How to Diversify Your Portfolio with a Self-Directed IRA

David Moore: Hi, David Moore with IRA Advantage and today we’ve got Tina Colson in our firm, joining us and hopefully I’ll be able to answer all the questions she’s got for me today.

Tina Colson: We’re going to be tricky today so we get a-

David Moore: She’s testing me.

Tina Colson: We get a lot of questions that come in, regarding objections with self-directed IRAs. So, how do we overcome those objections?

David Moore: Typical objections, when we’re talking about self-directed accounts, IRAs, 401k plans, usually those objections are just not accurate objections. I mean, there something that people have come up with through the years and it seems like a good reason not to do something.

So, one of the most common objections in self-directed accounts with buying, let’s say, real estate for example, is that real estate’s not liquid. So boy, what happens if you need to sell it? Well, that’s true. You don’t like a stock, you sell it, right? It doesn’t take long. You don’t like a piece of real estate you got, you got to find a buyer for it. So, there is a timeliness issue, but, let me ask you if that’s really a bad thing. In the investment world, they talk about the lack of liquidity as being bad. Well, how’s the stock market looked the last couple of weeks?

Tina Colson: Not so good.

David Moore: Yeah. And we are just for a period piece, I’m sorry to do this to you, but we’re in the coronavirus period. So, we’ve had a couple of weeks of absolute craziness. So, is the liquidity a good thing or a bad thing? And if we’re looking at the real estate, one of the things, the big issue I guess, with liquidity or lack of liquidity with real estate is, well what happens if you get to 72 years old and you’ve got that RMD, required minimum distribution, you got to take, and one of the big objections is, gee, you’ve got to take an RMD, and you used all the money, and now you don’t have anything to take.

Well, I really look at that, not as a problem, I look at it as an opportunity. I may be a little warped in that, but the bottom line is, you’ve got to look at, at some point, whatever you’ve put in has to come out of an account, right? I mean, no matter what goes in your retirement account, it has to come out.

David Moore: How are you taxed on that? Your tax is normal income tax. I mean a Roth, you don’t have that. I mean the difference. Traditional Roth funds, obviously dramatic. Traditional is pre-tax money growing tax deferred or Roth is tax money just growing tax free. So what I’m going to talk about doesn’t necessarily apply to Roth accounts, but traditional accounts. We’re just looking at a situation where you’ve got to take stuff out. How do you minimize the tax consequence? I would say that lack of liquidity or you’re not stuck if you can’t take a cash distribution, it’s something that’s just not contemplated very often.

So let’s say you buy a piece of property with your retirement account, your IRA 401k, and you really like that asset. Well do you want to sell it? No. Do you want to take a cash distribution? No. Can you take a piece of that property as a distribution? And the answer’s yes. Taken in kind distribution. So, the fact you don’t have the cash, for cash distribution is really irrelevant. Take a piece of something. Take an in kind distribution. If you’ve taken a minority interest in that thing.

David Moore: Think about this. Number one, what is something worth? Okay. I mean if it’s a stock, it’s a quoted price. If it’s a piece of property, what is the property worth? It’s really ultimately worth what a buyer and seller going to agree to. A highest, best use, so on and so forth. But it depends on what kind of property is, how it’s valued and go talk to an appraiser, or go talk to a CCIM that understands property analysis and valuation that’s going to give you that thing.

But if we’re talking about taking a piece of something, we can actually discount that value by up to 40%. So instead of taking the cash distribution, and taking 10000 out and paying tax on $10000 of income, in effect, if you took a $10000 interest in a piece of property and that was a minority interest, you could actually discount that by up to 40%. So instead of taking 10 you’re taking six.

Tina Colson: Great.

David Moore: So let me ask you this, Tina. Is it possible to maybe look at that not as a problem, but as a tremendous opportunity? Is the leading question, sorry counselor. But you look at it and you say, “Okay, it’s not a problem.” But is it actually an opportunity? Could you maybe accelerate distributions while minimizing the tax consequence by taking in kind?

Tina Colson: Absolutely. Yeah, I like that option and I think that there’s a lot of people out there that could benefit through that.

David Moore: Good answer. I like that. So once again, David Moore, Tina Colson, IRA Advantage, iraadvantage.com. Thank you very much for your time today. If you’ve got questions on any of these topics or any others, please do not hesitate to reach out and we’ll be happy to address your questions.