0:00:29 Kim: Thank you Todd, happy to be here, looking forward to talking about selfdirected

Transcription

1 0:00:18 Todd: Hey everybody, welcome to another edition of The Prosperity Podcast, this is No BS Money Guy Todd Strobel. Once again, we have cohost and bestselling financial author Kim Butler in the house with us, welcome Kim. 0:00:29 Kim: Thank you Todd, happy to be here, looking forward to talking about selfdirected IRAs today. 0:00:35 Todd: Super. A lot of people, I shouldn t say that, some people are familiar with the concept of an IRA which is of course is an individual retirement account but a self-directed IRA, you re in to a very select group of people know about these and they re an incredible powerful product that I m really excited for you to be able to share with our listeners today. 0:00:59 Kim: Absolutely. And it is funny how we get swayed in our own knowledge thinking everybody should know about these but I do find that the self-directed IRA arena has not only not a lot of people familiar with it but a lot of misinformation. So a self-directed IRA is at the beginning, just the same as your regular IRA, in other words, it might be money that was rolled over from 401k account or it might be money that you actually deposited in to that IRA but taking it up a notch in to the self-directed arena has 2 roads that you can go. So the typical brokerage house like your Schwab or TD Merry Trade or something like that, they say that they have self-directed IRAs and they do but I have to admit, I might have a little bit of a snobbery approach to them because their self-directed IRAs are still effectively invested in most of the typical investment arena: stocks, bonds and mutual funds, there might be wreath or something like that but they re self-directed IRAs that are inside the typical brokerage houses are still invested in the typical brokerage offerings. A truly independent self-directed IRA is kicked up a notch in that you literally could invest in anything that you wanted to as long as it s qualified for the IRA arena. And what typically happens is you will want to pick your investment first and then find the self-directed IRA trustee that works with that investment because each trustee has their favorite areas and each investment has to have a trustee that has okayed that investment. Now, I used the word okay not approve because technically, they don t really approve it but for example, if you wanna invest in life settlements which is one of our favorite things to do with IRAs, there s only a couple self-directed IRA trustees, I ll explain that term a little bit more here in a minute, that allow for life settlements. You can t just go to e-trade or Charles Schwab and invest in life settlements inside their self-directed IRAs because they haven t okayed them. So the selfdirected IRA trustee or the self-directed IRA 0:03:23 Todd: Custodian? 0:03:24 Kim: Thank you, that s the word I m looking for, custodian is available to a particular list of investments that they have okayed and so these are often trust companies and there are variety of them out there that will have hundred or more okayed investments on their list but it s so much easier if you pick your investment first and then go to their custodians that they already worked with because you as the client don t really care who your IRA custodian is. Most

2 self-directed IRA custodians charge a little bit more than regular IRAs so your typical IRAs can have maybe dollars a year in fees, your typical self-directed IRA is gonna have anywhere between 75 and maybe dollars a year in fees. Your typical IRAs gonna have maybe no setup cost or maybe 100 dollars of setup cost, your self-directed IRA is gonna have easy 100 dollars up to 300 or 400 even 500 or 600 dollars of setup cost, that s just the nature of that environment. A lot of clients get real frustrated, oh my gosh, that s so expensive compared to what I was used to, it s partially because you get the freedom so you re paying a little bit more for the self-directed IRA, I find that that s well worth it because inside your selfdirected IRAs, you can typically get investments that are actually gonna get you what we always look for which is that double digits, no loss of principal goal. 0:05:06 Todd: And you still follow the same rules as far as the age 59 ½, you re gonna withdraw all the money before age 59 ½, there is a penalty, I know there are some strategies around that. So they do comply to the traditional IRA arena as far as the tax rules and things like that, what really is significantly differently is your choice of investment options and a lot of times, the IRAs that are free are so inexpensive are loaded with high commission products so that the people who are selling the product are actually paying part of the compensation to pay for that annual fee for the IRA. So that s how I try to look at it is the fact that I now have the ability to buy no commission or I could buy a piece of investment property or whatever that I decide and in order to get out of having my choices be so limited, I have to pay the fee and it s not a huge fee annually, that doesn t seem like a bad tradeoff to me. 0:06:20 Kim: I agree. To me, the investment choice is really where the difference makes and whether you ve got a little bit of fees or not is not the big issue but a lot of times that gets overlooked in light of the big picture. And to me, the IRA custodian or the IRA trustee and those terms are largely interchangeable, is really just a service provider that s going to give you the platform to keep that money without tax. And as you said, there s some strategies to work around that but a lot of times, clients don t wanna pay the tax, yeah, they could convert to a wrought or they could go ahead and take it out of the IRA environment but it s pretty tough to write a big tax check in order to make those happen. Now, we do have some valuable strategies that make very good wrought conversions so if that s of interest to you, reach out to us, that s a pretty specialized area but something that we could help you with but again, it s a pretty tough thing to write a check. So we find a lot of IRAs being rolled from IRA to IRA or 401k to IRA and it can get rolled to a self-directed IRA just as easily, there re really no difference there at all. 0:07:34 Todd: Now I think inside the industry, that term rolled is pretty accepted. Why don t we go through a scenario where a person has a traditional job and then separates and explain what that rolled means. 0:07:48 Kim: Sure, thanks for asking that question. Yeah, we don t wanna get caught up in industry jargon, it s easy to do. So if you have a job where you have a 401k plan, you re contributing, maybe the company is matching a little bit and you re probably just contributing to

3 the match level and you have been there for quite some time, you re gonna get a balance, you re gonna be vested in that balance meaning that you would actually get the money if you did leave the employer. Then at the time that you leave whether you leave because you retire from that company or you wanna leave or they want you to leave, whatever the case is, you now have a particular balance in your 401k plan and it is not been taxed at this point so your money as well as the company match, if there was one, is all in this one account. And the most common thing to do is roll, that s the verb, the money from that 401k to an IRA and at this point, it could go directly to a self-directed IRA, it could also go to a regular IRA and I think technically, it s called an IRA rollover because what is happening is the money is going straight from the 401k plan to the IRA or the self-directed IRA without any tax, without any penalty, typically without any charge. Again, we ve talked about the IRA charges but typically, your employer will send that money over without any charge on their part and that again enables you to do that without any tax or any penalty to roll your 401k to an IRA. You can also make that same transaction from an IRA to another IRA. So let s say that you chose to roll your 401k to a regular IRA and you had some investing that you were doing or you were just sitting in cash then you met us and you wanted to roll again from a regular IRA to a self-directed IRA. No problem, no tax, no penalty, again, the only cost might be small setup fees but it s very feasible to roll from a regular IRA or a rollover IRA into a self-directed IRA. There are some rules around frequency but for the most part, you can do that without any penalty, without any tax and you are just moving it from one IRA to another IRA, just a self-directed IRA instead. 0:10:15 Todd: The biggest mistake to be careful of is if you, like say were to separate from your job, you have your 401k, you told them to send you a check and they cashed out your 401k and then at that point, you try to put the money in to an IRA, you ve just created a huge taxable mess for yourself. So if you let everybody know that it s, that you are moving money from a 401k to an IRA, they ll automatically take care of everything to make sure that you don t take possession of those funds and that you keep those in that tax differed status which is why you put the money in there to start with. Now, a lot of people are gonna go from one job to another job and their new employer is going to ask them to roll the money in to the new 401k plan versus setting up an IRA or self-directed IRA, what s your opinion on that? 0:11:20 Kim: Yes. As a general rule, I m not in favor of that simply because 401k-s have very limited investment choices. Now, if you have small dollars and there s not really anywhere else to put them, that s totally fine just for convenience sake to have it all together but if you have 50,000 or 100,000 dollars, you ll want to be choosing yourself where to invest that money not being limited by the new 401k plans restrictions. And that s a challenge with 401k plans no matter how you look at it, they re only gonna have certain investments that are available to you and you won t have the ability to do anything else. Back to your comment about the 401k checks and where those get mailed, something that happens sometimes that I wanna just mention so that people don t get confused is that the

4 previous employer will send the check to your address but it s made out to the new 401k provider or the new self-directed IRA provider for the benefit of you. And if you look at your statement, your statement reads the same way, it says: for the benefit of Kim Butler. But if it is made to that pay or the other IRA and sent to your physical address, you re still okay, you don t need to worry about that because what you re going to do is just pass that check on, you re not going to cash it, you don t wanna cash it, in fact you can t coz technically not made to you, it s made to the new IRA, it s just sent to the address of record which is typically your home. So that s fine, you just don t wanna cash that check coz that will get you in to the pain taxes plus the 20% penalty etcetera. 0:13:06 Todd: Got it. So now we ve talked about why and how we do the IRA, what are some payoffs to doing the self-directed IRA? I think we need a couple examples of those to really make people understand the power that is in the self-directed IRA. 0:13:26 Kim: Sure. So our favorite investments inside that environment fit our stated objectives of double digit and no loss of principal environment. And so if you are an accredited investor which is million dollar net worth or more or a suitable investor which is 250,000 or more of net worth then as long as your IRA is 50,000 dollars, you can invest in a couple of different things that fit the double digit, no loss of principal environment which in our minds are bridge loans or hard money loans, you re investing in a real estate based environment that, again, that s gonna get you that low double digit, no loss of principal guideline for those investments or life settlements which also gets you that double digit, no loss of principal. And those are both investments that can be done at particular trustees / custodians that work with those investments inside IRAs. So again, our 2 favorites for the self-directed IRA arena are the life settlements and the bridge loans. Now, if you re not an accredited investor and you have dollars that you want to invest in an environment where you re not gonna lose principal or at least not very often, that s the goal obviously, one of the things that we recommend are the peer to peer lending environments so prosper.com, lendingclub.com are both places where if you have, say 20,000 or 30,000 and that s pretty much all you have, you can invest your dollars, you pick the type of loan that you re going to choose and that s what dictates your interest rate. So those are fun things to take a look at, they re a great place to get the double digits, again, there may be a loss of principal but the goal is not and it s very, very far and few between and you control the risk that you re taking in that peer to peer lending environment so that can be a valuable place as well. 0:15:34 Todd: Let s say the whole self-directed IRA, that is the goal is if you re tired of delegating that responsibility to somebody else and you want to educate yourself, make your own decisions and find investment choices that are outside the traditional market but do things that other investments don t, a lot of times you can find those on your own and certainly we have some resources that we like to give folks and Kim, I think you brought something for our listeners today.

5 0:16:07 Kim: Absolutely. So we have available an ebook called Financial Planning has Failed and in fact it talks a little bit about these life settlements and bridge loans and it is available to our listeners at partners4prosperity.com/ebook, that s partners4prosperity.com/ebook. 60 pages, couple hours on an audio if you prefer it that way and a value in the learning field on both the bridge loans, the life settlements, why financial planning doesn t work and also our favorite place to store cash, the life insurance arena. 0:16:44 Todd: And I would encourage you regardless of what s your financial position is today whether you re accredited, maybe you re not, there s never a bad time to start the educational process. The Partners 4 Prosperity website got a ton of information on there that can start your learning curve. Also Kim would be welcome to have one of her people sit down and talk to you as well. Anything else you wanna say to kinda wrap up the self-directed IRA conversation? 0:17:15 Kim: I think we ve covered it well. Send in your questions if you have them, we ll cover them on the podcast. 0:17:20 Todd: Super. Well this is No BS Money Guy Todd Strobel for The Prosperity Podcast. Once again, thank you Kim Butler and keep sending in those questions coz we love giving you the answers. END