A self-directed IRA (SDIRA) gives you more control over your investments than a standard IRA and can help you diversify your investments within your retirement account. It allows you to invest in what you know best instead of forcing you to choose from a limited set of options determined by your IRA provider. Today’s guest, Juan Deshon, is an IRA specialist at Quest Trust Company is a self-described, certified nerd when it comes to IRA accounts. Juan explains the critical difference between a self-directed IRA and a solo 401(k), why you might need a custodian for your IRA, and how to find one that suits your needs. Join in to learn more about how you can make the most out of your retirement funds through a self-directed IRA!
Listen to the podcast here
Understanding Self-Directed IRAs and How to Find the Right IRA Custodian with Juan Deshon of Quest Trust Company
I’m excited to have Juan Deshon with us. He is a Certified IRA Specialist at Quest Trust Company. Juan educates investors on the use of self-directed IRAs for alternative assets and uses his own IRA to fund private money loans. Juan, welcome to the show.
Thank you for having me.
The way we usually start here is we would like to know your financial journey. How did you get to where you are at Quest and anything else, private money loans or what you are doing in the real estate world as well?
It’s quite interesting. I have been with Quest for quite some time now. I fell into Quest randomly. I didn’t know anything about real estate investing, in general. I was pursuing a financial career, more of those traditional becoming a CFA type of situation. However, I fell into an opportunity to work for this company as I was getting started. I have been here ever since. I have learned a lot through it.
My expertise has been with IRA accounts for the past couple of years. I have taken my Certified IRA Services Professional Exam as well, which means I’m a nerd when it comes to IRA publications. Honestly, it’s a three-hour exam that we take after a week of studying and lets us know that we know enough to guide people on what they can and cannot do as it relates to retirement accounts.
On the other side, Quest has helped me a lot to learn about real estate, in general. There’s the IRA side where we get into the boring stuff, the IRS publications, where I know a lot about, and then there’s a real estate side where most of my investors are real estate investors. I have had to learn about the industry, understand the investment types, and had seen so many deals come through my table.
We have over 18,000 clients here at Quest. I have had conversations on a daily basis for the last couple of years. You can imagine I have seen a lot of things, especially the most popular thing, being private money lending and passive investing. I have also even invested through my Roth IRA. I practice what I preach and I do private money lending as well. I tell people, “If I can do it, anyone can do it, honestly.”
If we are going to have anyone here to talk about IRAs, I would prefer a nerd IRA guy than anything else because that’s what we want to dig into. We want to understand how all of this works. The first question is what is a self-directed IRA?
I want to debunk any myth that the “self-directed piece” means that’s any different IRA account than the ones that most Americans traditionally used. When we think of IRA accounts, we are thinking of traditional Roth, SEP, Simple, and even sometimes 401(k) grouped into that category. We know and understand it in this space of, “My employer gives me a 401(k). I leave that employer and I transitioned out to an IRA account with one of those companies,” like Fidelity, Charles Schwab, and Merrill Lynch. It is invested in the market. That’s what most people’s understanding of retirement accounts is. It’s something extra. It’s pretty much on the back burner.
However, the self-directed IRA, the reason why we use that term is for marketing purposes and to help differentiate between accounts that you can use in the traditional sense of investing in the stock market and accounts that you can use to invest privately. When I mentioned self-directed IRA, I’m talking about the ones you can invest in privately. What that means is you get the same tax benefits that any IRA account would give you anywhere else. You have the same rules on when you could take the money out and what you are able to invest into as any IRA anywhere else, but you are able to take more control.
The control allows you to diversify your portfolio within your retirement account to “Invest in what you know best,” is what we say here at Quest. If a real estate investor comes to me and says, “I have retirement capital,” I simply ask him the question, “Would you be more comfortable investing in the stock market, which you may not know a lot about, and hope it rises throughout the years or take control of those funds, invest them into an opportunity that you are more familiar with?” Let’s say someone comes to you and says, “I’m raising capital for multifamily.” That may make more sense for you.
In my personal case, someone says to me, “I’m a real estate investor. I’m looking for some funding, so I can flip this home, buy this land, develop it, and sell it, but I need private money.” They are going to pay me 10% interest and I have more control over my investment and my returns if I understand it more so that’s what I do. That’s the idea behind self-directed, it is taking control and investing in what you understand, but I wanted to debunk that it’s no different IRA account. It’s not like a fancy legal term. If you try to Google a publication where it says that, it won’t.
When you say take control, what does that mean when you take control? I understand if you put your IRA through Fidelity, Schwab, or one of those, it’s basically a line account with your other accounts, but it’s special money. What does it mean to take control and have your own IRA that you can invest however you like?
Fidelity and Charles Schwab might even paint a picture of self-direction, but what they are going to do is tell you, “You have control to log in to your portal and let us know what plans or investments you have,” but in my eyes, that’s not complete control. In my eyes, complete control is going to be you being able to call Quest and say, “These are the investments that I want to make. I have found this opportunity and this is what I want to do.” No one’s going to tell me otherwise.
Our job as a custodian, when you go to the self-direction side is not to tell you whether something’s a good or a bad deal. I can see the worst deal on earth and cannot tell you do not make this investment. The only time I can tell you don’t make this investment is if it’s going to be blatantly prohibited, meaning it’s going to jeopardize your IRA and may become taxable or penalized. That’s what I mean by taking control. You are in the driver’s seat now as opposed to the passenger, maybe directing, “I want to buy this stock.” You are calling us and saying, “I want to invest with ABC company.”
You mentioned custodian. Can you talk about the role of the custodian? What do you do and how do you work with the investor?
In order to have an IRA account, you have to have a custodian and that can be a Fidelity, Charles Schwab, someone like myself, or our competitors. What the custodian does is provide a gap between you and your retirement account. What the IRS does not want is for you to have complete control of your funds because what they say is, “If you want to use your funds, however, you want, without any oversight at all, take a distribution and a withdrawal and pay us taxes and possibly penalty.” You can use it once it is served, but if it’s in the retirement account, you got to play by the rules. The only way that we can ensure that you will is by going through a third party or a custodian.
On the other side of that, custodians will also handle the things that people don’t want to do. The administration of the accounts requires separate bookkeeping and record keeping. Bookkeeping means funds coming in and out of your account when you are making investments. Record keeping is at times tax forms. If an individual takes out distribution or withdrawal that triggers a tax form. On an annual basis, you have to report to the IRS your values on a form called the 5498. No one wants to do that either.
There are a bunch of these little things IRAs need to have done throughout the year that wouldn’t make sense for a person to do it. Otherwise, they would be taken on another job. That’s why custodians exist. The custodian you choose will determine whether or not you can “have it as self-directed” or go the traditional regular route. What Fidelity does and what we do custodian-wise is identical, but Fidelity will let you buy Apple stock and Quest Trust Company will let you buy real estate or physical land.
I have tons of clients who have accounts at multiple custodians and move money back and forth as needed. You are not subject to having one custodian. Theoretically, you can have 100 IRA accounts as long as you can keep track of that and to the IRS, it’s all one IRA. Again, we are here to provide that buffer between you and your IRA account, the arm’s length distance, allowing you to make transactions, but also handle all the details, taxation, and tax forms involved.
You also mentioned prohibited transactions. Can you talk about what those are and how you make sure you avoid those?
Number one, I always say, “Call your custodian,” especially, if you are in a self-directed situation. Calling your custodian will help determine whether or not something’s going to be prohibited, but understanding the rule can be very simple if you understand one thing. It’s understanding who you cannot make investments with. This is typically not talked about when someone that’s not familiar with self-direction because when you are investing in public stocks, you are typically not falling into this category unless you are Elon Musk and investing in Tesla stock, but typically there are no issues.
What it is, is you cannot invest with certain people or entities. If so, it becomes a distributable event in the year it occurred. If you do one of these mistakes then ultimately the IRS says that investment was null and void the moment it occurred and usually, they don’t catch it until three years later. What happens is you now owe taxes and penalties for maladjustment of your taxation on a yearly basis. It gets pretty ugly pretty quickly. You can’t invest with yourself, spouses, children, parents, and spouses of your children, essentially the immediate family.
I cannot take my IRA account and loan funds to my wife or invest in my father’s business or to my children’s business. The reason why is because they consider these individuals and their entities fiduciary to their IRA accounts. If you pass away, typically the line of succession is going to be spouses, children, or parents, if you don’t have a spouse or child. They automatically disqualify those people. It’s too close for comfort. If I loan my spouse money, and then we live together, that money’s probably also going to be beneficial to me. You are not using your IRA account for what it’s meant to be used. At that point, you might as well take the money out and use it how you want.
They automatically disqualify those individuals, but if you did a transaction with them, that’s what’s called a prohibited transaction. As a custodian, when you call us and tell us, you want to make an investment with ABC, LLC, where John Smith, usually the first thing we are going to ask you is, “Is that company that you or those individuals I mentioned own?” If the answer is yes, there could be some problems.
Are there any other prohibited transactions? At one time, I heard that you couldn’t invest in gold or there are certain other asset classes that you had to steer away from. Is that still the case?
It’s more like investment restrictions. There are certain classes of things that you cannot invest in. There are only two and those are life insurance policies and collectibles. Those are the major categories. When we look into collectibles, some coins fall under that category. If you are buying gold and silver, you can. If you are buying coins, there are a few specific ones that are allowed, but for the most part, if there are collectibles type of coins then you cannot.
[bctt tweet=”There are only two things that you cannot invest into with self-directed IRAs – life insurance policies and collectibles.” via=”no”]
It’s funny that there is a list of these. You can look up prohibited collectibles in an IRA. One of them is even alcoholic beverages. Apparently, people are collecting alcoholic beverages. If you collect alcoholic beverages in your IRA account, I feel like you have other problems to deal with other in the IRS. There are only two things the IRS says you cannot invest in and that’s those two categories I mentioned. This is interesting because it hasn’t changed in years, but all this time self-direction, I feel like it’s now coming to light, but this whole time we have been allowed to invest in real estate or other assets. It’s the custodians, the banks, and the corporations that were not making money that way. That’s not what they promote.
They want you to invest in their products, not in products you find on your own. There’s a self-directed IRA and a self-directed 401(k), which have about 100 different names of what people call it. What’s the difference between the self-directed IRA and the self-directed 401(k)?
I called it the solo 401(k). How I differentiate the two, I think of the 401(k) as the car with all the bells and whistles. It’s the biggest truck you can think of. It’s lifted. It’s got everything you need inside interior-wise. It’s got everything. An IRA count is a regular car. It’s going to get you to point A to point B, Sometimes an IRA is better than a 401(k) for some, and then for others, and vice versa.
First thing, when someone comes to me and says, “I want a 401(k) plan,” we have to first make sure you even qualify. Before I get into that, let’s explain the differences. An IRA account is a personal account that anyone can have. Traditional IRAs and Roth IRAs are personal account types that as long as you have earned income, you can set up for yourself. You can have a 9:00 to 5:00 job and on the side, create a traditional or Roth IRA for yourself and contribute to it on a yearly basis and invest, so anyone can gain access to those.
There’s another category that we categorize as employer plans. Individuals who have businesses or sole proprietors and don’t have the corporation that is providing them with the 401(k) or maybe they do, but they also have a side hustle or a side business and they want to provide themselves with other 401(k)-ish type opportunities. There are certain employer plans that may be available to you.
The three types are SEP, Simple, and Solo 401(k). A solo K allows any individual who is a self-employed person with income that does not have any full-time employees. This is a key thing there. It’s in the name solo. The reason why is because it allows you to set up basically a corporate 401(k) for me, myself, and I. Otherwise, if you have full-time employees, you have to set up some 401(k) plans for employees and it’s fair to all employees on the laws of how much you can contribute to each matching.
A self-employed individual is going to come to me and say, “I want a 401(k) plan because I want to maximize my contributions. I want to put as much as possible as I can into this plan, especially because it’s me, myself, and I.” That sounds great. A 401(k) plan that you can contribute $61,000 a year right now to compare it to an IRA or Roth. An IRA is $6,000 if you are below $50,000. That is a huge difference in numbers there. You can theoretically put a lot of money into a 401(k) plan if you are self-employed.
Other bells and whistles that it offers you are more control. With a self-directed you get control, but with a 401(k), you get additional. By doing so you take on the responsibility of being trustee/custodian. That’s what I call it. A 401(k) plan, it’s almost DIY type. Instead of calling Quest or a custodian and letting them know, “I would like to make an investment,” you are able to physically make that investment on behalf of the 401(k) itself. You are able to sign and execute documentation and contracts on behalf of the 401(k) plan.
The 401(k) is its own separate entity with its own EIN number with you as the captain of the ship. It allows that flexibility for a lot of real estate investors who are doing more hands-on investments. Think of it like a fix and flip. A flipper will have to call Quest and tell us, “I need to pay X expense to pay out of my IRA account or send money to this contractor.” That can be a real pain in the butt sometimes, especially if it’s a Saturday and we are closed. You can see how logistically that can be a pain.
In a solo 401(k), you call yourself. You don’t have to go through a custodian. You can simply write that check out of that 401(k). It automatically embeds a checkbook control aspect to it. As I mentioned, bells and whistle type of plan. Anyone who’s self-employed has income and no employees should consider a 401(k) plan.
If you are not 100% familiar with IRA accounts, taxation, and reporting, then I also recommend having on your team, either a custodian that you can pick their brain about it or a CPA who’s also familiar with the recordkeeping and bookkeeping requirements for 401(k) plans, because it’s very easy to also mess up. You asked me, what custodians serve as, they also serve as making sure you don’t mess up. Without the custodian, there’s room for error. They are probably more audited than an IRA because the IRS knows where there’s room for error then there’s room for taxation.
You mentioned checkbook control on the 401(k) and you can also have checkbook control of your IRA. Can you talk about that and the advantages there?
Let’s define checkbook control. It’s almost as simple as it sounds, but checkbook control is having the physical checkbook of your IRA account or 401(k). You are physically being able to send checks and send money out of the retirement account without the need to funnel it through a custodian for the purpose of time and execution. Funds are never going to your account personally. It’s always a separate account that’s for the specific entity, but you have complete control. That’s what I define checkbook control as.
You are right. There are methods to acquire checkbook control access for an IRA. With the 401(k), it’s automatically within the plan documents. You end up being trustees so it’s part of the plan. With the IRA, what ends up happening, and this is a debated topic in our industry between tax attorneys and CPAs, whether or not, or how to go about checkbook control.
There are two things. One, there are some custodians that say simply set up an entity like a trust or an LLC where the beneficiary or the owner is 100% the IRA in question, then the manager or trustee of that entity would become yourself. You automatically are fiduciary to your IRA through the trust or LLC by sending funds here and there.
From a custodial standpoint, what the custodian sees is IRA sends money to an entity, LLC, or trust, and that’s it. Now, the account holder has access to the funds and can disperse it through investments how they see fit. It’s a wide strategy and saves you sometimes money on custodial fees and sometimes saves you time and headaches for those logistics that we talked about that may be difficult when you don’t have this.
The other side of the coin or the other debated topic is whether or not that’s a prohibited transaction. We talked about that before and who are the prohibited individuals, yourself, spouses, children, and parents, but you have placed yourself in a position to have direct access to the IRA funds and you are also there labeled as a manager or trustee of that entity you established, so it starts to get into this grayish area.
The IRS has never said whether or not that’s specifically prohibited because the argument is, you are doing everything for the purpose of the IRA. The question is, “Could they get you on the fact that you invested and sent IRA funds to an entity that you manage?” That’s where it’s gray. Some custodians stand on the side of, “It’s fine,” and some stand on the side of, “Let’s be more conservative, and let’s try to put someone in between there.”
I have clients that sometimes to avoid any scrutiny place an individual who’s not a disqualified person as manager or trustee. For example, I would place my brother. My brother is a non-disqualified person. I can loan him money out of my Roth IRA account if I wanted to. In that case, I can place them as the manager or trustee of the trust and LLC.
What happens now is I have created a buffer between myself and my IRA account so I have passed that sniff test for the IRS. I have also created myself a checkbook control where who has the authority to send checks out is my brother, who’s probably easier for me at least to contact on a weekend than the custodian is. That’s a way to avoid that.
When you look at grayish areas, the only thing that you can do from an IRA standpoint or a custodian standpoint is look at court case studies. The most recent one is an interesting one because it has checkbook aspects to it, but the reason why they were taken to court was another reason. This is called the McNulty Case.
The McNulty case was this couple, the McNultys were investing in gold with their IRA accounts. Nothing prohibited thus far. However, they did it through a checkbook control LLC, IRA account. They had an IRA that was invested into an LLC and they were managers of the LLC. They used that to go ahead and buy gold. Not only did they do that, but they also then held the gold coins in their safe at their home.
What ended up happening here is it got taken to court, whether or not this is a prohibited transaction for holding the gold in the safe at their home. Their LLC documentation and mail, everything always pointed to their home. What the IRS ended up ruling is that it was prohibited for the purpose that they had the gold coins in their home possession. They had it in the safe that they used for their personal possessions as well. What they did not like is that there was no separation between themselves and their assets at all. Theoretically would stop them from taking those gold coins to selling them and then, cashing out. No one’s overseeing this, so that became a problem.
They didn’t touch on the fact that they invested into an LLC that they manage, which is quite interesting, but they touched on the fact that they held assets and had control of them. The line that is engraved into my mind now is that IRS said, “It was the unfettered control of assets that they had, which ended up being the overall conclusion of that being prohibited.” The fact that they had unfettered control is the issue.
I argue that unfettered control of assets includes cash, in my opinion. What stops an individual from getting checkbook control, putting it to LLC, and then using some of that money to pay themselves with Christmas presents, whatever it is? Honestly, nothing stops them because we don’t see it anymore. It’s just if they get caught.
In my opinion, having unfettered control of cash, it’s also prohibited. Although they didn’t necessarily say it’s prohibited to invest in your own company, but the moment that you take control of assets that the IRA has, that’s where it becomes a problem. It’s interesting, and then we use that as a case study to stay on the conservative side. When I mentioned IRA custodians argue all the time, we are on the conservative side for that reason. There are some that say to each our own. Take it as you see it, but that’s the gist of the law in the court case.
When you talk about fees, what are the typical fees that you would pay for a custodian? In our community, we are always having people that say, “Which custodians should we go through?” One of the main questions is what are the costs and your choice is going to depend on how many transactions you are doing also. If you are doing a flip, you are going to want as low fees as possible because you are constantly moving money, but if you are investing a chunk one time, it’s less important.
I can speak to Quest fees and I will also say that our fees are competitive in the market. We consistently review them and compare them to our main competitors. Our main competitors are fairly competitive. One thing also is I have found that in this industry you get what you pay for. If you want a custodian, that’s going to be pretty hands-on, make sure things are done correctly, being able to contact them and receive responses, you are going to pay more than a custodian that simply sets you up an account and your checkbook control, and then you are off.
Some people want someone to help them and guide them through the processes and handle all the reporting. Some people want, “Set me up. I want to buy this real estate. I don’t care what happens afterwards.” Make those decisions. On average, what you are looking at is investment fees. When they come to make transactions or purchases and then yearly administrative fees.
For transactions or purchases, I define that as when you are physically signing contracts and buying a home or you are signing an operating agreement, that’s when the custodian typically charges you a fee to execute on behalf of your IRA. There’s probably some review process that happened and occurred beforehand. To give you a ballpark, ours is $125 for that action.
The next thing that you typically see is going to be a yearly administrative fee. “This is going to be how much it cost me to hold my IRA account with you and hold assets.” It always ties to accounts that hold assets. If you have cash, typically those aren’t considered assets. If you are holding an asset, this is where you can have multiple structures. On average, a client investing $50,000 to $100,000 is probably paying a $350 fee a year per asset they own. There are situations where I have clients who are investing in multiple assets at once, so $350 times 2, 3, 4, or 5 can get pricey. They start looking at other options. Other custodians like us have this option as well, where instead of paying per asset you own, you end up paying based on your total account value. This can range anywhere between a $150 quarterly fee to a $200 quarterly fee for larger accounts. It can be much lower too, by the way.
To give an idea there are usually fee structures to play with. Since you talked about the flipping, for a person making consistent transactions, typically that’s like a banking fee. If you are sending wires out consistently, our wire fee in the industry is $30. It’s simply between $25 and $30 or ACHs. ACHs are typically free. Sometimes you may have more cost by sending money out consistently, but for the most part, it’s usually that $125 and possibly $350 a year.
Our most active clients with ten plus assets and multiple accounts end up jumping ship to our gold family service and that means that we encompass all of their structure, all their investments, and all their accounts for 1 single fee of $3,000 a year. When you think about it, these are usually people who are investing $500,000 to $1 million in multiple assets. That’s dirt cheap compared to what they are investing. If you are thinking of a ballpark, how much it’s going to cost, think $300 to $400 a year is what I see as an average, if you are active.
Other fees, what factors should we consider when we are trying to choose an IRA custodian because there are all kinds of amounts there? Fees are important, but there’s got to be other factors as well. What should we think about when we are choosing a custodian?
One thing is responsiveness. I have heard countless times that people change custodians because they don’t get responses and/or they don’t know who to contact in certain situations. Being able to have a custodian that’s going to be there when you need them to make executions on investments, ultimately time is money here. How responsive are they? How quickly can they fund investments? How knowledgeable is the staff in the asset class you are trying to invest in?
That’s a big thing and that’s not even biased because if you tell me, I want to invest in cryptocurrency, I don’t know too much about cryptocurrency. Do we have the option? Yes, we do, but you might find a better custodian that’s more suited to cryptocurrency purchases or gold coins, or gold and silver. I recommend someone else over us for that. There are the custodians that have depository relationships already where they can hold the gold and silver for you.
I also always think about what asset classes are you going to be investing in and is that custodian is well-equipped to handle those investments. That’s one question you always want to ask, and then gauge the knowledge of the staff and what things they offer, because the more knowledgeable the staff, the more helpful they are going to be when you get into a bind if that occurs or that happens. Unfortunately, it happens a lot. That’s the two things I would look at.
[bctt tweet=”What asset classes are you going to be investing into? Is that custodian well equipped to handle those investments? These are the questions you always want to ask when choosing an IRA custodian.” via=”no”]
We hear a lot of talk about UBTI and UDFI. Can you explain those a little bit? When they come into play and when you are investing in syndication or real estate deal that uses leverage, are these actual costs that you see people having to pay?
Defining UBTI or Unrelated Business Taxable Income is taxation that IRAs pay in three scenarios. The first scenario is owning and operating a business. If I own a lemonade stand and I’m charging $5, I’m probably charging less than my competitors because an IRA doesn’t pay taxes. To level the playing field, if I’m owning and operating a business, they are going to charge taxes to the IRA and the IRA pays it at a trust rate. That’s reason one and a little bit about how much you pay.
Reason two, that’s the Unrelated Debt-Financed Income, so when you take out a loan or you leverage debt. Reason three is leasing property not attached to real estate. The most common thing of this is if you buy a mobile home, but you don’t own the land underneath, you are leasing property. That occurs and ends up being taxation for running a leasing business or a jet ski.
The most common one we see is Unrelated Debt-Finance Income. That’s either someone taking out a loan or the IRA taking out a loan from a non-recourse lender for the purchase of real estate or investing in syndication. The syndication takes on large leverage, so automatically it’s tied in which sometimes deters people from the opportunity or makes it look less sexy. However, I don’t think it’s a reason to jump out of these investments or even be scared of taxation. Typically, in my experience, you still make pretty good money.
What ends up happening is the new line company raising capital then goes off and takes a loan. This asset in question is a debt leveraged asset. They are using LLCs, which I call tax pass-through entities. They pass taxation on to their investors. The fact that they took on a loan theoretically is also passed down to the IRA account holder. The IRA account holder usually is a small percentage owner of the entire project as a whole. It takes on a small percentage of that debt.
What ends up occurring is years 1, 2, and 3, which don’t necessarily have too much income to report. There’s no UBTI to be worried about. Where UBTI occurs is in the backend when you finally get paid off, the refinance that they sell, and you receive your returns plus some. When you receive your returns plus some, the income that you made may be subject to taxation. At this point in time, whenever that investment closed and they sold, a CPA through their paperwork would have to figure out how much of the asset was debt leverage at the moment that you got paid off.
For math purposes, it was 50%. What ends up happening if you received $10,000 of income from this project, 50% of it goes back to your IRA free and clear. The other 50% or $5,000 will come into your IRA but will be required to be reported to the IRS as income. That income will be taxed at a trust rate and will come out of your IRA account to pay the IRS. It’s nothing that comes out of pocket. It comes out of your IRA account. It still doesn’t cost you anything. It’s a little bit to Uncle Sam out of the returns that you made.
It’s interesting to see the calculations. I’m not going to go over calculations, but I will mention that I ran through a real scenario on our YouTube channel with someone who calculated in two instances, how much UDFI they ended up paying. Off the top of my head, and if my memory serves me right, the individuals made roughly between $45,000 to $60,000 and paid between $9,000 to $13,000 in taxes out of their IRA account. In a time span of 4 or 5 years, they still ended up making about $40,000 to $50,000 even after the IRA paid taxation.
It’s a smaller percentage than you end up thinking would end up having to be paid, but it is something to be aware of because if you are investing in syndications, you most likely will incur this. When you do, having a CPA in your corner that understands the situation is going to be 100% key. Your custodian will not calculate this for you.
The calculation is very complicated. You will have to figure out how much you owe, report it on what’s called a 990-T tax form, provide it to your custodian, and then your custodian would take it, and see how much that you owe in taxes and send that check, ACH, or wire directly to the IRS to pay that expense. I hope I didn’t butcher that. It’s a complicated thing. It helps with visuals. I highly recommend checking out that video.
That was a good explanation because that’s always something that we are talking about and that’s one of the main reasons that some of the investments you do in your IRA, you would prefer to do them outside of your IRA if you have the capital so you can use those tax benefits and you don’t lose them. If you are investing in leverage deals inside your IRA, your returns are going to be a little bit less than they would be outside because of that tax issue, the UDFI, which is why, mostly, at least in my IRA, and it sounds like you do some of the same stuff is private money loans, lending, or debt. It seems more efficient in that vehicle.
Based on experience, I want to get into a multifamily deal myself within my retirement account and work on getting that capital up to meet those minimums, but I want to because they make pretty solid money. Those returns are typically larger than what I’m able to get in private money lending, private money lending. I’m everywhere between 10% to 13% on a good note. If I can get into one of those deals, I can get about a 20% to 28% return on my money.
Even with that, running the numbers, and figuring out whether or not it’s better to do it within the IRA or outside of the IRA, I understand there are benefits to both. The good thing is you don’t have to pick and choose if you have personal capital or retirement capital, maybe you can do both. If you are in a position where you only have IRA capital and you are thinking, “Should I take a distribution and then do it myself?” I would 100% say to run the numbers first because distribution is going to first add to your income so it depends on much it is and how big a tax burden is going to be. Two, it possibly causes penalties.
It’s a situation that would require a sit down with an accountant to run through the numbers and see what’s your best option, but I 100% agree. It’s a personal preference. If you want to avoid it entirely, you can avoid it by doing loans. It never occurs with UBTI or UDFI or investing in C-corporations. C-corporations don’t pass the taxation as LLCs do, so you won’t have to worry about it in a C-corporation setup.
At 59 1/2, that’s when you can access your IRA money without paying the fees. When you reach that age and you have a self-directed IRA, does it change what type of assets you want to hold, or if you want to take distributions and you have syndication, how does that all work once you are starting to make withdrawals from your account or you want to make withdrawals?
At 59 1/2, it may change the asset classes that you invest in. You get to think about your personal situation. Will you be dependent on the funds there? Are you trying to use those funds for the purpose of retirement and what they are for? Is it for wealth building or do you use it later and still have some savings elsewhere? If you are in the position where you are going to need the funds, you have to think about the longevity and liquidity of these asset classes.
This happens a lot for individuals who end up turning 72 or above because at 72, not only are you of retirement age but you are also required at least in traditional IRAs pre-tax accounts to take a minimum distribution on a yearly basis. If you wanted to leave money in there, you have to take out something by age 72 and on.
What happens now is if you find yourself in a situation where you have to take money out for whatever reason, but you are an illiquid asset, what do you do? You have no cash to take it out. One thing we do is say, “Do you have IRAs elsewhere?” If it’s for purpose of RMD, the required minimum distributions can be satisfied at any other retirement account that you have, if you have it.
If you do not, it gets a little bit more complicated. You have to take personal distributions of the asset itself. That is possible. There is a solution. What does that look like? If I’m taking a distribution of the asset I own, and that asset is the syndication, a private money loan, or a physical real estate asset, what’s going to happen now is I have to transfer the ownership of that asset from my IRA’s name to my personal name. That caused taxation.
I would have to get it evaluated. If it’s worth $10,000, $50,000, or $100,000, I would be adding that amount to my income that year, even if I didn’t receive $10,000, $50,000, or $100,000, I won’t be receiving cash. I would be receiving the asset. Moving forward, it’d be as if you owned it from the beginning. That’s what ends up happening. It’s a thought that you should have, especially as you start reaching age 72 specifically how liquid are my assets and what am I investing into. Make sure you have enough to meet your living requirements and what you need to take out the money.
[bctt tweet=”As you start reaching age 72, you have to think about how liquid your assets are and what you’re investing into? Make sure you have enough to meet your living requirements and what you need to take out the money.” via=”no”]
That makes good sense. The last question I ask is what’s a great podcast that you like to listen to?
I was thinking about this because weirdly enough, I don’t listen to too many financial podcasts. I listen to a lot of comedians, honestly. For work, I drive to Dallas and Austin a lot. Those 3, 4, to 5-hour drives, I put on a podcast, and it’s usually a comedian. I like that. One that’s very interesting and pretty informative as well is The Jordan Harbinger Show. I don’t know if you heard about that.
Jordan Harbinger is a guy who reads tons of books. What he usually does is interview the individual who wrote that book. There’s usually someone very interesting. Examples of people he’s had on are brain surgeons. This one that was very cool was an individual who spent his time in Afghanistan as a CIA operative acting like a photographer and getting Intel for the CIA. His name and everything were redacted, but he was talking about his experiences.
To me, that was super interesting because you only see those guys in movies, but he was talking about what he went through in real life. There were situations where he had to act friendly with the bad guys and he was put in situations where he had to quickly get thick on his feet and get out, otherwise, he may have been forced to kill someone that he shouldn’t. He’s got to get out of these weird situations and some pretty intense ones.
It was very interesting. That’s an example of that podcast. There are tons of episodes like over 600 episodes, or maybe more than that. You can go through the list and randomly pick one. If you see the individual’s bio and they sound interesting, astronauts, and all those guys. They are the people that are doing cool things out there.
I’m going to have to check that one out. I have heard of it, but I have not listened to it. Thanks for sharing that. If readers want to get in touch with you or hear more about Quest, what’s the best way to do that?
Three ways, one, you can always call on the main line. We are a fairly small company with 100 employees, but my name is Juan Deshon, you can always call me and say, “I would like to speak with Juan Deshon. I read about him,” and I’m happy to assist. If I’m not available, as I mentioned, I travel and do events and webinars. Go speak to any IRA specialists. Those are the individuals on my team. There are about 8 to 9 of us and they can answer any questions. Everything I have answered now, they know so they can help you out.
Another thing too, if you want to quickly go to our website and check out QuestTrustCompany.com. We have an education tab. We have a YouTube channel and tons of videos. Our main goal is to educate as much as possible, but the reason why I would go to the website too is we have a chat box. From 8:30 to 5:30 PM Central, Monday through Friday, we have someone on my team on the chat box, so it’s not someone from across the country, where you can go ahead and ask a question, whether it be about your account or questions, in general, about IRAs or what we do. You can start chatting with them.
They will answer the question pretty quickly. For example, if you go into the chat box and ask me, “Do I owe UBTI or UDFI and how do I calculate it?” I’m probably not going to chat that all in the chat box. I’m going to ask you, “What’s your phone number? Let’s set up a call.” Maybe even call you right then and there, but it’s a good way to get in contact with someone almost immediately. It’s very easy and resourceful.
Thank you very much, Juan, for being a guest. This has been great learning about self-directed IRAs. We appreciate your time.
Thank you for having me.
That was a great conversation with Juan learning about self-directed IRAs. I have had a self-directed IRA and I have what he terms a solo 401(k), but I have to admit, I did not know all the ins and outs of it. It was nice to hear that. The first thing he said is the self-directed IRA is no different than a regular IRA, except that the custodian, which in this case would be Quest or yourself, or one of the other self-directed IRA companies, allows you a broader set of choices in what to invest in than Fidelity or Schwab.
Fidelity and Schwab lock you into their platform and invest in what they want you to invest in. These custodians for the self-directed IRAs allow you to invest in a lot more things. You have to run it through them. The rules and the tax treatment are all the same. You have a little bit more control over where you are investing your money.
He talked about the custodians and making sure that they have experts relating to what you are investing in, and that was interesting to me. I hadn’t thought of that. It would be helpful when you are talking to your custodian and trying to get money for an investment from them or get their permission because you have to run it by them at least, to have someone there that understands the asset class that you are investing in.
He even said if you are doing gold, they have a better company that does it differently than they do. They recommend somebody else and that’s what you want from a custodian or a professional is when they know that they don’t have the expertise that you are looking for, that they are okay to recommend you to go somewhere else so you get what you need rather than trying to be someone that can be effective for everyone because no one can cover every situation. I like that Quest is able to recognize that.
We then had a conversation about the UDFI. That’s always interesting to me because UDFI and UBTI are the big things that people talk about. The more you look into it, it’s not that big of a deal potentially. If you would like to avoid taxes and invest in syndications outside of your qualified accounts, you are unlikely to pay tax on it. If you can do it outside of your IRA, I would always do that first, but if you run out of capital and the only capital you have is in your self-directed IRA and there is a multifamily deal or self-storage deal that you think is going to be a great deal, then go ahead and invest in it.
You might have some UBTI, UDFI, or some tax that you have to pay, but that’s better than keeping your money in cash or putting it in paper assets. You have to compare it to your other options. I don’t think UBTI is necessarily a deal killer. I prefer to use my qualified accounts which are the self-directed IRA and self-directed 401(k) accounts for debt types of investments. That way I’m not losing any tax benefits. In fact, I’m gaining because I won’t have to pay taxes until the end.
We had great a conversation about IRAs and self-directed IRAs. In our forum that the Infielders have access to, there have been a lot of conversations about which custodian is the best and so we got some ideas from Juan on how to talk and think about that. I appreciate him being on. That’s all we have this time. We will see you next time in the left field.
About Juan Deshon
Juan Deshon graduated from the University of Houston in 2018 with a Bachelor’s degree in Finance from Bauer College of Business which helped kickstart his career at Quest Trust Company. Quest Trust Administrates Self Directed IRA’s with over 18,000 clients and 3 billion assets under management. Juan started his journey at Quest Trust five years ago as a college intern, and worked his way up to become a Sales Supervisor with a team of up to 9 IRA specialists and acquired his C.I.S.P certification (Certified IRA Services Professional) by the American Bankers Association in October 2019.
Now, he educates on the use of Self-Directed IRAs for alternative assets and IRA rules, regulations, and guidelines in person and virtually to investment-focused groups across the nation. Juan currently resides in Houston, TX after growing up and living in Canada, Miami, and Nicaragua where his family is from. Juan hopes to keep Quest trust company on the forefront of the IRA investment space and continue educating investors’ minds on the possibilities and use IRA’s while also practicing what he preaches. At the moment, Juan uses his Roth IRA to fund private money loans.
Our sponsor, Tribevest provides the easiest way to form, fund, and manage your Investor Tribe with people you know, like, and trust. Tribevest is the Investor Tribe management platform of choice for Jim Pfeifer and the Left Field Investors’ Community.
Tribevest is a strategic partner and sponsor of Passive Investing from Left Field.