC is out the door.

Mark Kohler: [00:34:00] I love it. I will not expand on that number seven. And this kind of relates to some of our prior comments. We talked about personal use and we talked about transacting with yourself. Now we’re talking about compensating yourself, your IRA business, whether it’s an online business, a restaurant, real estate, whatever it is, cannot pay you for services you provide. Is that a fair rule? A good one. I don’t know if this goes along with it, but the IRA cannot pay for your cell phone to reimburse you for mileage you for your time.

Mat Sorensen: [00:34:42] Pay you to travel to the Airbnb rental you want to go see in Florida, even if your IRA owns it. OK, that’s going to there’s too much self-dealing issues with that.

Mark Kohler: [00:34:52] Now, I think this leads us to number eight, Mat, if this tees us up for this one, is that you can’t compensate yourself or reimburse yourself for expenses. But could I fly to Florida and go check on my rental that’s owned by my IRA? Where’s the line in doing too much?

Mat Sorensen: [00:35:10] You can, but I don’t like the IRA to pay for it. So even if it’s Florida, you can say that’s self-dealing. You’re personally benefiting because there’s some called a self-dealing primitive transaction where you benefit, which essentially is what Mark’s talking about here. So I don’t want you benefiting from your retirement accounts transacted. So flying to Florida can be seen to self even if you’re flying to, you know, Duluth, Minnesota, is that are those that are place we make fun of? I don’t know. You know, there’s not a lot of people going there for fun, you know, but those that could still be deemed self dealing, you know. All right.

Mark Kohler: [00:35:44] I’m sorry, all my Duluth’s listeners, we just lost a few. Apparently, there’s nothing to do in your town. And Mat uses that as a pun. And as I do not endorse.

Mat Sorensen: [00:35:55] They had ad to be to fall on the sword. They had to just had to be done for the sake of education to teach a point, you know. Sure.

Mark Kohler: [00:36:03] You delusions. I do not endorse nor whatever Mat Sorenson’s analogy is because I just want you to know.

Mat Sorensen: [00:36:16] Thank you. Thank you for taking the other side on this. OK.

Mark Kohler: [00:36:24] All right, compensate yourself, oh, that’s what I wanted to get into sweat equity, and I think this is an important delineation. So I have an LLC and again, real estate tends to be a good example, but it could be online marketing, online selling a product or whatever. You can be the manager of the LLC. Don’t let some irate trustee company or custodian or accountant freak you out. You can be the manager of the LLC owned by your IRA.

Mat Sorensen: [00:36:51] But there’s a limit. As long as it’s set it up right, and the documents are done right. We’ll talk about we do the IRA/LLC sometimes called checkbook IRA two episodes from now.

Mark Kohler: [00:37:01] So your management role has to be limited to administrative duties, bookkeeping, cool writing checks, paying bills, not a problem making phone calls, hiring people. But once you start going out to the property or going into the restaurant and cleaning the place or doing dishes or going down to the warehouse and helping package things to mail, once you start providing physical on-site labor, is that fair? What would you say? That’s where you cross lines.

Mat Sorensen: [00:37:33] Yeah, I’m cool. I go into the property, but like going to like, tell someone else what to do or to make sure someone did it, but not like going in there and picking up the hammer and starting to do the work. That’s where you cross the line.

Mark Kohler: [00:37:47] Now, let me just now let’s see. This is where some people, I think, get there’s people out there that want to motivate you not to self-direct. And this is one of their I think deceptions is they’ll say, well, if you buy a rental in your own name, you can save money by playing your own property manager and you can go plunge the toilet or you could go mow the lawn. And so you’re going to make more money when you own a rental in your own name. And they’ll say never buy rentals in your IRA because you don’t get the tax benefit. Well, hold it. We’re not buying rentals in my IRA for tax benefit. I’m buying rentals in my IRA because they get a better return than a stupid ETF or mutual fund is getting six percent. I can get a better rate of return.

Mark Kohler: [00:38:40] So now could that return be a little higher in my personal life when you add some tax benefits? Sure, but I’m not comparing it to me buying real estate. I’m comparing it to my IRA, buying other options. If you know what the real estate option looks pretty damn good. So don’t worry about these issues of, well, I got to pay for a property manager now. I want to put it in the budget. How does it just pencil out? Yeah, I still make a 23% rate of return with my rental cash flow and everything, even though I pay the property manager to do it. Don’t stress out that you’re paying a property manager. Look at the final result. That’s what you need to focus on. Keep your eye on the ball. Don’t notice the red dress walking down the street. Keeano Reeves that happened to him in the Matrix. Keep focused on the Matrix.

Mat Sorensen: [00:39:27] All right, rule number nine, don’t extend credit or guarantee loans that your IRA is getting. Gotcha. OK, let’s go back to real estate again, getting the easiest one, IRAs, buying real estate. I want to get a mortgage on the property. I’m going to put down some cash from the IRA, get a loan for the balance. You can do that. Not a problem, but you need to get what’s called a non-recourse loan. And the non-recourse loan is a loan with a bank lends money on the property but says if there’s a default by the IRA or your IRA/LLC or Solok or whatever it is. We’re going to foreclose and take the property back, done, we’re not going after the retirement account, we’re not going to have the account owner personally. Our remedy is against the property that we loan on, period. Now, you cannot sign a guarantee, OK, that violates the rules, you can’t just get the regular mortgage loan that you go to your regular bank or mortgage loan officer, they’re probably not going to do it. We have a list of about four banks that specialize in non-recourse loans to IRAs by single-family rentals, to commercial apartment buildings or commercial properties or apartment buildings. So if you’re going that route to get a loan. Don’t guarantee that.

Mark Kohler: [00:40:40] I’ve got two curveballs. Here’s my first tell me the name of one of your brothers, Mat. I feel bad. I’ve met him a couple of times, but I. Brett, Brett. OK, let’s say Brett. Mat’s brother says, hey, Mat. I love what you’re doing. I’ve been watching, believe it or not, I’ve ignored you for years, but I want to invest with you now. And Mat says, all right, maybe this is good for us to rekindle our relationship as brothers. Let’s do it. Now can Mat, can you put in your IRA money? And Brett cosigns on the loan to get a better rate and have it non-recourse, I’m sorry, and haven’t recourse to him, he’s not prohibited because he’s a brother. So when you say you can’t have a you can’t have a recourse loan, well, you could as long as it’s not a recourse loan to you. Is that right?

Mat Sorensen: [00:41:29] Absolutely correct. So a disqualified person really never lets you or your spouse, your kid’s parents, not my brother. Like Mark, do this example. My brother’s totally clean, OK, but so disqualified people can’t guarantee the debt or provide their credit. So that’s another investor could that’s not on the naughty list. That’s not the disqualified person list like my brother. Absolutely. You could do that. And I’ve done that plenty of times.

Mark Kohler: [00:41:56] You see, this is where the lenses come in, where you put on those 3D glasses, see if Mat’s going to go buy a property and it’s his second or third property of the year. It’s a good deal. He doesn’t want it on his FICO score, he calls his mom and says, Mom, you’ve got a great FICO score. I’ll give you 20 percent of this LLC. I just want to throw this on your credit. You get a better rate on the mortgage. Are you in? And Mom says, Mat, that sounds great. I trust you. That is a personal real estate deal that happens all the time. Wonderful, great. Go for it. Love it.

Mark Kohler: [00:42:27] But once you put on those 3-D glasses and the IRA is doing the deal, it can’t call mom, can’t call the IRA owners mom, but it could call the IRA owner’s brother Brett and say, go sign on the loan down at the bank. We’re going to get a better interest rate. The cash flows to property. Are you in? OK. All right, I got another curveball, OK? OK, let’s say I’m running an operational business, so I’m doing a restaurant with my IRA happens all the time in my IRAs in this restaurant, I’ve hired a third-party manager, people that are running the show. I’m just coming in, checking in on it once in a while.

Mark Kohler: [00:43:10] And they need to pay for some new furniture or they need to pay for a new software system or a point of sale program or some sort of thing, can they use my credit card to do that? Could they what type of credit could the restaurant use where it wouldn’t cross the line and where would it cross the line? So what does the IRA on the IRA owns the restaurant 100% sure, 50% or more. OK, my IRA owns 50% or more of this restaurant. Maybe I partner with the chef and I happens to I had a client that took their IRA, funded the restaurant buildout and it partnered in an LLC with a chef that was really good. And the chef didn’t have the money to open the restaurant, but was willing to run it. Great little partnership, LLC. But the IRA is the majority owner. Can my credit card be used for acquisitions or prices or a credit line at the bank?

Mat Sorensen: [00:44:10] No, I would not do that at all. And there’s a case called Peacon FLAC versus Commissioner that’s on that’s in my book and everything. I won’t get on it, but that’s a company structure like that where it was two 50/50 owners actually both use their Roth IRAs and guaranteed debt. We’re trying to say, well this is at the company level and you know, there’s an unrelated person here for the other 50%. I just don’t like it when your IRA is in at all 10%. I don’t want you guaranteeing debt for the company. It might be in.

Mark Kohler: [00:44:38] What I was trying to use the example that it was not real estate so that debt could be a credit card. Right. Line of credit, whatever. So stay away from that. Even if it’s not, you may say, well, Mark and Mat said I can’t co-sign on a mortgage for a rental, but I could use my credit card. No, same thing if you’re personally responsible for that credit. OK, that was my curveball.

Mat Sorensen: [00:45:05] Number ten, you have ten I think we call it at ten. You want to cut ten rules. That’s good. OK, ok. And this is the overarching one. OK, don’t be stupid. Pretty close on this.

Mat Sorensen: [00:45:22] Invest in what you know and do your due diligence. See, self-directing is a way to make money, to get better returns than you can in the market, to go into what you’re good at. But you need to know what you’re doing on the investment side of things too. Sometimes I get clients who get so good at all the technical rules. They read my book, but they’re clueless about the investment that they’re making. Yeah, all right. And so and they’ve done everything right on the technical side, but they did not ask the questions on the investment. They’ve just been pitched something like, cool, I can do this with my IRA. Just because you can doesn’t mean you should still, when you’re investing, make sure you’re doing your due diligence.

Mark Kohler: [00:46:05] You guys in college, that’s a rule that you want to live by. Just because I can doesn’t mean you should. All right, let’s make a note of that, OK? And these young guys, they just, you know, just can doesn’t mean you should.

Mat Sorensen: [00:46:18] Ok, I’ve learned some things over the years.

Mark Kohler: [00:46:21] This is teaching your life lessons as well. Ok, now, Mat, I want to amend yours. I think just to add something to this one is invest in what you know, do your due diligence, yada, yada, get educated on this, which I think goes with it. Not only do you need to know just because your IRA can buy a restaurant, don’t go buy a restaurant if you don’t know what the hell the restaurant business is about because it’s not easy. Same thing with real estate or an online business or bitcoin. Bitcoin sounds cool, but if you don’t know what you’re doing with currency like that, then don’t do it. So but that also goes with rules. We have some clients like we were talking about just the other day. Everything this guy touches turns to gold. I mean, he’s one of my favorite real estate developers. I mean, I just want to follow him around and buy anything he buys. I mean, but he doesn’t know the IRA rules and nor does he want to learn them. He just wants to call me every time he gets upset when I bill him. But he wants to just call me, can I do that? I’m like just spend a little time getting to know the rules. You don’t need to call me all the time.

Mark Kohler: [00:47:25] I don’t want to deal with it. So I think it goes both ways. We have to get too educated on the IRA stuff. Yeah. But then don’t learn about restaurants and then people that are great with restaurants or real estate and don’t want to learn the IRA. So just, just get educated on it. We’re going to try to spoon feed you this on a podcast like this where it’s not too bad.

Mark Kohler: [00:47:44] And just on that note, I will quote Lieutenant Dan from Forrest Gump. Don’t get yourself shot. Don’t go out, do something stupid and get yourself shot in Forrest Gump. Oh, OK,

Mat Sorensen: [00:47:58] That’s a good one. And, you know, you can always finish what a Forrest Gump quote. You’ve done a good job, know, run, run, run, fly, fly away like a bird in the sky.

Mark Kohler: [00:48:09] Yeah. If you’re if your accountant says you don’t need a L.L.C. with the law firm, you can do this on legal zoom run run run Forrest. There’s the sales pitch. You really need a good custodian and a good kind of tax law firm that knows what you’re doing. We’re not charging $5,000 for an LLC for the most complex IRA/LLC, unless you want to spend a ton of time on the phone for $1,500 bucks, $1,500 bucks.

Mat Sorensen: [00:48:39] The typical what most people do is $800 bucks. That’s where you have your IRA that owns a 100 percent clean and easy. $800 bucks, you get a consult, we break down how to use it, how it’s going to work in your deal. So but of course, KKOSLawyers.com, where you get more info on legal services or consulting if you need it.

Mat Sorensen: [00:48:57] The book, The Self Directed IRA Handbook is on my site and on Amazon. We have QuickStart guides at DirectedIRA.com for a lot of these issues. It’s a ton of free content. And of course, we’ll have more amazing episodes here on the directed IRA podcast.

Mark Kohler: [00:49:12] Now and Mat can I before the music starts. Ok, one other thing. And maybe I’m going to get on a soapbox here for just two seconds, but. If you’re a custodian, which is lesser level than a trust company, I mean, these custodians are kind of running around the country. But if you’re dealing with an IRA custodian or a trust company that says, oh, we can do the LLC for you or, oh, we’ll give you the advice you need because they don’t want you to open your account anywhere else. And they’re afraid to send you out to the wolves because they don’t have a referral system they want to do so. They try to do it all themselves. Now, let’s say you try to follow what they say and something goes wrong. Do you think they’re going to say, oh, well, we’re we gave you legal advice, we have malpractice insurance, we’ll back that up, or are they going to say, well, the technical prints said, you are self-directing and you better know the rules on your own. You were giving me advice.

Mark Kohler: [00:50:12] Well, we are just trying to educate you on it. But you needed to go get your own professional. Would you give me any professional? And you didn’t even suggest that I get another professional as fast as these people will give you advice is as fast as are going to run if anything goes wrong.

Mat Sorensen: [00:50:28] Plus, they don’t have credentials to give that advice. And I can’t tell how much stuff we’ve had to fix that comes over here from clients that have been, you know, destroyed. Another custodian messed up. And we have to get over here. We got to try and straighten it out. And so save yourself from that just and it doesn’t have to be us. Just get someone that I mean, we are like experts in this field, like the best, you know, really.

Mat Sorensen: [00:50:53] But Mat’s the best out there. And so and our team of tax attorneys here, we have five tax associates that are like on this stuff and have all consulted over a thousand Self-Directed clients. So we’re here as a resource if you need it. And of course, the accounts, you can do it directed IRA you can set up fully online at DirectedIRA.com.

Mark Kohler: [00:51:12] And this is one reason why we started DirectedIRA.com. And I want to give full kudos to Mat. The president of the company is because people, these stupid custodian’s ships were hiring Mat to go out and teach brand new college students sitting in a cubicle to give clients advice. And he’s and I’m putting some words in your mouth, Mat, but you tell me if I’m wrong, you get in the conference room, teach these 20 kids were older so we can say that.

Mark Kohler: [00:51:41] But these young people in their 20s, these rules, and then they were going out and getting on the phone, giving this advice to everybody, we were like that’s not too wise here. Well, we want to grow and get more accounts and we’re going to answer their questions. Well, they were it was just a disaster. And so we said, you know what, if we can do it right. And Mat Sorensen had a vision. He fell off the in the bathroom and saw the flux capacitor and said. I can do it.

Mat Sorensen: [00:52:10] Two parts to it, so we got we got the law firm we need the advice. We got the account to handle with yourself checking accounts, so that all comes together, light speed. You know, you’re going back in time, baby.

Mat Sorensen: [00:52:27] All right. All right. Thanks, everybody. You can learn more at DirectedIRA.com/podcast where there are prior episodes, see upcoming shows. Also, get the texts and see the video if you’re into the video. And thanks for being here.

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