The Personal Finance Podcast

A Masterclass on Self-Directed IRAs with Kirk Chisholm

In this episode of the Personal Finance Podcast, we’re going to talk to Kirk Chisholm about Self Directed IRAs.

In this episode of  the Personal Finance Podcast, we're going to talk to Kirk Chisholm about Self Directed IRAs. 

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On this episode of the personal finance podcast, we're going to give a masterclass on self directed IRAs.

What's up everybody. Welcome to the personal finance podcast. I'm your host, Andrew founder of master money. co and today on the personal finance podcast, we're going to be talking to Kirk Chisholm about. Self directed IRAs. If you guys have any questions, make sure to hit us up on Instagram, Tik TOK, Twitter at master money co and follow us on Spotify, Apple podcasts, or whatever podcast player you love listening to this podcast on.

And if you want to help out the, consider leaving a five star rating and review on Apple podcasts, Spotify, or your favorite podcast player. Can I thank you guys enough for leaving those five star ratings and reviews. I love when you leave those. It is absolutely amazing. Truly, truly helps out the show.

Now, today we are going to be talking to Kirk and Kirk is the host of the money tree investing podcast, but he also is going to give us a masterclass on self directed IRAs. And we're going to dive into a what self directed IRAs are some of the things that you can invest in when it comes to self directed IRAs, some of the rules and regulations surrounding self directed IRAs.

And how you can also invest in real estate within your self directed IRA as well. But there's a tons of tax benefits that we're going to go into, but some of my favorite parts of this episode is when Kirk dives into some of the stories of folks who have hundreds of millions of dollars, if not multi billion dollar self directed IRAs out there and some of the top 1 percent in those self directed IRAs and how they've created this massive tax shelter with self directed IRAs.

And in addition, he's also talked about some cautionary tales of folks who have lost. All their money in their self directed IRAs because they did not set them up properly. So in this episode, we're going to be diving into everything you need to understand to see if you want to open one up, but in addition, it's going to also give you some really cool stories from Kirk's past clients and some other people out there who have these massive self directed IRAs without further ado.

Let's welcome Kirk to the personal finance podcast. So Kirk, welcome to the personal finance podcast. Thanks for having me on Andrew. We are really excited to have you on. Cause we're going to talk about a topic that we haven't talked about a ton on this podcast. We've gone through like Peter Thiel's massive self directed IRA.

And we've talked about some of these outliers that are out there. Uh, but we've never actually dove into some of the details when it comes to self directed IRAs. And I know you are one of the experts out there. And so this is going to be a really, really fun episode. So before we dive in, can you introduce yourself and tell the listeners about yourself?

Yeah, so my name is Kirk Chisholm. I'm a wealth manager at Innovative Advisory Group. I've been a wealth manager since December of 99, which as you can imagine is really a terrible time to start in the industry. Um, probably only second to starting in, uh, August of, uh, 2008. So yeah, it was a great time to start, but, um, been through a lot in the industry, seen a lot.

And I think one of the interesting things that the timing of my starting the industry, um, was my attention to risk management was paramount because the markets went down for three years and the first, you know, 99 to pretty much 2003, the markets dropped. So I had to learn risk management quick. First people who started in 1990, who just saw upside all the way.

And it's interesting because we're in a similar time period now where the markets are all time highs. And I think people have forgotten what risk management is all about. So, you know, that's a little bit about my background. I've been through a few firms in the past, a few brokerage firms, but at Innovative Advisor Group now.

And, uh, we just do a lot of interesting stuff. It's the best way to describe it. I love that. And I think starting out in 1999 is obviously got to be tough for folks who are listening, who don't know what happened. And we had all sorts of things like a big market crash. We had the tech bubble, all those different things happened during that timeframe.

And so overall, I think that is really interesting because then you had to start from probably the hardest period of time, like you said, outside of 2007 and learn that risk management side. So overall, that is an interesting time to start, but also it couldn't get any worse than it did when it started.

So that's, uh, that's awesome. So we're going to dive into self directed IRAs. Today. And so for folks who have never heard of a self directed IRA or do not know what it is, can you kind of compare a self directed IRA and how it differentiates from something like a traditional IRA, for example? Yeah. So it's funny because the term self directed IRA, it's like calling somebody a financial advisor, right?

A financial advisor is kind of like a meaningless term, right? It means somebody who's providing financial advice, but, uh, it doesn't have any legal distinction or regulatory distinction, a self directed IRA. Every IRA is self directed by its nature, right? Individual retirement account. It's meant to be directed by the individual.

Now the term self directed IRA is typically only used to describe an IRA that is investing in an alternative asset. So if you're investing in stocks, bonds, and mutual funds, that is an IRA. People just refer to it as a traditional or Roth IRA. A self directed IRA Is if you wanted to invest your IRA into real estate or a horse, private company stock, fishing rights, gold, physical gold, like, uh, cryptocurrencies, which, you know, obviously you can invest in traditional markets, but all these different alternative assets or non securities is typically how we define them, uh, can be invested in, in your IRA and most people aren't even aware of it.

And overall, I think that is one of the biggest powers. Cause you, like you said, most people are not aware of a lot of the cool things that you can do with a self directed IRA, and we'll get into a bunch of those here today. What are some of the benefits of, you know, utilizing something like a self directed IRA instead of just a traditional retirement account?

Yeah, I mean, when the rules were created, the intention was for people to be able to create their own retirement account and build it so they could not necessarily rely on Social Security. That was the original intention. So the intention was put away money today, defer taxes until you take it out. And then I think it was 97 that the Roth IRA was created, which allowed people to put in after tax money and it grows tax free.

Now most people think, wow, that's great. That's a better thing. But it's actually not. The traditional IRA and the Roth IRA are actually the same. So if you think about it, if you put in 5, 000 into a traditional IRA, pre tax, right, it grows to, let's say, 100, 000. But if you put in 4, 000 into a Roth, which is, After tax or you take out a thousand for the tax.

You only have four thousand left You put in four thousand to the Roth and it grows to eighty thousand at retirement It's actually the same number because when you pull out the hundred thousand from your traditional you're paying twenty percent tax Which comes down to eighty so the net is the same people don't think of it that way.

They just think oh Roth It's tax free. It's better now. You might say well, yeah, but the Roth I can do whatever I want with the Roth. Yes So the differentiator between the two is effectively Tax rate going in, tax rate going out. That's really the only differentiator that you can predict, right? Because if you say, well, I'm in college, I'm not earning any money, well, that's a low tax rate.

You just put it into a Roth, right? If the money's coming out, let's say you're in a high tax bracket, you should go into a traditional, right? And let's say when you're pulling your money out, the idea is you put money into a traditional coming in because you're at a high rate. And you're pulling it out at a low rate because you're retired, right?

That's the intent. But if it's the opposite, right? If it's a Roth, you want to put it in a low rate and bring it out at a high rate because you're not paying tax. Now, you can't predict returns. But getting back to your question, what's interesting is that with alternative assets, in the traditional markets, you're getting somewhere between like a 6 percent and a 12 percent return on average, depending on what market cycle we're in.

I think right now it's probably like 10. 5%, 11 percent is the Average, but, you know, if we go into recession, that average is going to be much lower. So, let's say it's somewhere between 6 and 12 in that range. Now, that's generally what you're going to get in returns a year if you're indexing or something along those lines.

But in the alternative space, you can get returns that are much, much higher. Now, I'm not saying they're better. I'm gonna be very clear. Alternatives are not better. They're just different, right? Because you can get returns like last year you could have invested in one of the closed end funds in crypto and you would have made like 100, 200, 300 percent returns, right?

You know, you could invest and I think metastock was up like 158 percent or something crazy. So you can get those returns too in the traditional markets, right? Like I said, it's not better, it's just different. But if you're investing in alternatives, let's say you're a real estate investor. That's your full time profession.

You decide, you know what? I want to invest in rental property in my retirement account because I'm really good at it. Great. I think that's an excellent idea. Something, you know, it's something you have an edge in, you know, real estate. I don't know what this utility is going to be doing. I don't know what Apple is going to be doing or Microsoft or GE.

I don't know what they're doing. I don't have any insight, but I do have insight into the rental market because of what I do every day. So I always advise people invest in what you know, that's a Peter Lynch quote. Um, so if you're a real estate investor, invest in real estate. If you know that, Hey, I can, uh, lock up the contract in this property and flip it to somebody else and make 500 percent returns, do that.

If that's what you know, I can't do that. You know, any other stock, but I can do that in real estate because I know what I know, right? So, I always advise people invest in that. That's where you can get outsized returns. Now, if you're investing in something and you know, hey, I can lock up this property for 100, 000 and flip it to somebody for 500, 000, because I've already got the deal, I just haven't signed the contract.

I know I have somebody who will buy it, great, put that in your Roth IRA, you get a few hundred percent returns, move on, right? You know, I know a guy invests in, uh, dressage horses, and he invests in a horse, he buys a horse from Europe, trains them up and sells them to really, really rich folk. And he's making a, you know, let's say over a hundred percent return.

But it's what he's doing. I wouldn't do this for clients, right, because they don't invest in horses, but that's this guy's profession. He's a horse trainer. So he can do that legally, and he can shelter returns inside his traditional or Roth IRA. That's the benefit of the self directed IRA. Now I'm using these ridiculous returns, and I want to be clear, like, this is not common, but if you are a professional in something you know, you can find these opportunities, right?

I've seen a lot of these things. Let's put it. Over time, when you have more control of the situation and the understanding, you can do that. Whereas you can't necessarily do that in the public markets, because everything is known to everybody, and there's no informational advantage, because information is technically known by everybody.

And that is the power of that self directed IRA. Because like you said, if you have that edge and you have that availability, where there's something, you know, and you surround yourself with, you know, all that knowledge based on something like real estate investing and, or some of these other things that we're talking about here, um, you can really make a difference in your portfolio, but it's gotta be something that you really truly understand overall.

So can you kind of talk about the range of investment options that are available and are there any restrictions when it comes to the self directed IRA on what you can invest in and what you can't invest in? Yeah, great question. So what's interesting is most people think that there's some, um, conspiracy to hide this information from others, and actually what it really comes down to is just when the rules are written, there were a handful of exceptions.

And this is actually a really interesting fact. You hear people talk about self directed IRAs. They don't talk about this. So when they were coming up with the rules for self directed IRAs, they were trying to find a way to allow people to shelter money. And IRAs are actually a very secure it's a trust, effectively.

It's a secure trust. Like, somebody can't go in and take your money, unless you're the IRS and you haven't paid your taxes, but they can't really go in and take your money. Like, if you get sued, generally speaking, that's kind of like off limits. I know there's a lot of nuance there, but anyway, so it's a really secure place to put assets.

Now what's interesting is when this was being created, it was the same time that all of this stolen artwork from the Nazis. The Nazis stole all this artwork from the Jewish people in Germany. And so a lot of this was actually coming out. So people were finding artwork that was stolen, like, Hey, this is mine.

And it was a big issue at the time. It's still an issue, but it was actually like front page news and a big issue at the time. So they decided to put certain exceptions in the rules. Now the exceptions, things you cannot invest in. You cannot invest in collectibles, which is like wine, art, like collectible coins, things like that.

You can't invest in collectibles. Uh, you can't invest in life insurance on yourself. And you can't invest in an S Corp. Virtually everything else is allowed. So, you can invest, like, the world's your oyster. You can invest in real estate, private companies, you can invest in fishing rights, airspace rights, uh, horses, uh, livestock, uh, church bonds, which is a weird thing.

It's a popular thing, but nobody's ever heard of it. Tax liens. I mean, you name it. You can invest in it. You just have to stay within the rules. Now, the asset exceptions are one thing, but then there's exceptions around, like, Other things that create prohibited transactions. Like you can't do business with a disqualified person, which is yourself, your spouse, your kids, grandkids, parents, grandparents, and not exception is you can invest in something with your brother or sister, your cousin, a niece, nephew, you can do stuff like that.

So it's kind of like a loop. It's not a loophole, but it's like a workaround that is perfectly allowed. Um, so if you understand the rules, you can do a lot of things. If you don't understand the rules, you can really get yourself into trouble. Now, what's interesting is if you have a IRA at Schwab or Fidelity or one of the big firms and you say, well, Hey, I want to invest in rental property with my IRA.

They're going to tell you, you can't do that. Now, what they really mean is. They can't do that, and I want to be really clear, because this comes up a lot, like, well, Fidelity said I can't, like, yeah, they can't. You have to find a custodian that specializes in this and work with them. And, you know, if you go on our website, there's all the rules and regs and IRS and Internal Revenue Code you want to see if you really want more evidence.

But realistically, there's 47 custodians out there that actually specialize in this. Type of asset. You need to find one of those. If you want to do this. And that is my favorite part about this is because your range is just wide open on what you can invest in. And you can really have it as some sort of, you know, a shelter for taxes and a bunch of different things that are involved there.

So when it comes to, you know, setting up a self directed IRA, what are some of the steps that people need to follow? Maybe they're listening to this episode and they're a real estate investor. For example, we have a lot of real estate investors who listen and they want to start investing in real estate within their self directed IRA, what kind of.

Steps that they need to take in order to set one up so they can do it properly, find the right custodian, all those different pieces. Yeah. So what's interesting is people usually go out of order when they do this. And the reason is, is because the people who are educating the public that self directed IRAs are a thing are typically people who are selling you the self directed IRA or, Hey, you need to do an LLC in your IRA.

Coming from people who will sell you the LLC, right? Or for self directed 401k, we'll sell you the 401k. Just like the traditional IRAs are sold by traditional custodians, right? They want you to invest in stocks, bonds, and mutual funds, not horses because they don't sell horses. Right? So you got to understand the bias.

It's not like a conspiracy. It's just a bias. So the steps that people take, it's traditionally people are like, Oh, you got to do this self directed IRA. And they're like. Great, and they go set up a self directed IRA and they're like, now what? Well, you got this account, you're paying fees, what am I doing with it?

I have no idea. So, rather than setting up an account first, the best way to proceed is to find the alternative asset you want first, make sure it can be put into a self directed IRA and then do your due diligence on it to make sure it's a good investment because there's tons of people out there selling you garbage.

I get pitched like 30 times a week of garbage, like tons of garbage. I'm like, Oh yeah, you're going to invest in my thing and this and that. I'm like, I don't know who you are, but if you're calling a random stranger to raise money. It's probably not a good investment because if it's a good investment, everyone will be throwing money at you.

And that's kind of a rule of thumb, right? And there's some exceptions, but generally that's the rule of thumb. So if you're Joe Sixpack and someone sends you an email and says, Hey, I've got this cool thing and getting 50 percent returns, ignore it because they don't know you. And if they're raising money from you and somebody they don't know, they can't raise it from people who are actually good investors.

And it means it's probably not a good investment. Rule of thumb, you should take that to your grave and always apply. As they say, if you're at a poker table and you don't know who the Rube is, it's you, right? It's the same thing in investing, right? When I get calls from private equity guys saying, Hey, I've got this great thing for you.

I'm like, Why are you selling to me? Why don't you take it yourself? Like, oh, we need to free up liquidity. I'm like, yeah, liquidity from this bad investment that you know, you want to put the liquidity into a good investment. So I, you always have to consider like who's on the other side of trade. Is Warren Buffett selling to you?

You probably shouldn't be buying. So if you want to set it up, go through the process, find an investment you want to invest in, do your due diligence, make sure it's a good investment. And then find a custodian that will actually house it because you know, most of them invest in real estate, which is the most common alternative asset in self directed areas is real estate.

You know, I think it's like 40 percent are actual properties. Another 20 percent is real estate related. So it's really like 60 percent in the real estate category. Um, so you want to make sure it can house that alternative and then choose a custodian, make sure it aligns, make sure the fees align with your strategy.

So if your strategy is to buy and hold forever, Then your fees should be according to that strategy. Now, if you're going to be flipping assets every week, then your fees should be attuned to that, right? So that might be more of an asset based fee, whereas the one and done might be more of a transactional fee because You want the lowest ongoing fee versus a guy who's got a lot of transactions who might be like, Hey, we don't want to pay for a transaction.

So you just have to find a custodian that align and there's 47 of them. Our website has done a lot of research on this to make sure that people can find the right one because there's a ton and there's a lot that are questionable. I'll tell you, there have been a few that have gone under and questionable.

It's a different space. It's not like your traditional custodian. So you need to put a lot of effort into it. And that makes sense to find the asset first. I think that's a really important point is to make sure you know what asset you're looking at first, and then ensure that it can actually go into a self directed IRA and then find your custodian.

So after that process, I'm sure your custodian kind of sets the rest of this all up for you. And then from there, we talked about the fee structure, uh, beforehand here. So what are the fees kind of look like when you put something into a self directed IRA? Is it some sort of asset under management fee or how are those structured overall, typically, let's say for a real estate deal, for example.

So things like real estate are more complicated. Um, so typically, like I said, every custodian is different and people always ask like, what's the cheapest fee? Well, it depends. It depends on the custodian, right? So if you have one asset and some custodians will charge like 50 bucks a year or something like that.

Let's say in this example, and they might charge you like per transaction, let's say another 50 bucks per transaction, or they might charge you for custody of documents. So they might charge you for like wire fees. Like think of it this way, because TDs and the Schwabs and the Fidelities of the world.

They make their money multiple different ways, right? We learned this through the Robinhood debacle where they were selling market information, trading flow information to like Citadel and a few others, right? That was always kind of the case, but the public found out around then. And so that's how they made some money.

Cause they didn't charge for transaction, whereas historically they did, but they realized like, Hey, we can just sell our order flow and make money that way. They also make money through the float, right? You got cash, they're paying you 0. 1 percent on the cash and they're making 5 percent on it. So they're making a spread on the float.

They also have a margin, so they're buying and selling securities, they make a little spread on the margin, even though it's really small, they do millions and millions of transactions, so they make money that way. They make money through products, they sell products. So, the brokerage firms make all of this, they're really profitable, if you ever look at one publicly, you see they make tons of money.

The alternative custodians actually don't, it's not a very profitable business model, we actually looked at it. As a consideration to think about is like, Hey, maybe we should start one because there aren't many good ones. And we looked at it like the business model is horrible. Like you're basically making money on the float.

That's it. Like there's some transactional fees, but they have to pay for employees. They have to pay for technology. Like it's really not a very profitable business. And so we decided not to do it. But understand that it's a different business model. So if you go in and say, Why am I paying all these fees?

Fidelity doesn't charge me these fees. Yeah, but Fidelity doesn't do this. And there's a reason why they don't do it, right? It's not as profitable as what they're doing. So if you're looking at this, you have to understand that you will be paying other fees. Most likely there will be either an annual fee, transactional fee, wire fees, um, statement fees, like there's a bunch of like Mickey Mouse stuff that's filtered in there.

And it's not a ton, like you're not going to pay more than 1%, but if you have a small account, you should expect like 1 percent on the high end for custodian. If you have a big account, it could be like 10 basis points. I'm just giving you kind of a range. Um, but if you have like, you know, 10 million and you're investing in one thing, you can find a custodian.

They'll charge you like a hundred bucks a year, 200 bucks a year. Like it depends on what you're trying to do. And so I just caution everybody to spend the time up front and also understand that if you make a mistake, most custodians will charge you 250 bucks to close the account. And people don't notice that until they leave and they're like, why the hell are they charging me this?

I'm like, well, you know, they all do it. It's not like This one, some of them charge 500 and you have to stay away from those. But generally speaking, you just have to understand what the fees are and think about going in, going out, what are my costs going to be? And if you're looking at 10, 000 for one of these things, I wouldn't do it.

I wouldn't start before you hit 50, unless you're hitting like 500 percent returns, because if you have 10, 000 and it costs you 500 bucks a year, that's a big impact. Like that's not insignificant. Right. So you don't want to go in and be like, well, I'm paying 5% in fees. If you're making 500%, who cares?

Right. But it, it's, it's like, uh, the closed end fund, uh, GBTC, which was charging 2% a year in fees, and people are like, I'm not paying 2%. Like yeah, but it goes up 500% and down 70%. The two percent's nothing. , you know, like you're not buying and holding forever. And now that's changed 'cause the ETFs. But understand that the fees.

They only matter when it's a significant part of your return. If you're getting 7 percent a year, the fees are important. If you're getting 50 or a hundred, it's less important, you know, obviously money's money, but you just want to keep things in context. And that makes sense. Cause I think overall, like you said, the most important thing to understand is.

Upfront, you need to do your research. You need to ask the correct questions when you're kind of interviewing these custodians. And likely you might want to interview two or three and kind of find some information on some of these so that you can get the correct information. So you don't make the mistake and have to close the account and go somewhere else.

So overall, Hey, got to find the custodian that is really specialized in what you're doing. And then in addition, make sure you're interviewing them and asking them those correct questions. So can you do some of this stuff with say a Roth IRA as well, and. If you wanted to do it with maybe something like a 401k also, could you kind of transfer cash over to an IRA to do that, or what are some of the rules surrounding that?

Yeah. So you can move money back and forth between IRAs and 401ks. And I think that's a individual situation, depending on which applies. I will tell you a funny story. Cause you mentioned at the beginning, the concept of the big IRA or like the multi million dollar IRA, um, this came out the first time.

With Mitt Romney, when he ran for president because he had to disclose publicly his financials, it came out that he had a 102 million IRA. And now here's a guy who did private equity. So he's very, very smart guy is in the hundred millions, probably like pocket change for him. But you know, 100 million IRA that he made in his private equity days.

And you could look at that and be like, wow, that's really cool. That's small in comparison to what's out there. So the Government Accountability Office in 2012 came out with a report. They actually did data on all of the, um, IRA balances, and I'll give you some numbers because I think these are fascinating to me.

So they kind of look at different brackets, like million or less, and then a million up to 25 million or greater was the top category. There are 314 taxpayers with a IRA above 25 million. You know what the average balance of those 214 people are? What is it? You want to take a guess? I'll say 50 million, just to kind of go in the middle.

257 million was the average of those 314 people. Now you're looking at the low end of 25. Imagine what the high end is. Well, I can tell you, I know for a fact, there are at least two people with billion dollar IRAs, Peter Thiel's one, because some clown disclosed information they weren't, they didn't have a right to disclose, but I don't think it was a secret because he invested in Facebook in his Roth IRA.

For pennies a share, he invested in PayPal, he invested in like, I mean, that's what he does, he's a venture capitalist. I mean, he probably has, I don't know this for a fact, but I would guess he probably had over 10 billion in various IRAs through his investments. He never has to pay taxes on them ever again because of the nature of it's a Roth IRA.

Now, here's a guy, like, he's a single guy, he doesn't have kids, like, what does he need money for other than just a scorecard, right? But think about it, you could create a billion dollar Roth IRA, you never have to pay taxes on if you know what you're doing and it's totally possible now It's unlikely because there's you know Two people who are very successful in finance and obviously they know a lot more than we do But the point is is it's possible you could do that with any asset I could take like a url right your domain name.

You could buy a domain name url in your roth ira Uh, take, uh, what was the first big one? It was like wallstreet. com. I think it was that sold, it was the first one that sold for a million dollars. And it was back like 20 years ago. I think it was like 99, 97 sold for over a million dollars, a domain name.

You could do that. Domain names cost 12 a year. You can, if you're lucky enough and smart enough, you could do that in your IRA and build up. a huge money. You could sign up a piece of real estate for, you know, 1, 000 and flip it for 50, 000. Do that over and over. There's so many different opportunities out there people can take advantage of if they're thoughtful and creative.

And I always advise people, look, if you have something that you have a very, very high confidence rate that is going to do well, um, then you should put that in your Roth, right? Because it's tax free. You have the opportunity to do these things. Now, of course, high return usually means high risk, right? If you're investing in like crypto, you're like, well, I could make a thousand percent return.

Yeah, I could go to zero. Is that worth it? Probably. In my opinion, you know, if you're flipping a coin, 50 percent chance it's going to up a thousand, 50 percent chance going to zero. I'll take that all day. But you have to be thoughtful about it. You can't just go in and be like, oh, Ross, great. I'm going to put all this stuff in and lose all my money.

Like, don't do that. Right? Have a strategy. Talk to somebody if you can't. But like, Find a strategy that works for you and help enhance your retirement accounts. Because look, I mean, we're all in a place where social security probably won't be there in 10 years. So you got to take care of yourself. And this is one way you can do that.

And the internal revenue code allows us to do it. And it's totally legal if they can't, I mean, they went after Peter Thiel, right? Like they, they were head hunting for him. The fact that he discloses information was completely wrong, but they were going after him, Mitt Romney during the election. They're going after him.

They can't touch it. Because it's in our IRA and it's protected. They can't, and they're, you know, they're trying to change the rules, but you know, they're not going to change the rules. I mean, you got a hundred million dollars in your IRA. Just take it out, you know, um, so anyway, but my point is, is I love this stuff because there are a lot of smart people out there doing smart things, and I hope the listeners fall into that bucket as well.

And I I'm so glad that you mentioned that. Cause this stuff fascinates me to kind of look at how people can get money into some of these accounts and they can grow them so incredibly quickly. And the tax benefits that they are getting are just absolutely amazing. And a lot of times that average is just absolutely amazing to be that 257 million on average, which obviously averages are skewed by some of the top level too, but overall, I think it's just so amazing, uh, what people can do with a self directed IRA.

Now I have a couple of questions when it comes to a self directed IRA for real estate, because I know we have a lot of real estate investors. Listening. So I wanted to kind of go through just at least a few of these. Cause I think overall it is one interesting way. And you mentioned it's probably around 60 percent of self directed IRAs, you know, have assets in real estate.

And I remember, you know, going to real estate meetups in the past. And when I would go to those meetups, there would always be that self directed IRA person there. Kind of talking to each person and kind of going through those pieces. If you buy real estate through a self directed IRA, how does that process work?

Say, for example, you want to buy a single family house and you want to go out and buy that single family house, and maybe you want to get a loan on that house. Uh, so how does that process kind of work if you're buying it through a self directed IRA? Cause obviously we can only put so much into an IRA each year.

Um, so how do people kind of look at that and what does that look like if somebody wanted to buy a property in the self directed IRA? Yeah, so properties are, once again, a great investment, um, but there's a lot of nuance when it comes to property, and this is something you have to be mindful of. So the first thing you have to realize is, if you're paying all cash, it's a simple transaction.

Well, it's not simple, but, you know, you gotta pay the fees associated with any transaction, any real estate transaction. They're gonna be the same. But if you have leverage, a mortgage, which most people do, borrow money from anybody, now it creates some challenges with the IRA. You can do it, but you have to be aware of what happens.

So if you buy a 100, 000 property for cash, that 100, 000 is equity that goes into your IRA, no problem. Now, if you decide to buy a property with 30 percent down, 70 percent mortgage. Well, now that 100, 000, 30, 000 is equity and 70, 000 is debt. So, you basically have to pay taxes on 70 percent of the gain and the tax implications on that real estate.

So the equity is sheltered. The debt is not equity, so it's not sheltered in your IRA. Technically, you can have leverage in your retirement account. If you go to your brokers, they'll say no, you can have leverage. You just have to realize that you're paying taxes on that. And you would probably have to file a tax return from your IRA, which people don't realize either.

So, I don't generally recommend taking out debt on real estate in an IRA. However, if you put that real estate in a 401k, you don't have that same problem. Now, I'm not a tax advisor. Talk to your tax advisor. I'm talking generalities here, but generally speaking, if you put that real estate in a 401k and you have leverage, it doesn't apply.

So the rules are different. There are very few differences between IRAs and 401ks is one of them. So just understand that real estate is a great asset, but it doesn't mean you shouldn't do it. Right? If it's a great deal, you have to run the numbers, right? You're paying tax on 70 percent. However, you also get the deductions that you typically get on real estate.

You know, you get write offs, you get depreciation, you get all that that counts on that 70 percent. So it's not like you're just paying tax on flat, you know, income or gains. You're actually getting all the deductions. So it's just like any piece of real estate. Real estate in itself is tax advantaged. So It always kind of begs the question why put it in an IRA anyway because you're already getting so many tax benefits But let's say you're doing something that is not as tax advantageous, right?

You're not getting the same depreciation deductions Like say you're buying like raw land or you're buying fishing rights or whatever it is something like that Then you might not get the same tax benefits. So maybe that's a better use of it. So just Run the math, right? Don't just blindly throw stuff in and be like, I hope it works.

You know, go in, do the research, run the numbers like any smart real estate investor does. Run the numbers, make sure it works, make sure you understand the pros and cons. I can't recommend it highly enough, but you have to do your research. You have to do your numbers. Like you can't just say, oh, it's real estate.

It's great. I'm not touching real estate right now. The numbers are awful. Like in general, but you can find deals like their deals out there, but they're hard to find, right? Because the nature of borrowing is just so much higher. It's like costs double in the monthly payments than it did three years ago.

So you have to be careful, right? Just run the numbers. Exactly. And you make all your money in real estate on the buy and you make all the money when you're running those numbers. It is the most important skill really overall that you need to learn, especially if you're brand new to real estate is making sure you understand how to run those numbers.

And when you're putting it in that self directed IRA, there are some additional things that you need to kind of go through, including the fees and everything else, uh, to make sure that property still cash flows. Now, when it comes to buying property in a self directed IRA, can you actually live in that residence?

Could you ever put your personal residence in a self directed IRA? Uh, no. And I also want to point out that there's actually a lot of, um, bad information out there. There are people out there saying, Oh, buy your personal real estate in your IRA. And, uh, this one guy, I actually called him cause he was advertising this and I called him like, yeah, but aren't the rules such that you can't do that?

It was, that was pretty clear. He's like, Oh, we got some like. You know, private letter ruling that allows us to it. I'm like, can I see that? They're like, Oh no, it's competitive advantage. I'm like, so you want me to trust you that you're not breaking the rules? Like, I think I'm good. You know, like, so there's a lot of people out there like that.

There was a company, I won't name them, but they're actually called out in the New York times. Uh, there was a company out there saying, yeah, you can buy gold and store it in your house and your IRA. I'm like, no, you can't. You very clearly cannot do that. And like, everybody was harping on the guy in the articles, like.

10 people saying, no, you can't do that. And one guy's like, oh, you could do it. It's like, oh God, the IRS is going to visit him. But you just have to be careful. You can't just because somebody says you can do it. It's the Wild West. Uh, you cannot put your personal residence in. Remember, disqualified persons are people who Have a personal benefit you have to think of it this way you have you and you have your ira way out here, right?

Your ira is arm's length. It is a third party. You have to treat it like the neighbor on your street. You hate That's how you have to treat them. You're not gonna let them borrow money You're not gonna let them borrow the lawn mower. You're not gonna fix the roof for free You're not going to, you know, like you have to treat them arm's length, you're a completely separate person.

You cannot benefit from your IRA and your IRA cannot benefit from you, right? You can't like, oh, I'm just going to put the rent in my pocket or I'm going to pay for this little thing with my money and I'll deal with it later. No, it has to be like a completely separate. person and you have to differentiate.

You can't cross pass at all. If you do your whole IRA could be disqualified. And I'll tell you, this is a, I want to scare the crap out of people so you don't screw up. Um, there was a case that we were brought in a little too late. We were trying to fix it, but there was a guy who invested in like bus shelters and made tons of, it was work.

I don't know. It's, it's a case. So it's, it's public information. Um, And I think he was, I forget what he's worth, like 25 million, something like that in bus shelters in his IRA and come to find out that the custodian he was using wasn't an actual custodian. And what happened was the IRS found this and they took his, his list of, this is what happens by the way, if you screw up and you're working with a provider that is not what they say, they will get their list of customers and they will call every single one of them say, ding, ding, ding, ding, you're all getting a letter from us and you owe us tons of money.

So. What happens is if you have a disqualified transaction, what happens is that money is immediately distributed, taxable. So if you have a hundred thousand a piece of real estate, you screw up, a hundred percent, a hundred thousand is taken out, you're paying taxes on that today. Right? Which is a problem.

That's not the problem. The problem is, he didn't know about it, this was eight years later. I forget the number, it was like eight years later. So, he took the money out eight years ago, didn't tell the IRS, because of course he didn't know, and no one knew. So they consider it eight years ago, so you owe interest and penalties for eight years.

So the net result was effectively 25 million went to zero. He lost it all because he owed penalties and taxes on all of it. So the problem isn't right away, the problem is down the road, you owe all this money. And now you basically, your investments are worthless. Now the judge actually took pity on him and gave him like a one time transaction to take some money and put into a Roth.

And it was, it was very gracious. Cause this guy was like lost everything. Um, and it was a good result, but you can't expect that. Like the IRS has not taken any prisoners and so you can't screw up. So if you're trying to like. Think about like, how can I get around the rules? Don't. Because if there's a way around the rules, somebody like myself will say, Yes, there's a gray area and here's where you can play.

You just have to be aware of where the boundaries are. But if you're trying to break the rules, and we get this a lot, like, Oh, I want to have an LLC in my IRA so that I can hide what I'm doing. You're not hiding anything, like, if the IRS comes knocking on your door, you can't hide that. There's no protection from the IRS.

If you screw up, you're done. And if you think you can outsmart them, you can't, because I know all the tricks, and they know all the tricks, everyone knows all the tricks. There's no, you're not breaking new ground here. You're not like, oh, I discovered something. No, you're not. Like, it's been tried, believe me.

Um, like every, like there's plenty of court cases of people who've tried, um, so you don't want to be that person. You don't want to be the example, the court case of somebody doing something stupid. So there's so much you can do within the rules. There's no need to try to break the rules. Like there's so much latitude.

You don't need to try. So don't try to start some t shirt companies. You can funnel your money into your pocket. It's not going to happen. Just do it the right way. Like Mitt Romney, Peter Thiel. They made all their money by doing it the right way. I mean, they've got a target on their back. Like they know they can't screw up.

So don't screw up. Do it right. Exactly. That's an amazing story. A, I had no idea that you could invest in bus shelters, but B overall, I think that is just one of the biggest cautionary tales overall is that you have to do it the right way, just like Kirk is saying, because. It is never, ever, ever worth it to bend or even break the rules because overall, there's just so much more opportunity that you have available to you right in front of you that you could be taking advantage of.

So I think that's a really, really powerful lesson for all of us overall. So Kirk, I want to ask you a couple of rapid fire questions that I'd love to ask a lot of our guests, uh, before we finish up here today. And I love asking these questions just because we get some pretty cool answers here. So what part of your work or your life makes you come alive?

Uh, I would say, you know, as a financial advisor, I love numbers. Numbers are fun for me, but I really love is making difference in people's lives, is being able to change somebody's life. From one where they're overwhelmed and stressed and anxious about where they're going to one where they feel relief and we're kind of their safe Harbor and we're, we're their lifeboat in this kind of volatile seas that we all live in nowadays of stress and overwhelm.

Uh, I really liked that. Cause I feel like I actually made a difference in this person's life. This person actually will have joy in their life that I brought them, that it's beyond the numbers. So. I love that. If you could tell your younger self one thing about money, what would it be?

How much time do we have? Um, you know, I think the best lesson that you could give somebody is make smart decisions, start early, and probably the hardest one for most people, not for me, but I think for most people is sacrifice early, take risks early. So, sacrifice meaning Yeah, I know you could take that money and go out and have fun with your friends, but it's probably better to put it in your 401k, right?

I always did that, but I find that almost nobody does, so that's a really great one. But the other one is, take risks when you're younger. You can afford to take a risk when you're 20. You cannot afford to take a risk when you're 65. Right. So don't invest in crypto when you're 80 years old and you can lose it all.

But when you're 20, you can afford to lose it because you're going to make it back, right? Unless you inherited some big fortune, which case you probably shouldn't do that. But generally, like, just understand the risks you're taking and take them. Like, don't be afraid to take them. That's how you learn.

That's how you Discover who you are, what your interests are is take that risk, join a startup, start a business, something to take that risk when you're young, because as long as you, you have nothing to lose, you have nothing to lose. Why not do it? Right? So that's how I think about it. Exactly. And life gets just more and more complicated as time goes on and it reduces that ability to take that risk overall.

And the last one is my favorite, which is what does wealth mean to you? Yeah, wealth. Most people think of wealth in terms of money, and that's what I do professionally. But I think wealth is, it's a viewpoint on life, right? Having wealth could be social wealth, could be financial wealth, could be mental wealth, you know, it could be, I think of wealth as like Abundance in some area of your life.

I know people associate it with finance, but wealth is like, you know Having a great family that loves you and you love them like just having that that great family like that's wealth Like I don't need money for that Like I can go live in a cabin in the woods and I can still have you know an abundance of Greatness in my family life or in business.

Like maybe I work for a nonprofit, no making money. Uh, you know, it's funny cause somebody said this a few weeks ago on it's selfishness, like people think of selfishness as like a bad thing. It's like, no, all great things come from selfishness, right? Like if you're being selfish in some area, people think, well, no, no, I, I contribute all my time to a nonprofit.

I'm not selfish. Yes, you are. You're selfish because you want to feel that feeling that you get from helping people. That's a selfish thing. All good things come from that. It's not bad. Like, we look at it as a bad thing. Like, selfish is like, you know, Ebenezer Scrooge in Pinching Pennies. Like, no, like, if you run a company and you're selfish, you're creating jobs.

You're creating abundance in other people's lives. You're employing people. You're helping them. Like, of course, I'm sure there's some examples I'm not thinking of, of selfishness, but a lot of selfishness actually leads to abundance. In other areas. So I always look at wealth as like, what can I do to make other people's lives better?

And that to me gives me a tremendous gratification. And of course that's selfish, but it makes me feel good. And I'm helping other people at the same time. I love that. And overall, I think that is one of the most powerful things is wealth is not just all about money. There's a lot of different areas in your life that, uh, you could, you know, be creating wealth in, which I think overall is really, really powerful.

Well, Kirk, thank you so much. I could listen to all these, uh, unique investing strategies all day. And I love the stories that you tell, um, from some of your clients as well. But can you tell listeners where they can find out more about you, your website, your podcast, everything else that you're doing. Yeah.

And I'm, I'm pretty easy to find we're everywhere in the interwebs. So you can go to innovative wealth. com, uh, to find about me and the wealth management practice that we have. Uh, you can, you can learn more about my podcast, a money tree investing. Andrew was on there recently. Uh, I don't think he's come out yet, but he was on our show.

So come listen. That was an excellent episode and did a great job. Um, so you can find me at money tree podcast. com. And frankly, you can find me everywhere else. I mean, I'm easy to find I'm out there, but, um, but yeah, if you have questions, just, just let me know. Happy to, happy to chat. Awesome. Well, thank you so much again for coming on.

We truly appreciated it. Great. Thank you again.

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