Everything You Need To Know About Self-Directed IRAs with Bill Neville

Sean: [00:00:44] Go ahead and introduce yourself and kind of let us know who you are and what you do and how long have you been working in this industry?

Bill: [00:00:51] I’m Bill Neville. My name is Bill Neville and the company I work for is called The Entrust Group and we are administrators and custodians of what are called self-directed retirement accounts and we’ll get into what exactly that means in a little bit. Entrust has been in business since 1981. So we’ve been in business for 38 years. I’ve been with the company for just over eight years. My title was Manager- Franchise Operations. We had some franchise offices at the time and the owner of our company ended up selling those all to the individual franchise owners and then I moved to compliance and internal audit within the company for a couple years. Now I do business development, which I’ve been doing now for about five years and essentially my role as business development manager is to educate people about what a self-directed retirement account is. So my business development is not so much trying to sell but to educate. It’s to explain to people how it works and what the rules are. Essentially what we’re going to be doing for the next however long it takes is, what I do all day long is that people call me up to do presentations, not necessary all day long, but I do presentations to groups to explain what the rules are around investing in non-traditional assets inside a retirement account. So things other than publicly traded stocks, bonds, mutual funds. Like I said, we’ll get into the specifics of that as we go along.

Sean: [00:02:15] Great. I was wondering who are the kind of people who are calling you? Are they like HR Representatives or the individuals who are looking into doing it themselves?

Bill: [00:02:24] Yeah. Mostly it’s individuals who are looking to it themselves. I mean, we do get calls, not HR, but we’ll get financial advisors. I’ll get realtors, investment sponsors. So I know, there are a lot of people out there who maybe they have a private fund that they’re looking to raise funding or startup companies or anybody who’s really looking to raise capital. And they want to offer the ability for retirement accounts to make those investments. Then I’ll get calls from them to understand what they need to know, that they’re talking to their potential investors or, again realtors who might have clients who are looking to invest in real estate or financial advisors who want to branch out into alternative assets and not just be limited to stocks, bonds, mutual funds. But the majority of the people are individual investors who they want to invest in a property or they found some investment opportunity and they heard they can do it inside a retirement account and they’re calling to find out how that works, what the rules are. Sometimes people have a pretty good understanding and they’re looking for very specific things around some rules, which we’ll get into about prohibited transactions. And so sometimes people have done enough research to know that potentially they might be a disqualified person. And so they have specific questions around that. So that happens every once while. Those are good conversations when this happened but largely, it’s really very like early new ones, kind of “Hey, I heard I can invest in real estate inside an IRA. Can you tell me everything I need to know to how that works?”

Sean: [00:03:54] Absolutely. And so what are the typical questions that people are asking?

Bill: [00:03:58] How long does it take? What’s the process? What are your fees? I mean, those are like the big three that I get. If I never have to answer what are your fees ever again, I’ll be a happy guy because every single question, every single conversation ends with that. But that’s okay, I understand the need for that. But yeah, just like,”I want invest in this. Can you tell me what I need to know? what the rules are? and how long does it take?” is probably the most popular question after what are your fees?

Sean: [00:04:26] Right. I mean you hear about things like self-directed IRAs and it’s something different, you assume that fees are very high, which is probably why people ask that question a lot.

Bill: [00:04:34] Yeah. I actually think people just have no idea whatsoever. Like I could say it’s $5,000 and they’d be Okay. Not that they’d be okay with it that but they might be like, “Oh, OK”

Sean: [00:04:47] That’s reasonable.

Bill: [00:04:48] Well, I don’t know if that would sound reasonable. But I think people could come in with like really completely no idea. Like I could have this massive range that could be anywhere from here to here. They have no idea. And so we mostly get, whenever we do tell the fees, I mean, I’ll get everything from “Wow, how do you guys stay in business?” to “Oh that sounds pretty reasonable”. Upon occasion. “I’ll get, “Wow, that’s high” And my comment to that is always like, “Have you ever looked at what you’re paying your brokerage firm to hold those funds? Because if you do look at that, you’ll realize our fees are actually really dramatic.” and I’m not just talking about Entrust. I’m talking about the industry. The self-directed IRA industry tends to be pretty inexpensive comparatively to most banks and brokerage firms and what they charge to hold stocks and, not stock so much, but mutual funds.

Sean: [00:05:37] Right and we had this conversation yesterday, but can you go over the difference between a regular IRA versus a self-directed IRA?

Bill: [00:05:45] Yeah, the term self-directed means really two things. It means that when you say self-directed it’s really describing the service that the custodian provides. So self directed by definition means two things. The account holder makes all the investment decisions. So when you have your account with a self-directed custodian as opposed to a typical custodian like a brokerage firm or a bank like Merrill Lynch, Charles Schwab, Fidelity, TD Ameritrade, like everybody’s familiar with all those names, those banks and brokerage firms, one, they typically are going to have somebody who’s going to advise you. They’re going to do maybe some research and due diligence on the investment you want to make in theory. They’re going to have a conversation with you, get an understanding of what your risk tolerance is and what your age is and then they’ll recommend Investments for you to make. They’ll say we think that these three or four mutual funds are really good or maybe a mix of stocks and bonds or blah blah blah. And then you can choose to say “Okay. That sounds good. I’ll make those Investments” or you’re saying “No, I want to invest in this stock, in this mutual fund.” But the underlying theme is that that they’re limiting you to only investing in publicly traded stocks, bonds, and mutual funds. So for that reason, because of that and most people like 90% percent of the population that has retirement accounts, that account is held by a bank or brokerage firm. Most people think that the only thing you’re allowed to invest in is publicly traded stocks, bonds, and mutual funds because that’s what the bank and brokerage firm is willing to hold inside the retirement account and that’s what they typically advise. But within a retirement account you’re allowed to invest in pretty much anything you want, almost anything you want. I’ll mention the things that you can’t invest in, but you need to have your account with a custodian who’s willing to hold and process whatever investment that you want to make. So if you want to invest in real estate or if you want invest in a private company, or if you want to do notes and lend your money from your IRA or if you want precious metals or tax liens, trust deeds, etc. I may have mentioned this to you yesterday we spoke, we had someone invest in a race horse one time inside their account, in cattle and in a bowling alley, and an airplane. These are all Investments that are as long as the assets being invested in are used for investment purposes only and again, I keep saying it’s we’ll get into more details around that later, but what self-directed means is that the custodian you have the account with is willing to hold non-traditional assets, but the custodian also isn’t going to do any research or due diligence on the investment. So that’s what that means. That’s a difference between you’re more sort of standard retirement account with Fidelity, Charles Schwab, Merrill Lynch, companies like that and a company like Entrust and some of our competitors. It really comes down to they advise but they only hold stocks, bonds and mutual funds; we don’t advise or do any due diligence but we’ll hold other Investments besides just stocks, bonds, mutual funds. and Entrust specifically as long as the investment you want to make isn’t specifically prohibited by the IRS then we’re willing to hold it. So there are some self-directed custodians that might not be interested in holding, say single member LLCs, or they might not be interested in holding let’s say a Cannabis-related fund, or some of these things that are not prohibited but they may make a business decision not to hold those. Whereas within Entrust specifically as long as it’s not prohibited by the IRS we’re willing to hold.

Sean: [00:09:14] That makes a lot of sense. So I want to make one thing very clear. One of the major breakthroughs I got from speaking with you yesterday was that it’s not like this is a special IRA. It’s still the regular traditional IRA or Roth IRA. It’s just that you are the holder and because you guys are the holder now we can invest in different things.

Bill: [00:09:33] Exactly. Yeah. I mean a traditional IRA with Entrust is exactly the same as a traditional IRA which we have in Fidelity and Merrill Lynch from a contribution rules, from a tax rule standpoint. I mean the contribution limits aren’t different when somebody opens an account with us. They still have to choose a type of account. They still have to open either a traditional or Roth or a SEP or SIMPLE 401k like some type of retirement account. They have to establish that with us, but just by definition the fact that we’re holding the account means that it’s self-directed and I put quotes in the air because self-directed is not a type of account. It’s a description of the service that we provide or the type of custodian that we are. And you will see sometimes, you’ll see guys like I’ve seen advertisements on TV where a traditional brokerage firm will advertise that they have a self-directed retirement account because they’re saying we’re not going to provide you any advisory services. It’s you get it cheaper and you can use our platform and you can buy all the stocks and mutual funds you want inside your retirement account, but we’re not going to advice you so hey, it’s self-directed. But in reality it’s not truly self-directed because they’re not letting you invest in everything. They’re not letting you invest in things other than just publicly traded stocks, bonds, mutual funds, so their definition of self-directed which simply means you’re not being advised is already different from what I consider to be the industry definition of self-directed which is AND you can hold non-traditional assets. You can hold things other than stocks bonds and mutual funds

Sean: [00:10:57] Thats right and like you said when you create an account with your company, it’s not going to be an option for self-directed IRA. All of them are self-directed.

Bill: [00:11:05] All just by the fact that we’re the custodian means any account you have whether It’s a 401k or a SEP or traditional, by definition means it’s self-directed because we’re the custodian. That allows for it to be self-directed and hold alternative assets, right.

Sean: [00:11:18] That’s right. So let’s go back to one of your big questions that get asked a lot. What is the transfer and time between taking funds from one account to another account?

Bill: [00:11:29] Yeah, anytime you’re transferring accounts between IRA custodians whether from Charles Schwab to Fidelity or you move from Charles Schwab to Entrust there’s going to be a process involved with it. You have to liquidate whatever assets you hold and then they have to do a transfer and typically what we see is about 5 to 7 business days over like on average. Some custodians are quicker than others. So when you do an IRA to IRA transfer you fill out the transfer request. Like for transferring to Entrust, fill out our transfer form and then we send it to your current custodian then they transfer the money over to us. From that point that we send the transfer form, on average five to seven business days. It’s not really a very long time. But I also have seen it happen as quick as a day or two. If you have like a view as the account holder with your brokerage firm, you have a certain relationship with them, you can always call them up and say “Hey I need this transfer processed quickly” and there’s a chance that they’ll do it particularly prompt. Some are pretty slow but on average, if we had a bell curve, the top of the bell would be 5 to 7 days. And I’ve seen as quick as one to two days. I’ve also seen it take as long as a couple weeks depending upon some custodians. I won’t mention who but some tend to be particularly slow whether they have a backlog or they just don’t hop on it right away. I don’t really know but I can tell whenever a transfers coming in from a certain custodians like, again, I don’t expect that to come for a couple weeks.

Sean: [00:12:55] And in terms of creating an account with Entrust or any other company, it’s just like creating an account. It’s like, no big deal within 10 minutes.

Bill: [00:13:02] Open an account. 10 minutes. Name, address, social security number, date of birth. Like we, all of us who hold, all custodians and trust companies that hold retirement accounts, we have certain requirements that we need to meet, it’s under the Patriot Act called customer identification protocols. And so we have to ask you for certain information: your name, address, social security number. We need to get a copy of your ID for signature verification purposes. And then we also run a background like a check. LexisNexis is who we use, that verifies essentially that the name you gave us, the social security number, the address that you gave us and your date of birth is consistent with what records show. So LexisNexis is able to run that. People sometimes who recently moved for example, and they use their most recent address. It might kick back and say like “we can’t verify this address” So then we have to go back to the account holder and we ask for them to actually send like lease agreement or a purchase contract or something that shows a utility bill that shows that address and then we can confirm it. But other than that, and that only happens like rarely. Over 90% of people just automatically opens the account because all the information is confirmed. But you’re right. Opening an account with us is easy because if you go to open a bank account with Wells Fargo, or if you go to open an IRA with a Fidelity or somebody like that, it’s probably the same thing. Go through the online protocol takes maybe 10 minutes in general to open an account.

Sean: [00:14:27] So I guess a limiting factor Is that transferring funds from one custodian to another custodian?

Bill: [00:14:31] Yeah. That’s typically the longest part of the process. The difference between when you’re making an investment with a self-directed account as opposed to when you have an account with a brokerage firm is that those brokerage firms can serve funds, publicly traded stocks, bonds, mutual funds. And those are all traded on the exchange, their large extent. They’re entering the information and hitting a button, again those exchanges happen very quickly. Those purchases happen because it’s all through the New York Stock Exchange or the AmEx. It’s all publicly traded so they simply have to get verification that you want to purchase 10,000 shares of Apple stock or whatever it is. And then they place the trade through your IRA and boom it’s done. Whereas with alternative assets, with things like real estate with things like an investment in a private company or a private fund there’s actual physical paperwork: like a private fund isn’t traded over any exchange so they have to submit a purchase agreement to us. Often It’s called a subscription agreement, and there’s a physical document. Let’s use property as an example because a lot of people who’s listening maybe have been through the process of buying a property in their lives. There’s a closing process right? It has to go to title and it has to go to this review process and and it typically takes like, a fast close on a property is often three weeks, right? So the difference between that typical process where you personally bought a property and your name is on the purchase contract and your name is on all the closing documents, and your name is on title, is that it’s your IRA is the name of the entity that’s on title. So if you were to open a retirement account and go buy an investment property, it’s not Sean Pan that’s buying the property. It’s The Entrust Group for benefit of or just letters FBO Sean Pan, IRA number and then whatever your account number is. At least that’s the best thing are the titling that Entrust uses. Somebody else might use a little bit different wording. But ultimately it’s sort of the same thing and that it’s going to be name of custodian for benefit of account holder and then it includes the account number somewhere in there. That’s pretty standard IRA titling and so people see that and there’s an actual physical document that shows the name of the the asset being bought under the IRA. So because things like real estate and private placements and even precious metals if somebody wants to buy metals like gold or silver, you have to find a dealer and you have to like tell the dealer you want to buy it and the dealer has to send the invoice and then we have to send the money from the account to the dealer and then the metals have to get sent to a depository. There’s this whole manual transaction that you don’t have with publicly-traded stuff because you’re not just hitting the button and boom it goes over in the exchange in the purchases made. And so sometimes people can get a little sort of mixed up at the idea that it’s an entity. It’s a retirement account that’s buying it and not themselves personally, but the same thing happens when you buy a mutual fund or stock using your retirement account. That stock or mutual fund is held in the name of Fidelity for benefit of etc., whatever titling they use. Except you don’t see that actual naming because it’s traded over an exchange. You don’t have paperwork that you need to sign but back in the day whenever they used to send actual stock certificates, if you bought it inside your retirement account, that stock certificate was held in the name of your retirement account. And it was held by your custodian. It wasn’t held by you physically. So the same thing, you buy real estate, title is held title on that property, once it closes, it is held by your retirement account, and that title paperwork, the actual physical title document needs to be held by the custodian. You don’t get to keep possession of it because you don’t own the account or you don’t own the property. It’s the account that owns the property.

Sean: [00:18:25] Do you guys sign the paperwork or do we still sign the paperwork?

Bill: [00:18:28] Well, so Enrust as the custodian of the account or your custodian of your account signs all the documents. So purchase contract in the name of the IRA signed by Entrust. If you have a rental agreement, if you’re renting it out, you have a rental agreement it’s the account that’s running it out. I mean unless you use a property manager you can have an agreement with the property manager and the property manager can sign the rental agreement, but then Entrust is signing the agreement with the property manager because it’s the account. An IRA can borrow money. There are financial institutions that will lend money to your retirement account; to borrow money to then turn around and buy property. It’s the account that’s borrowing the money. So Entrust has to sign that document on behalf of the IRA. Now legally the custodian has to sign those documents. Entrust for one we do have a policy in place where we ask our account holders to add what’s called their “read and approved signature” on any document they want us to sign. So a purchase contract or a loan agreement or any of those, we’ll sign the document, the signature line as the investor, but we ask our clients to just somewhere write “read and approved” inside next to that. That’s a way that we do it, other custodians might do it differently. So there is an aspect of the client, the account holder does need to sign the document. But that’s for Entrust. The seller of a property doesn’t need the individual signature. They only need to Entrust signature but we ask for the individual signature for our own internal process.

Sean: [00:19:57] Got it. So I’m going to go back to transferring money from accounts. I think most of the retirement money isn’t in IRAs. They’re probably getting 401Ks. So is there a process of transferring money from 401ks into an IRA?

Bill: [00:20:12] Yeah, it’s called a roll over. So when it’s going from an IRA to an IRA, it’s a transfer. when it’s going from a 401k or 403b, pension plan, any other thing other than a IRA to a IRA, then it’s processed as a rollover. And the difference between the two is that the transfer request, for an IRA to IRA Transfer, the transfer request comes from the receiving custodian. So they fill out our transfer form. We send it to your current custodian. They transfer it to us with a rollover. It’s initiated by the account holder. So you contact your 401k provider and tell them you want to do a rollover and then they’ll have a process for you. They might take it over the phone. They might have a form for you to fill out. They might ask you to enter some information online. Different custodians will have it differently, but the key is the account holder has to initiate the rollover. It can’t be initiated by us. A rollover is technically a distribution in which you then have 60 days to roll it over into a new account. Now the rollover can be a direct rollover where they send the money directly to us. But the fact remains is that it’s still processed as a distribution on the 401K providers end and then we report that we received the rollover. And so there’s no tax consequences. An IRA to IRA transfer there’s no tax reporting or anything. With a rollover 401K to IRA there is reporting but there still no tax consequences as long as the rollover’s done within 60 days. So in theory you could have that money go to you and then you could do something with it for 59 days. And then on the 60th day roll it over into your new account. There’s no tax consequences associated with that. You’re right, majority of money like that go into IRA where it sometimes probably held in like a 401k. One thing I will point out the question that I commonly get asked, you’re typically not going to be able to roll over from a 401k in which you’re still working for the company that you’re covered by that 401k plan. Well, that’s not to say never, it depends upon the 401K plan. Some 401K plans allow for what’s called an in-service distribution or in-service withdrawals. That plan allows for that then you can roll it over into an IRA. If the plan doesn’t allow for it then you need some kind of triggering which is typically you leave a company. That’s the most common triggering event that allows you to roll over a 401k to an IRA. But there also can be like an age like there was some 401K plans where once you hit a certain age will allow you to roll over. Maybe when you reach a certain, not even age, but years with the company. I mean, it really depends upon the plan itself, but most company 401K plans in particular big companies aren’t going to allow you to roll over unless you leave the company.

Sean: [00:22:49] That’s great you mentioned that because that was my follow-up question. When I started working at my current job I was told that I was not allowed to roll over my money into an IRA and I was thinking like “Is this real or are they trying to scam me right now?”

Bill: [00:23:03] Well, I mean if you ever do really want to check that, for sure you have 401k plan documents. When you open a 401k account you become part of the plan and there are plan documents that have the rules of the plan. And for anybody who’s listening if you want to check that, if you don’t necessarily want to talk to your benefits administrator or call the provider themselves, look for the words “in-service withdrawal” or “in-service distribution”. If it has that in there then, it may have it in there that it says you’re not allowed to do in-service withdrawal, but it has in there that you can do an in-service distribution and they’re telling you can’t roll over to an IRA then they’re not following the plan rules because the plan states that you can do an in-service distribution, then you can roll over to an IRA.

Sean: [00:23:47] Yeah, because if you only have an IRA, from what I understand the maximum that you can contribute a year is like 5,500 bucks. Right?

Bill: [00:23:54] Well, it’s up to 6,000 but we’re talking about a traditional or Roth IRA. Like anybody with earned income can open and contribute to a traditional or Roth IRA, anybody with a retirement account can rollover or transfer into a traditional IRA. Those are just individual, I mean the IRA stands for Individual Retirement Arrangement, but in this specifically we’re talking about individual plans here or individual accounts. There are IRAs called a SEP IRA and a SIMPLE IRA where those are employer-sponsored retired IRAs which if you’re self-employed or you have your own company. SEP for example, so if we have realtors, they are typically self-employed. They’re independent contractors. A lot of realtors who want to have a retirement account can have a SEP and they can contribute up to fifty six thousand dollars, right? So it’s based on 25% of your income. So not all IRAs, traditional and Roth IRAs, It’s six thousand dollars as of 2019. It was 5,500 last year. It’s gone up to $6,000 in 2019. Unless you’re 50 or older. You can do additional 1,000. It’s up to $7,000. But if you’re self-employed or if you’re an independent contractor, you have your own company, then you can look into doing your own 401K. You can look into having a SEP IRA or SIMPLE IRA and those have a lot much higher contribution limits than a traditional or Roth.

Sean: [00:25:22] And is there such a thing like a Roth SEP IRA or is it only traditional for SEP?

Bill: [00:25:28] There’s no such thing as that. SEP is a traditional IRA for business owners basically. Traditional IRAs, SIMPLE, and typically a 401k they’re pre tax account. So you make a pre-tax contributions you get a tax deduction when you make the contribution, but it grows tax-deferred. There are Roth options to 401K plans, like our individual 401K plan has a Roth option. So it allows you to contribute a post tax contribution to through a 401k that allows you to contribute a much higher amount but it also grows tax-free. You don’t get the tax deduction but it grows tax-free. That’s a big benefit of a Roth. But there is no sort of the equivalent of a Roth SEP that allows you to contribute up to $56,000 through an employer-sponsored Roth IRA. There’s just the Roth option of a 401k plan. And again I go back to, it’s essentially the same as the the in-service withdrawal. The plan has to allow for that. So if you work for a company that you have a 401k and you would rather do like a post tax contribution and have it potentially be a Roth, you have to find out if that plan has a Roth option included as part of the plan because not all of them do.

Sean: [00:26:43] And can you briefly go over what a SIMPLE IRAs is? I don’t think I’ve heard that one before.

Bill: [00:26:47] So SIMPLE is an acronym. It’s an IRA typically for businesses that have less than a hundred employees. See with a SEP IRA it’s the employer that’s making the entire contribution. With a 401K with a SIMPLE the employee can make a contribution and the employer can have a match or they can even exceed the match if they choose to. With a SEP it’s only the employer that’s making the contribution. So this is handy for people who are self employed. Again, a realtor or somebody like that who are essentially deciding how much they want to pay themselves. They can report business income and then they can report personal income. And so I think most people who are self-employed report their whole entire business income as personal income, but you don’t have to, you can choose to separate that out. And so as a business owner, you can contribute to the SEP up to 25% of the income you’re going to pay yourself. With a SIMPLE it’s the employee that can make a contribution and then the employer has a 3% match or an optional 2% contribution and the employee can contribute up to 13 or 13.5% I think is where we’re at right now in 2019. So again, it’s an employer-sponsored plans typically for companies who have less than a hundred employees have a SIMPLE. Any time I get into a discussion with somebody around who particularly self-employed or has their own business, I gotta pull out the documents. I’ll explain the rules. I’ll send them like this summary document we have but ultimately the best plan for any individual of what they want to do, I always suggest you should be talking to your CPA about which plan works best for you. I can talk about the rules. I can explain the contribution limits and even talk about the pros and cons to some extent but ultimately any individual who is looking to open an account and particularly business owners, they should talk to an advisor or CPA about which plan which type of account is best for them.

Sean: [00:28:45] It makes sense. And what is the benefit of investing in real estate inside a retirement account?

Bill: [00:28:52] I mean the ultimate point of having a retirement account is to grow the retirement account as much as you can until you’re ready to retire and then you have a nice big retirement account that you can live off of. So really comes down to what investment do you want to make inside your retirement account that you think is best equipped to grow your account. Right? So, I mean a lot of people have grown their retirement accounts through investing in stocks bonds mutual funds. I mean, that’s certainly what I did for a long time before I sort of became aware of self-directed accounts. If you think that real estate is or real estate along with mutual funds along with maybe metals, it’s really just a tool like self-directed is really just a tool to allow you to choose what types of investments you want to make to grow your retirement account. And so obviously real estate offers a lot of advantages from a standpoint of not only do you get equity but you also can potentially get cash flow from it, right? It’s almost like a dividend paying stock where a company pays a dividend, but they also the company can increase value, so that stock can get a cash flow coming in through a dividend but it also can increase in value as the company value increases. Not quite as many dividend-paying companies out there. But if you got cash flowing rental property that where you’re renting it out and it’s cash flowing, you’re getting cash coming into the account, plus obviously a property can appreciate where you’re getting that benefit of both the appreciation of the value of the property as well as cash flow coming in, it’s a question I get sometimes from a standpoint of why would I invest in real estate in my retirement account as opposed to like in my personal savings? When would when I do it for my personal savings I get to deduct appreciation and and things like that whereas you don’t get to do that inside a retirement account? And I always tell people they’re making the wrong comparison. It’s not comparing investing it inside your retirement account versus outside your retirement account. It’s you have a retirement account. You’re going to invest inside the retirement account. It’s what do you want to invest inside your retirement account? And you want to invest in real estate as opposed to the stock market as opposed to Metals as opposed to a private fund. Like the options are out there. So you’re going to invest in something. I mean, unless you’re not, unless you want to just keep it in cash and that’s an option too, but it comes down to how do you want to invest your money inside your retirement account? There’s nothing to say you can’t hold real estate inside your retirement and hold real estate outside your retirement account. Now, you might not want to do that from a diversification standpoint. You might not want to be that tied up into real estate, but it just comes down to what investment do you think is best equipped to grow your retirement account and then make the decision accordingly.

Sean: [00:31:29] Yep I heard that when you have properties inside your retirement account, you are like not allowed to work on it actively. Can you talk a bit more about that?

Bill: [00:31:38] Yeah. So there are rules the IRS has in place. The overriding theme around it is based around self-dealing, that you’re not allowed to engage in self-dealing. And so there are specific people that are considered disqualified persons to your IRA. And that’s the wording that you have in the Internal Revenue code. That’s a disqualified persons. And essentially if you’re looking to invest in real estate, a disqualified person, you can’t sell a property or I cant buy for a property from or sell property to a disqualified person nor can a disqualified person ever stay in a property or do physical labor on a property, do like sweat equity even swinging a hammer. And those people, disqualified persons are the account holder, the account holder’s spouse, then it goes through the lineal family line, the account holder’s ancestors so parents. That’s great grandparents, all the way up the line. The account holders lineal descendants. So that’s children,grandchildren, great-grandchildren, etc. and spouses of any lineal descendants. Those are the list of disqualified person. So again, If there’s a property out there, you want to use your IRA to buy property as an investment, that’s fine. It just can’t buy property from yourself, your spouse, your ancestors, your descendants. At some point if you want to sell it, you can sell it but not to the disqualified person and then those lists of people can’t ever stay in a property that’s owned by an IRA or do physical labor. So if you wanted to buy a home in let’s say another country and you want to be able to go vacation there sometimes, you can buy a home in another country, but you can’t go vacation in there. If you want to buy a home and you have a child in college and you want to buy a home in that college town and have it rented out and you want your kids to stay there. You can rent it out. You can buy but your kids are not allowed to stay there. They’re disqualified persons in your IRA and also like I said they can’t do physical labor on it. They can’t swing a hammer. They can’t put sweat equity into it.

Sean: [00:33:30] But you’re allowed to do I guess non physical labor on it. Right? Like you can manage the property maybe?

Bill: [00:33:35] Yeah and right you can be responsible for the asset. So let’s talk about what we mean by managing a property because a lot of times the property manager, one of the things that they’ll do is they’ll receive the rent checks and then they’ll like deposit and keep account then they’ll forward the money on to the account holder or they’ll forward the money on to owner. Like if you had a property in your personal name, you used a property manager, lot of times the property manager is receiving the rent and then they’re forwarding the rent checks to you after they receive it right. They may be deposited into account. They take their whatever percent and then they forward you the net. Or maybe they keep a balance for you. So when you get a property tax or insurance then you send the property manager the bill and they just pay right from the account, like stuff like that, which is fine. But if you’re going to manage your own property, which means you’re allowed to show a property to the tenant like you’re allowed to be responsible for the property which means that if work needs to be done on it, you can hire the contractors, you can show them the work like you can go to the property. You point out like you’ve got this leak or something needs to be repaired or you can show a tenant the property. You can put an ad up and say I’ve got this rental property and meet them there and show it to them. So those are all things that you’re allowed to do because you’re allowed to be responsible for making sure that your asset generates a return on investment. What you can’t do as a manager is you can’t receive the money. You can’t receive the rent and hold it into an account on behalf of your IRA. The rent money has to come to the IRA directly. Now, you can physically receive a check from the tenant but the check has to be made out to your account and then they have to forward it to you, you as the as the owner have to forward it directly to Entrust to deposit into your account.

Sean: [00:35:18] So let’s talk about what you cannot invest in.

Bill: [00:35:21] Yeah, three things, collectibles. So like art, alcoholic beverages, coin collections, pet rocks. Stuff like that. So collectibles, life insurance, and S corporations. A corporation could be established as a C-corp and LLC, a limited partnership. Like there’s different ways you can establish a company. And your IRA can invest in any of them except an S corporation. So just from a collectible standpoint, so just to clarify something like alcoholic beverages. So you can’t own wine inside your retirement account, but you could invest in a winery for example. You can’t hold art, but you could invest in an art gallery. So one’s a business the other one’s a collectible. And then there’s metals. Your IRA can invest in precious metals, but it can’t invest in like coin collections. And what it really comes down to is there’s a purity or fineness that determines whether it’s investment grade or collectible. And so there are dealers out there that sell investment-grade gold silver and then there are people out there that sell collectibles of like coin collections. And so it just comes down to who you’re buying from. If it’s investment-grade then your IRA can invest in it. And if it’s collectible no. But other than that, like as long as you can imagine it your IRA can invest in it. But again the large thing comes down to making sure that whatever you’re investing in you’re not planning on doing it, using that investment away that’s considered prohibited. So you’re not getting personal use out of the investment. So one good example of this, it sort of falls in the like a unique circumstances, is classic cars. So you might think that that’s a collectible but classic cars can actually be an investment inside a retirement account. Right, like I had back when I was fairly new to this company, I’m new to the job, I had a conversation with someone who had done his research and he knew for a fact you can invest in classic cars. So he wanted to buy a classic car like a really high priced car. But here’s the thing. He can’t ever sit in the car. He can’t wash the car, certainly can’t drive the car, like you could literally like just have to put it in some kind of storage, can’t keep it at his own place, right? It has to be held at some facility where that facility is paid by the IRA or held by a third party. It can’t be like in his own home or anything like that literally. He can go look at the car. But that’s about the extent you can do and you basically are holding it to appreciate. So that’s one example of something where, like it can be done but you can’t use it in any way. I have mentioned earlier that we had somebody invest in an airplane one time. He bought an airplane. I wasn’t with the company that time. So it was before I was around but my understanding is they use their IRA to buy an airplane and then they leased it out. So people who wanted to lease this airplane, the IRA owned the airplane, the IRA paid the pilot, so he couldn’t find it, like the account holder could never find it, couldn’t get on the airplane. Actually, that’s not true. I guess they could probably get in the airplane. Because you can go into your house if your IRA’s in a house, it’s not like you’re not allowed to walk through the front door. You can’t use it, he can’t find it. It was a business and so he was leasing out the airplane to people who wanted to rent the airplane in the IRA and it receive the payments for it. So, investments like that are allowed as long as you’re using the investment for investment purposes, for the benefit of the IRA not for your personal use and personal benefit.

Sean: [00:39:02] What about for like federally prohibited things? For example, like you mentioned earlier like Cannabis. Cannabis is federally prohibited but it is legal in different states.

Bill: [00:39:12] Well, so you can’t hold Cannabis inside your retirement account. Like you can’t go buy a hundred pounds of weed or anything like that, right? But there are businesses in the Cannabis industry and those are businesses. So your IRA can invest in a private company in private businesses. So for example, there are like new legalization in different states what has had to come up from that is because these different states have certain testing laws, like they asked us test like a certain amount of every pound or something like that has to get tested. There are labs that have popped up to help service this need. Your IRA can invest in a lab. There are funds out there. There are private funds that are investing in the Cannabis industry. They’re investing in the labs. They’re investing in real estate that is leasing out to people who are growing cannabis. Your IRA can own real estate that’s leasing out to people who are growers. Now, your IRA can’t own weed but it can certainly invest in the industry because there’s actual SEC registered funds that are investing in the Cannabis industry, not publicly traded ones, but private funds and someday there will be publicly traded funds. They’re investing in the Cannabis industry and that’s inevitable. But right now an IRA can invest in a business or a fund that’s related to Cannabis industry, but they can’t hold actual marijuana inside the account.

Sean: [00:40:38] Of course because I’ve heard that because it’s federally prohibited, even the companies that have like distilleries they have to keep their money in cash and they actually hire these special security guards to take their money, put it in to a vault because they can’t put it into these like federally insured banks like Chase. They won’t take the money.

Bill: [00:40:54] Yeah. I mean there’s risk in investing in the industry. We get investors in cryptocurrency, right? Like we’ve had people who have used their IRAs to set up LLCs and invest in cryptocurrency. There’s a significant amount of risk with that.

Sean: [00:41:10] So you can invest in bitcoin with a self-directed IRA?

Bill: [00:41:14] You can actually hold Bitcoin but not with Entrust anyway. What you have to do is you’d have to have your IRA invest in an LLC, that you can be the manager of that LLC and then through that LLC you can invest in Bitcoin. So ultimately the asset being held inside your IRA is the LLC. But then through that LLC if you want to invest in Bitcoin you’re free to do that because its an actual investment. To talk about which time… like Cannabis, it’s still in some stages. It’s like the Wild Wild West right? It’s a little bit of a gold rush kind of thing where it’s cash-heavy, you have a lot of banks that have compliance issues around that and they don’t feel like they can do that. So if you’re making an investment in a fund or an investment in a business that’s in the Cannabis industry you’re incurring some of that risk that something federally might come down that supersedes the state laws and things like that. So you’re just incurring that risk, but from Entrust stand point, as custodian, if you submit a document to us and instruct us to invest in a business, we’re not doing research on that business to make sure that it’s in some industry that you’re allowed to invest in. That’s not our responsibility. That’s your responsibility to take on as the account holder. And if it ends up where you either lose that investment because the business got raided, I mean that’s on you. Again, we don’t do any due diligence on the investment that you make. What we’re doing is we’re trying to make sure that you’re not a prohibited transaction or you’re not a disqualified person to the entity that you’re investing in. And that the investment that you’re doing, that it’s properly structured in the name of your IRA not in your personal name and that you submit the appropriate documents, so that when subject to regulatory audits, when we’re under scrutiny for that, when they come what they look for is that that we followed our clients instructions, that we had the appropriate supporting documentation and that we didn’t process anything that’s an obvious prohibited transaction. But we’re not expected to do any due diligence on the company to make sure that it’s legal. Well that being said we are subject to to certain OFAC regulations, which is the Office of Foreign Assets Control that like if we’re sending money to some country that doesn’t smell right then there are requirements that we have to report that, that it looks like it could be something and it falls under the Patriot Act. There’s rules under the Patriot Act. So I don’t want to give the impression that we’ll process anything like if something comes in. Particularly if it’s going out of the country, there are certain rules that we need to do from a review standpoint to make sure that they’re not engaging in any sort of terrorist type activities. But that’s a whole different thing than investing in a company that might be engaged in the industry that right now regulatory wise is still got some openness to it that’s not quite settled for at least from a federal standpoint.

Sean: [00:44:12] Yeah, absolutely. So, I mean it seems like you guys are giving us a lot of opportunity out here by letting us choose what we want to invest in. So what are the fees that are typically associated with an Entrust account?

Bill: [00:44:24] Again, I’m going to tell you specifically Entrust fees. But again, I want to point out the self-directed IRA industry is inexpensive. So we’re all pretty inexpensive. And we all sort of fall into a fairly narrow range. But for us we typically charge $50 to establish an account. We have a transaction fee to process the investment of $95 if it’s a non real estate transaction. So like LLC or something like that or a promisory note that’s not collateralized by real estate or a $175 fee to process a real estate transaction. And then we have an annual record-keeping fee. We have two options. A flat fee of $299 per asset per year. So if you buy a property inside your account. That property can be worth $50,000. It can be worth a million dollars. It’s one asset. We charge a flat fee of $299 a year. We also offer a fee option based on the value of the account that could be as low as a $199 a year. So depending upon the dollar amount, if you’re only looking to invest say $20,000 in something then our fee, the minimum’s a $199 a year. We also have a special fee option for precious metals and certain crowdfunding sites. That’s a flat $150 a year. So there’s some crowdfunding sites we have relationships with where we’ll process the transactions, where they can hold five different investments in a crowdfunding site and we’ll just process it and will charge a flat $150 and it’s the same with precious metals. They could invest in gold, they can invest in silver, hold multiple different metals and we only charge $150 a year. The reason for the metals thing is because those metals have to get shipped to a depository. The depository is going to charge you a fee. So when we’re a custodian of real estate or something like that, not only are we processing the transaction but we’re holding custody of the asset, which is typically just paperwork. But with metals, we don’t have like a facility to hold metals so they get shipped to a depository. So since we can’t hold the metals for you and you’re going to have to pay a fee or really your accounts going to have to pay a fee, we essentially reduce our fee so that you don’t have to pay as much. It’s like combined between our fee plus the depository. It’s not like an overwhelming fee to have to be paid.

Sean: [00:46:36] Yeah, it goes to Fort Knox where it gets locked up So you don’t even get to see your gold coins.

Bill: [00:46:40] Well, it goes from Fort Knox to a depository. The depositories, I forget the names of them. We have them on our website. But no, Fort Knox holds gold but I think, I mean unless I misunderstand, we have a precious metal center based out of Reno who knows much more about that I do, but I think that it actually shifts from places like where it’s bought it goes from places like Fort Knox where it’s held essentially and then it goes to these depositories. And then there’s a dealer that essentially… or maybe the dealer buys them from Fort Knox and I probably shouldn’t be speculating, but no Fort Knox is not a depository. It’s not one of the depositories that our client would use as someone to hold the metals on behalf of them.

Sean: [00:47:24] Gotcha, a quick question for you. What do you think is better, the Roth or traditional?

Bill: [00:47:29] Yeah, so as I tell everybody whenever they ask for better, “better” is a very relative term. So a traditional is a pre-tax contribution that grows tax-deferred which means at some point when you take a withdrawal you’re gonna have to pay taxes on it. A Roth is a post tax contribution that grows tax-free. So any earnings that you make you’re going to grow tax-free. So from a standpoint of it, it’s hard to argue that growing an account tax-free isn’t better than growing a tax-deferred. It’s hard to argue that a traditional could ever be better than a Roth when a Roth is tax-free. But the concept behind retirement accounts is when you make a contribution, when you’re getting earned income and you make a contribution you’re at like, and nobody’s going to say this, but you’re at a higher tax bracket. So let’s say you’re at a tax bracket of 30-some percent, and when you retire and you start taking withdrawals now your tax bracket is maybe 20 percent, right? And so you lower your taxable income when you’re at a higher tax bracket, and then you take withdrawals when you’re at a lower tax bracket. So that’s the concept originally. Roth didn’t come in until later, originally retirement account started with Keogh accounts. They were all pre-tax that grow tax-deferred. The point was is hey, we’ll give you a tax break now while you’re making more money and then later on when you’re making less money and you need to take withdrawal you won’t have to pay as much taxes. So the the split between the two is a benefit to you, like you pay 15% less on all that money that you contributed than if you had not been able to take a deduction at the time. Where the Roth you don’t get any deduction but it does grow tax-free. So I mean we have had a lot of people who have made an investment inside like their traditional IRA. And then they’re like something’s going on with that investment. They invest in a startup company or a private fund or something and they know something’s coming. Like it’s going to get bought out or something like that. They move that thing into a Roth because all of a sudden it’s about the jump. When you move it from a traditional to a Roth you’re going to take a tax, because you’re moving it from a pre-tax account to a post tax. In order to do that you have to pay taxes. But I mean if you can grow something tax free as opposed to tax deferred it’s hard to argue that that’s not better. But again I’m going to come back to better is different for different people. Right? And so it’s always going to be your individual situation. So I don’t really ever sort of tell someone that one is better versus the other because it depends. But I mean again, it’s hard not to argue that a Roth is better than tax deferred.

Sean: [00:50:11] And final question, like imagine a magical spell was cast on you and you are able to talk to your 22 year old self, right out of college. What would you tell him?

Bill: [00:50:22] from a standpoint of IRAs self-directed? I mean. Know that this exists. Know that self-directed IRAs is an option out there. and that’s really sort of the theme of my job because I’m not necessarily trying to convince anybody that they should have a self-directed IRA or that it’s the right move for them. But I think like I truly believe this, everybody should know that self-directed IRAs is a thing and not many people do. You have trillions, like counting 401K there is over 20 some trillion dollars in retirement accounts. Trillion dollars. Just IRAs I think it’s like seven trillion, right. 97% of that is I think the last figure I heard it maybe it’s down to like 96 whole percent, 97 percent of that is in traditional brokerage like stocks, bonds, mutual funds type things. 3% of all that trillions of dollars is in alternative assets, is in self-directed accounts and so like yeah, there are definitely some decisions I made particular in my 30s that I ended up paying the price for a little bit from a tax standpoint because I had pulled some money out to make an investment because it was in my retirement account. I didn’t think I could do it inside a retirement account that it actually ended up being a bad investment. I lost some money and sort of got ripped off but I also had a tax hit and I was going to get ripped off because I made the bad decision right but I can live with that like I kind of knew at the time. The frustrating part is knowing that I could have avoided the tax that I had associated with it by just doing it inside a retirement account. So I would just like, I wish that I had known that this existed as an option. That’s all. not that I would have started out doing it. I wouldn’t have, I mean I wasn’t making much money. I was working for a company, I had a 401k plan and but I mean after my first nine years in industry, I left that company and I had a 401k plan at that point. Like now all of a sudden I would have been able to start… I now own personally a couple of investment properties. From the time that happened I had living in Chicago, had been able to buy a condo that I moved out and kept it and rented it and so I had some experience with real estate investing. I would definitely would have done some things to my retirement account. I just wish I had known that it was even a thing that it existed as an option at the time.

Sean: [00:52:42] So what point should people be going into self-directed IRAs versus just leaving it into stocks and bonds.

Bill: [00:52:48] I think when they have an investment in mind that they think is going to grow their retirement account better than stocks, bonds, mutual funds. Like if there’s an asset out there that they’ve come across or I mean, here’s the thing we’re not gonna be doing any due diligence. So when they should do it is when they are comfortable doing their own research and due diligence on the investment and not expecting a third party like a broker to recommend and do the due diligence for them. They have to do it themselves. And so anytime anybody’s ready; if they’re doing it themselves already personally, then you’re ready to do it inside a retirement account. And then it’s just a matter of finding the investment that you want to make. I mean a lot of conversations I have with people, and they call up to understand how it works, what stops them from doing it is they haven’t found an investment yet. Like I follow up with these people. I have conversations I follow up a month or two later and said “Hey, we talked, I haven’t heard from you since, just checking in” and usually their response is “yeah I haven’t found anything yet. I mean, I’m still interested. I’m still thinking about doing it, but I haven’t found an investment I want to make.” And so that’s the big thing is when with self-directed, the account holder is responsible for doing all their research and due diligence and if you’re not comfortable with that… And I understand there’s a significant percentage of population just doesn’t have the time or the interest and they’re too busy just doing their jobs and making their income and and allowing a broker, and advisor to suggest those things. But that’s great. I mean people have done that for centuries and it works very well for them. But, if that’s what you’re comfortable with then you should never have a self-directed IRA because self directed IRA inherently means that you’re going to have to do some legwork and do your own research and due diligence.

Sean: [00:54:38] Perfect. Thanks a lot for all your information you gave to us today. How can people get in contact with you?

Bill: [00:54:44] Well, our website is www.theentrustgroup.com. My email is my first initial and my last name bneville@theentrustgroup.com. And then I’m here in Oakland, California. My phone number is 510-587-0950 and then my extension’s 237. So there’s multiple different ways. Go our website, all my contact information is on our website and there’s a lot of good information on our website. We have a learning center on there that has a lot of educational material articles. We do monthly webinars that we keep on there. We don’t do podcast yet. Although that’s something I should probably talk to you about. But yeah, so there’s a lot. But just go to our website is ultimately what I would steer people towards and educate yourself a little bit and then if you want to reach out to me, just give me a call or send me an email.

Sean: [00:55:40] Perfect. And is there anything else that you think that we should know that we probably don’t know?

Bill: [00:55:44] Specifically the prohibited transactions, disqualified persons rules. Like those are really really important to know because if you commit a prohibited transaction inside your IRA, you’re essentially putting your account at risk of being considered disqualified and if it’s disqualified now, you’ve got a distribution and if you got taxes and potential penalty consequences associated with that. So it’s not as simple as like making a mistake on your taxes where they may charge you a penalty and you have to redo your taxes. With an IRA, they disqualify your IRA. There’s no going back. Like that’s done. Your IRAs distributed to you. So yeah, I mean, that’s the most important thing. I feel like we covered the most important stuff. This was good.

Sean: All right, perfect. So thanks a lot for being on the show today and giving us all this wonderful information. I definitely know who to call when I want to open up my own personal self directed IRA.

Bill: [00:56:33] All right, Sean. Thanks for having me.

Here are some of the key takeaways from my conversations with Bill. It’s important to know that self-directed IRAs exist. You’re not limited in only investing in stocks, bonds, and mutual funds in your retirement account and they’re really inexpensive and can be opened in just 10 minutes like any other account. And there are some things that you can’t invest in such as collectibles, life insurance policies, and S corps, but pretty much everything else is fair game. And you need to be careful about how you use an asset in your retirement account, because if you do something that breaks the rules, the IRS considers the entire account invalid and you’ll have to pay a huge tax penalty for it. And when it comes to investing in real estate and retirement account, you shouldn’t make the comparison of whether to invest through a personal account or through a retirement account. Instead the comparison should be between what to invest in inside your retirement account. Do you prefer to invest in stocks, bonds, and mutual funds or do you prefer to invest in real estate or do you prefer to invest in other businesses tax free or tax deferred? And finally it seems like Roths are the way to go. Tax-free is often better than tax deferred but it really depends on your own situation. Hope you learned a lot. The show notes can be found on the website everythingrei.com. Thanks and have a great day.