What Are the Risk Factors Involved with Self-Directed IRA Investing? Benefits & Pitfalls…

David Moore: Hi, David Moore, IRA Advantage, IRAadvantage.com. And I’ve got Tina Colson from my office here today asking me some questions. So what are you going to grill me with today, Tina?

Tina Colson: Always grilling David behind the scenes, even in front of you today. So a lot of people call up and also we think about the fear of doing a self-directed IRA because we’re in charge when we sign up for that. Now what? We don’t have that advisor that’s directing us on Wall Street. We have many choices in front of us that we can invest in, notes, loans, precious metals, cryptocurrency, and then the real estate.

So really it comes down to the comfort of the client. What is it that they want to invest in? But really what are the true risk factors and the percentages of that risk factor? If you think about it that way, when we talk about notes, there’s all different price factors when it comes to a note, if somebody wants to invest in that. So let’s start with notes and go from there.

David Moore: Sure. So, number one, I’ve just got to look at it and say, any of us that have retirement money or money in Wall Street, there’s probably been moments we’ve been very, very happy with our financial advisors and moments we haven’t been, right? So, what my experience in the self-directed world is it’s easy to get mad at somebody else, but then when it all comes back on you, it gets to be more of a problem. So if I were to say, “Hey, over the last dozen years, we’ve had people that we’ve put checkbook IRAs together for that have never used them.” That would be a true statement. And when I talk to them, it’s like, “Well, I put it together, but I just didn’t really, I wasn’t comfortable making the investment.” Well, that’s a personal deal.

David Moore: That’s a personal preference. It’s not that I don’t understand that. I do. It’s easy to get mad at somebody else, now it’s all on you. So you’re the expert. And I always like to say, when we’re pushing self-directed retirement accounts, invest in what you know. If you’re a mortgage broker, you want to do that. You asked me about notes. This is one of those areas that I’ve got to tell you, do as they say, not as I do.

Tina Colson: What you do.

David Moore: Exactly. So, when you’re looking at a note, I would never do anything, but a first, never for anything more than you’d be happy owning the asset for. With that said, I had something that wasn’t a first two years ago now, and I ended up with a nice tax write off.

And I knew better, but it was people I knew. And I thought, “Hey, it’s all good.” Don’t do that. All right? Keep the friendships alive and just keep it up and upright. But so once again, if we’re talking notes, never anything, but a first, never for anything more than you’d be happy owning it for.

Something that’s really interesting to me about retirement accounts, and you’ve been with us for a year now. And you think about, I was going to say, think about the people come in. It’s not a fair question because the last year has been what? COVID. So we don’t have many people coming in, but historically, 1031 people I hardly ever come in the office and I don’t really understand why.

David Moore: They close the deal, money gets sent into us and then we send it out. But we never see them. I might handle exchanges for somebody for a decade and I’ve never seen them. And then we do a retirement account and they come in and I’ll ask them, I said, “Well, why is that?” And they said, “Well, this is my retirement account.”

Well, I don’t really see the difference. It’s all your money, it’s all something you’ve worked hard for and we’re going to work hard to keep it yours. So, I like notes. I like notes because everybody thinks they own things. You don’t own it until it’s paid off. And when we’re having situations like we are now, the market’s going absolutely crazy and real estate and the stock market’s all time record highs too.

David Moore: And you’ve got to look at what are the opportunities today? I was taught never to bank on appreciation. So of course I’m not going to necessarily like what maybe stocks, if I’m banking on appreciating at the top of the market. Where the real estate, if I can buy something with some leverage, somebody else’s paying for it for me, I’m making a return whether it goes up or not. I could lose money on the value of it and still make money.

So I really liked that, unlike something personally owned where I’d have the interest deductions, depreciation, I don’t have that either, but really you’re talking about comfort. So people come to us because they want to diversify. That’s what it is. I’m going to tell you, diversification is what the secret is. You don’t want to shove everything back and forth, but the other thing, the other opportunities are one, obviously invest in what you know.

David Moore: So taking risks, what causes risk? And typically you got that risk and reward. The more risky, the more potential return, so on and so forth. But that’s not necessarily true. As I said, if you’re a mortgage broker, you probably have better knowledge than I do on notes. Right? Well, could you take your retirement account to make additional loans? And the answer is yes.

So that would be a less risky thing. That would be something you’re comfortable with. Buying real estate with your retirement account, if you buy it outright, it’s a pretty easy deal. If you buy it with leverage, it’s going to be more cumbersome. You’re going to have tax exposure on the leverage. You’re going to need a non-recourse loan. It’s going to be a lower loan to value. There’s just other things. And there’s going to be some, like I said, the tax exposure on the leverage.

David Moore: So, it’s a different thing. It’s a little more aggressive. Now, those lenders in the non-recourse space to exhibit that, they typically are to want to see somebody that’s had background experience in real estate.

Tina Colson: Absolutely.

David Moore: And they’re going to want to see reserves, let’s say 15% reserves or more. So when we’re using a retirement account to go buy, let’s say a piece of property. Number one, when is the last time anybody out there bought a piece of property and had it perfect when they bought it? They probably had things that had to be done. Tenants have a tendency not to treat things quite as well as you, as the owner might. So you’re probably going to have a potential for problems there. So I’m going to tell you, when you buy that thing, you better have enough for the purchase and enough to cover the carrying costs of that thing for a set period of time, until you’ve built up some money. Get rid of that risk.

David Moore: Another reason people like self-directed retirement accounts is when you put something in into Wall Street, it’s wherever it is.

Tina Colson: Correct.

David Moore: If you want to put money into your community with a retirement account, you can. So if you want to make a difference locally, or you want to be able to drive by that thing, know where it is, or you just want the bank, your bank to have that retirement accounts money. If it’s a solo 401k or a checkbook IRA, you put that account in the bank of your choice.

So if you want it in a bank, you’re not comfortable with ABC bank, or you don’t know who XYZ investment firm is and you’re worried about what’s going on there, this is one of those reasons people come to us. They want to know where their money is, and they want it with people they know and trust.

David Moore: And that’s why they do it. So, a lot of cases, you’re taking something where they’re uncomfortable and putting it into a place where they’re comfortable. But as I said, we’ve got a number of people, strange timing to me because you look at the stock market, you look at where we are with all this stuff.

And we’ve got a couple clients that have had checkbook IRAs for a couple of years. Haven’t used them. And it’s because it comes back on them, all those decisions and what’s happening with those investments. But I wouldn’t say today’s the day to turn those things back into a Wall Street IRA, maybe wait another year and see what happens with everything. What happens with Biden’s tax measures and everything else that would change it. But the fear is real because the fear is it’s on your shoulders.

David Moore: And as I said, you pick the wrong stock or your financial advisor picks the wrong stock, it’s over there. And in this space, it’s all on you. And your tax people, they need to be comfortable with what’s going on too. They need to understand this stuff. And that’s why I spent the whole wasted COVID year, but the previous year I spent two different times I spoke with the Oregon State CPA Association going over these issues. So that tax and legal communities on same page with our people and getting where they need to be.

Tina Colson: Which is so important. And so with the notes and the loans, whichever you choose to do, or both, you can start off with smaller increments, which is going to be lesser of a risk to you. But like David is saying, don’t buy more than you wish to own if something were to go sideways, so that’s the other piece of that. Precious metals, so we’ve got a couple of different options with the precious metals piece, where in one account you can retain those precious metals in your possession. And other accounts may require you to hold it with a securitized …

David Moore: Yeah. So, if you’ve got a basic self-directed IRA, so a basic self-directed IRA for those of you out there that don’t know what I mean by that. A basic self-directed IRA is an account at a custodian, and to make the investment, you have to submit the investment to the custodian, along with a variety of forms. And then they will make the investment. They’ll be the owner of that asset, whether it’s whatever it might be, if it’s the metals that you’re talking about or the real estate, whatever it is.

So if it’s a basic account, they’re going to require a depository, period. You’re not going to be able to have physical custody of that. So the checkbook IRAs going to allow you to do that. So where do you want it? And understand that stuff’s not light, right? So physical custody, you got a lot of weight sitting there if you got much money into it.

David Moore: And we had a guy, this is probably a decade ago, he was concerned, actually, might’ve been a little longer ago than that. I think we were probably in the recovery from the last crash. And he was concerned about the metal being here. And one of the owners of one of the actually title of the escrow companies here originally, he’s an economist too. And he speaks all the time. And I always come back to him, Pat Stone is his name, he says, “Hey, you can say what you want about United States, but we’re the cleanest dirty shirt.” So I don’t know where you’re going to put stuff that’s safer than here, at least right now. Talk to me a year from now, I might have a different perspective on that.

But anyway, if you look at what you’re wanting to do, we had this guy that wanted to take the money off shore and I’m going, “Okay.” Or not the money, the gold, and I’m going, “Do you know what that way?” And by the way, there’s the government wants to know this stuff. There’s reporting requirements too, if you’re taking much of it off shore. So just understand the laws and how they apply. But to Tina’s point, a checkbook IRA would allow you to have physical custody of it. A basic account is going to require a depository to have that metal.

Tina Colson: Absolutely. And a fireproof safe if you are holding the metals yourself, I think that’s a good idea too.

David Moore: Melt that down on your own.

Tina Colson: Absolutely. So another hot topic in today’s world is the crypto currency, and what’s going on there. And the risk factors that may be involved, we see Elon Musk comes out and he purchases up a large chunk of the crypto. And so we see the fluctuation in that market as well, but this is just another topic of discussion risk wise.

David Moore: So that topic’s really interesting me because if we go back, we’re sitting at the end of March in 2021 right now. And if I go back to, it was probably the fall of 18, for example, I think it was, we ran crypto ads on the radio and huge response. And then I think it was 2019, we ran same ads and zero response.

So you look at what’s happening in that market at different times, to your point, Musk has opened up a lot of that stuff, but the bottom line is if you want to invest in crypto, our accounts are going to allow you to do that. You just got to find that institution with the wallet, that’s going to open it up. And actually I had a client this morning, we were talking about it.

David Moore: If we’re talking about IRA funds in that world, you’re really going to open up the account in the LLC’s name and federal tax ID number. So just be aware of that. And that particular client, it was trying to open it up. They wanted to open it up in, he was calling on behalf of his mother. So they were wanting to put it in her name and so, that’s not okay.

So you got to understand, anytime you’re looking at an IRA, 401k funds, the best thing you can do to keep things straight and to be comfortable that you’re doing the right thing is to make sure that you look at that account as not yours. So I always joke. I said, “It’s not you, it’s Susie down the street.” And as long as you remember that it’s not yours, I think your opportunity to commit a prohibited transaction is much lower than if you think it’s you.

David Moore: And we have clients, you know, you’ve taken the calls and say, “Gee, I need more return off my retirement account. And I want to go buy an apartment building.” I said, “Well, what do you mean by that? You’re not going to get the cashflow off it. It’s not yours. It’s the retirement accounts.” So the only way you’re getting that cash flow is by taking distributions.

So understand whatever’s going on, if there’s a tax exposure when I talked about tax on leverage earlier, it’s not your tax exposure, it’s the retirement account’s tax exposure. So understand that what’s ever happening with that account, it’s not you, it’s it. And we like when you’re setting up an account with us, for example, we don’t want you to name that people inevitably want to name it.

David Moore: If you’re Susie, you want to call it Susie’s LLC. We don’t want your name on it. We want you to name it something that you’re going to remember every time you look at that, it’s not you, it’s the retirement account. And the second reason we do that is we don’t want IRA or 401k or whatever in the LLC’s name either because when you go to the bank, they’re going to want to shove you off to the trust department, which you really don’t have anything to do with.

So it’s really important if you’re going to put one of these accounts together, really think about what you’re going to do with it and make sure that you’re comfortable doing it because it is not right for everybody. If you’re not somebody that’s going to be diligent with your record keeping, it’s not right for you.

David Moore: If you’re not going to follow the rules in this stuff, it’s not right for you. As I said earlier, if you’ve got a Wall Street account, you can make a bad investment, you’re not going to blow up the account. In our world, you can commit a prohibited transaction, which with an IRA is going to blow up the entire account. 401k, big difference, it’s only the funds involved.

So make sure that when you’re looking at this stuff, make sure that you’re comfortable doing what you want to do with it. And I think more so than ever before, it’s really important also that you keep the diversification or keep the Wall Street stuff with your Wall Street people, move what you don’t want to use, move the self-directed stuff and keep it segregated. That way, what’s going on over here is not going to impact what’s going on over there.

Tina Colson: Absolutely. And just know that when you’re setting up a self-directed account, it does take a little bit of time. So make sure you’ve got a good two to four weeks before you’re ready to make any purchases, especially if you’re doing the checkbook LLC account. And so, we can definitely get you lined up with what you need, but like David’s saying, be prepared, know what you’re going to invest in. Don’t let your account just sit there as we’ve seen with some other clients, because it just costs you money and you’re not really using that as it should be used.

And so, you have the option of what percentage of risk you want to take in what you invest in. And we just appreciate you joining us today for this educational series and look forward to helping you out. If you have any questions, please reach us at (503) 635-1031, or you can check out many of our YouTube videos on IRAadvantage.net. And when you look at that YouTube video, David, we’re skiers, what do we say when we’re ready?

David Moore: When you see that like button, what’d you say? Hit it.

Tina Colson: Hit it. All the water skiers out there, yes, that’s it. So thank you again for joining us today. David Moore, Tina Colson, IRAadvantage.net.

David Moore: Thank you.