Announcer: Please note disclaimers at end of show. Welcome to Creating Wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing, fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible.
Jason is a genuine self-made multimillionaire, who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it. And now, here’s your host, Jason Hartman, with the Complete Solution for Real Estate Investors™.
Jason Hartman: Welcome to the Creating Wealth Show No. 137. This is Jason Hartman. Thanks for joining us. We have a great show for you today. We’ve kind of moved some upcoming shows around because this topic is very topical. And basically, what we’re going to talk about today is how to bypass tough lending regulations, how to invest in income property using your IRA. We’re going to expand on the very short segment we did a few shows back on Roth IRA conversion rules, which have changed, and that goes into effect in about 2 – 3 weeks actually, January 1, 2010. This is a big, big tax giveaway, so it may or may not apply to you. If it does, you should be ready to take advantage of this. So that’s why we wanted to move this show up in the line-up because it is very topical right now.
Again, we have an interview here with Jennifer from Entrust, and I will play that in just a few minutes for you.
I want to tell you about some upcoming shows. We have Lisa Bromma, who is the author of a couple of investor books, most recently, Wise Women Invest in Real Estate. And we have Lorel Langemeier. I’m sure you’ve heard her name. She’s a big guru, and she is going to talk about “Making Money Now.” Her latest book is all about how to just generate quick income, and simple stuff, but it works.
So we’ll continue along the investment, finance, and economic forecasting track, as well as the home-based business for our workweek, micro-preneurship entrepreneurship track as well. And we’ll be covering a lot of that great stuff on upcoming shows. We’re trying to get about three shows a week out to you now because we have so many recorded that we have not published yet. I interviewed an attorney on asset protection recently. He did a great show. So there’s just a lot of stuff coming up for you.
Also, be sure to listen to our other shows, The Speed of Money, The Holistic Survival Show, and Creating Wealth Video Show. This is all free for you, and we’ve posted a lot of videos just recently to the Creating Wealth Video Show, so if you’d like more details on the various income property investment areas and a lot of the other concepts that we cover completely different from this show, it’s on the video show, so make sure you’re watching the video show as well.
And by the way, those are short. Those are usually 6 – 10 minutes long. They’re much shorter shows on video. So take advantage of all of that, and look forward to our new show coming up, our Jetsetter Travel Show, which we’re about to launch.
One more thing, of course – upcoming events that I have to tell you about: January 23, Creating Wealth in Today’s Economy Bootcamp; March 2010, Masters Weekend; and we have a couple of conference calls and things that we’re going to be scheduling pretty soon here that we’ll tell you about as well. Stay tuned for that.
Here’s the interview on investing in real estate with your IRA and how to get past the tough lending restrictions and regulations so that you can purchase more properties. If you’ve already reached your four-property or ten-property limit, depending on which way you look at it, this show is also for you because we’re going to talk about that. Here’s the interview with Jennifer from Entrust.
Announcer: If you thought making money on real estate was just for big spenders, well, you’re in for a surprise. There are investments out there that require very little cash upfront, yet have the potential for outstanding returns. Where are they? How do you get hooked up? Well, you’re going to find out at the Jason Hartman Platinum Properties Investor Seminar. You’re going to learn everything you ever wanted to know about investing in real estate, but were too afraid to ask. You’ll learn about the best areas for cash flow, how to make money with tax-free income, how appreciation works, and so much more. You can even see how to get back the taxes you’ve paid for the last five years just by investing in real estate. You need to attend the next Jason Hartman Platinum Properties Investment Seminar. You have to register soon because they’re going to fill up fast. Visit HYPERLINK “http://jasonhartman.webimpakt-green.com” www.JasonHartman.com.
Interview with Jennifer of The Entrust Group
Jason Hartman: It’s my pleasure to welcome back to the show, Jennifer Williams with The Entrust Group. And today, we want to talk about the ever more desirable, and again, we have not covered this topic in depth before because over the years, I haven’t felt that this was as desirable as it is today and you’ll hear why. So what am I talking about? Self-directed IRAs, self-directing your retirement plan so that you can invest in real estate.
The stock market is probably getting close to a peak here. Many experts think we are due for another correction, and you know how ugly the last one was, so let’s talk about having a self-directed account. Let’s talk about being in control, which is Commandment No. 3, “Thou shalt maintain control.” And when you maintain control of your personal finances, you don’t leave yourself susceptible to the three major problems of outsourcing your investments to somebody else. What are those three things? I’ll just remind you real quickly before we welcome Jennifer. They are:
No. 1, you might be investing with a crook.
No. 2, you might be investing with an idiot.
No. 3, assume they’re honest, assume they’re competent; the third problem is they take a huge management fee off the top for managing the deal.
And that is why we love investing in income properties. Done properly, done on a nationwide basis so that you’re diversified because all real estate is local. You’re buying properties that make sense the day you buy them. You’re following our Ten Commandments of Successful Investing™ basically.
And with that, the self-directed IRA plans have become much more desirable just recently, so that’s why we are now interested in this topic. Jennifer, we’re glad you’re here to talk to us about it today.
Jennifer: Thank you for having me, Jason.
Jason Hartman: My pleasure. What is it all about and what can people do here?
Jennifer: Wonderful. What I’ll tell you about today is a little bit about Entrust, what it means to truly have a self-directed IRA account, what you can and cannot do in your IRA. We’ll also talk a little bit about prohibitive transactions, what to watch out for, as well as whom you can’t do business with, who are disqualified people in your IRA.
Entrust will not give you financial or legal or investment advice, but we do do these educational types of events or broadcasts with you to educate the public and our clients on what you can and can’t do in the IRA.
So let me tell you a little bit about who Entrust is. Entrust is the oldest and largest provider of self-directed IRAs in the country, so we currently have over 27,000 clients and over $3 billion in our clients’ assets. All of our clients’ assets are FDIC insured, so hopefully, that will give some of your listeners a little bit of peace of mind at this point.
Jason Hartman: Now, Jennifer, tell us what that means. If they buy an income property in their account, that’s not FDIC insured.
Jennifer: Correct. It would only be their undirected funds, meaning once they have an account set –
Jason Hartman: The funds in the bank account.
Jason Hartman: Entrust maintains a bank account for non-invested funds.
Jennifer: Exactly, so your actual IRA will hold undirected funds or un-invested funds. Any assets you purchase, such as real estate, once that leaves the IRA, obviously that’s not going to be insured. But any cash or any funds that you leave in your IRA to pay for expenses, which we’ll talk about in a little bit, all of that is FDIC insured.
Jason Hartman: So this is similar to when you have a brokerage account at Charles Schwab or whatever. You always have, I think – at least I do – a money market account there, so that when you’re trading in and out of positions, there has to be someplace to catch the cash that’s un-invested.
Jason Hartman: So that part is FDIC insured.
Jennifer: Yes, it absolutely is. And along those same lines – and again, we’ll talk about how the money should come in and out of the IRA – but along those same lines of the FDIC insurance, keep in mind if, since we are speaking specifically about real estate today, let’s say you sell a property. So all of a sudden, you’re putting $400,000 – $500,000 into your IRA. You do not have to worry about hitting that $250,000 FDIC insurance threshold. Entrust will immediately split up your funds into little sub-accounts. It’s all within one IRA so that it’s all FDIC insured, so that you don’t have to worry about how close you are to that $250,000 mark.
Jason Hartman: Okay, great, and the FDIC insurance limit, obviously, when the financial crisis occurred, went from $100,000 per vesting to $250,000 per vesting. The disclaimer I want to give you with that, folks, is yes, the FDIC may be insuring your account and note that the FDIC is on the verge of bankruptcy, or insolvency I guess is a more proper word for that, they don’t insure what the money will actually be worth when you get it back because they’re going to print a lot of money to bail it out. But I digress. Go ahead, Jennifer.
Jennifer: So let’s go ahead and talk about what it means to truly have a self-directed IRA. The term “self-direction” is used really loosely these days. So many brokerage firms consider their accounts self-directed, so wherever your current IRA –
Jason Hartman: Like stock brokerage firms.
Jennifer: Exactly. So if you have a current account at one of those standard stock brokerage firms, and if you ask them if your IRA is self-directed, chances are that they will tell you that it is, but not necessarily. The real test there is you ask them if you can hold real estate in your IRA with them, and that’s where they’re going to be like, “Oh, no, probably not.”
Jason Hartman: Far be it for a brokerage firm, like a Wall Street firm, to mislead anybody. I can’t imagine that.
Jennifer: Unintentionally perhaps.
Jason Hartman: Here we go again, Jason, with your commentary.
Jennifer: So to have a true self-directed IRA account with someone like Entrust, they’ll allow you to invest in anything, except for a life insurance or a collectible. And we’ll talk more about what that collectible means in just a few minutes.
But basically, you want to think about your IRAs being almost like an umbrella, so all of your funds, in most cases, except for a ROTH account – in most cases, all of your funds are going into an IRA on a pre-tax basis, if you have a traditional account or a SEP account. And then all of your investments grow tax-deferred until you start pulling those funds out at retirement age.
Jason Hartman: And when you take distributions – this I have to make a comment on, Jennifer – I think when Wall Street lobbied Congress to make all the laws that govern all of this stuff years ago, the sales pitch for a retirement account is while you’re in your earning years, put this money away pre-taxed so that it grows pre-taxed, and when you take distributions at 59 ½ optionally – or you’re forced to at 70, right?
Jennifer: Seventy and a half.
Jason Hartman: Seventy and a half. Then you’ll be in a lower tax bracket they say. But folks, I don’t know about you listening, and I don’t know about you, Jennifer, but I hope to be in a much wealthier position when I’m that age. And I certainly don’t think with our Obamanist government we’re going to see lower taxes, lower tax rates I should say.
Jennifer: Well, that’s why if some people feel that way, a ROTH is a good fit for them.
Jason Hartman: Right, but just letting it grow, putting it into the account before its taxed and having the power of it growing before the tax, even if the rate is higher in the future and your personal marginal rate is higher, too, you can still win the game that way.
Jason Hartman: Pardon my sarcasm.
Jennifer: No, absolutely. So along those same lines, you’re putting all the money into your retirement account on a pre-tax basis and all those investments are growing tax deferred until you start pulling those funds out at retirement age. Along those same lines, all the rental income or any asset gains from those assets you hold in your IRA are going back into the IRA. So an example of that would be, let’s say, I, Jennifer Williams, bought in my IRA a condo and I’m renting that condo out. All that rental income from that condo is 100 percent going back into my retirement account. All of my tenants are just writing out a check in the name of my IRA, sending it into Entrust; Entrust is putting it in my IRA account. All of that is growing tax-deferred.
Along those same lines, any expenses I have associated with that asset – so it’s a condo; let’s say it needs a new water heater, new carpet, something like that –
Jason Hartman: Are paid out of the account.
Jennifer: Exactly. All of those expenses come out of the account. So you just send in, as the owner of the property, my IRA, I would just send into Entrust an invoice for that new water heater or new carpet, and then Entrust cuts a check out of my IRA to pay those expenses. So you just want to keep in mind that it just needs to be a complete circle.
Jason Hartman: It’s a separate entity.
Jennifer: It’s a separate entity.
Jason Hartman: Arm’s length is the rule, is the phrase you need to know.
Jennifer: Exactly. And in regards to real estate, the real key thing is have your self-directed IRA set up before you find a property that you want to invest in.
Jason Hartman: And I just set mine up with you last week, by the way. I have to say that. I’m really excited about it.
Jennifer: So you’re in the process of getting that funded and ready to go.
Jason Hartman: I’m looking at a property today and we’re just moving the money from that rotten stockbroker.
Jennifer: It could be challenging. We’re helping you.
Jason Hartman: They’ve lost so much of it for me that I don’t think I should trust them by giving them any more or letting them have the honor of holding the account. And by the way, when I’m talking to you, folks, the DOW is up right now. The market is over 10,000 today. But still, it’s nowhere near the 14,000 it used to be.
Jennifer: So along those same lines, like I mentioned, you want to have your retirement account with Entrust opened first, before you get your heart set on a property, meaning that once you find the property you want to make the offer on, from that very first stage, that first Letter of Intent, or the first time you write that contract, you want to make sure you’re doing the proper vesting. So it wouldn’t be Jennifer Williams as a person. It’s going to be Jennifer Williams IRA, so Entrust Administration, Inc, for benefit of Jennifer Williams IRA, and my account number. It makes it really crisp and clear with the IRS that it’s two separate entities purchasing that asset.
Jason Hartman: Yeah, absolutely. Now, Jennifer, before you dig into this a little more, can you sort of give the broad view here? What are the different types of accounts, of retirement accounts that people can have? They hear all these acronyms: IRA, which means Individual Retirement Account, SEP, 401k, Keogh. What are the other ones? I can’t remember them.
Jennifer: That’s a really great question. Basically, you want to think about it as being two separate categories.
Jason Hartman: Well, of course, ROTH. We didn’t talk about that.
Jennifer: Exactly. So you want to think about it as being two separate categories, IRAs versus qualified plans. So under that IRA umbrella, it would be a traditional IRA, ROTH IRA, SEP IRA, SIMPLE, thinks like that. The traditional and the SEP and the SIMPLE, you’re putting money in on a pre-tax basis, like what we’ve been speaking about. The ROTH is a little different. You’re putting money in post-tax. Then all that profit and gain is growing tax-deferred for life.
Jason Hartman: And we have to tell everybody that’s a pretty exciting opportunity here because you were on the show just for a couple of minutes previously, and there is a big opportunity coming up, which you can talk about it when you wish, but this is pretty exciting.
Jennifer: I’ll talk about it just briefly, if you’d like, now. For 2010, there is going to be some ROTH rule changes. Normally, for a ROTH – so this year and previous years – you have to make under a certain dollar amount in order to qualify and contribute to a ROTH account. Those numbers vary every year, so they can be a little bit different. If you’re married, you need to make under about $166,000 per year. And again, that number changes, so based on when someone is listening to this, you want to double check those figures. If you’re single, about $100,000 per year, and then you have to make under those thresholds in order to contribute to the ROTH IRA.
And if you do a traditional to a ROTH conversion this year and previous years, you can convert at any time, but then that’s a taxable consequence. So when you do your taxes at the end of the year, whether that’s the next April or the next October, you’re having to pay taxes on that difference, that amount you converted.
But for next year, they’re doing two things, which is really, really exciting. They’re taking away that income limit for 2010.
Jason Hartman: So now if anybody actually still makes money, again being sarcastic – I know a lot of people do because a lot of money is made in these down times – but there’s no limit on the income to make them eligible for a ROTH contribution?
Jennifer: Correct. So no matter how much someone makes next year, for 2010, they’re able to do a contribution to the ROTH IRA, which also means they can do a traditional to a ROTH conversion next year. So no matter if you make $250,000 next year, you’re able to convert however much you would like out of your traditional IRA into your ROTH IRA. Now, that’s still a taxable consequence because you’re going from pre-tax dollars to post-tax dollars.
Jason Hartman: Explain that a little bit.
Jennifer: Meaning that when you have a traditional account or that pre-tax account, where say you make $100,000 a year, you’re putting in your $5,000 contribution to your traditional account, that pre-taxed account, now when you do your taxes, you’re saying that you made basically $95,000 that year. So you’re getting that immediate benefit. You’ve not paid taxes on those funds. With the ROTH or the post-tax dollars, you’re, in that same scenario, making $100,000 per year. You put $5,000 into that ROTH account or that post-tax account. You don’t get that immediate benefit when you do your taxes. You’re still saying you made $100,000.
Jason Hartman: But eventually, when you take distributions, you don’t pay tax on the ROTH.
Jennifer: Exactly, so if that ROTH or that post-tax account, all that profit and gains, all that asset that you earned over the lifetime of that IRA, tax-deferred for life. So at 59 ½ when you start pulling out your funds, you never pay taxes on it because that initial contribution you already paid taxes on.
Jason Hartman: So the difference is, folks, with a traditional IRA, you’re putting the money in pre-tax, letting it grow pre-tax – hopefully it’s growing in your investments – and with a ROTH, you’ve paid taxes on it, you’re depositing the money post-tax, but you get a lot of gratification later because when you eventually do pull it out, there’s no tax.
Jennifer: There’s no tax consequence at the end.
Jason Hartman: It’s a different kind of thing, delayed gratification or “now” gratification.
Jennifer: Absolutely. So when you do that conversion from the traditional to the ROTH conversion, it’s a taxable event. You have to go ahead and pay the taxes on it at that time, getting it to that ROTH status. But for next year, that second benefit is that they’re allowing you to spread that tax consequence out over two years, meaning that you can spread out that tax consequence in 2011 and 2012, if you so choose. It’s just a really exciting thing, and if anyone wants to learn more about it, we can definitely put them in contact with CPAs and financial advisors to make sure it’s the right fit for them.
Jason Hartman: Yeah, and we want to say to everybody that we don’t give tax advice or legal advice. But check out these concepts with your tax advisor. Now, Jennifer, have they ever done that type of thing before? The ROTH is only ten years old or so, right?
Jennifer: Yes, they have not done that before, but there’s talk about them perhaps extending that, that income ceiling going away. There’s talk about that, but again, definitely speak to your tax advisor, your CPA, or get in contact with one of us and we’ll put them in contact with someone who can advise them.
Jason Hartman: This is a pretty cool opportunity.
Jennifer: Absolutely. So let’s talk a little bit about why you would want to self-direct and what those benefits of self-direction are. We’ve already talked about what it means to have a truly self-directed account. Some of the reasons that people like to self-direct is it gives them control over their retirement account because let’s face it. Who’s going to take better care of your money than you?
Jason Hartman: Good point. Commandment No. 3.
Jennifer: And self-direction gives you the freedom to invest in what you know and understand. So if I’m a realtor, do you think I’m going to feel more comfortable buying real estate or stocks and bonds? Probably real estate. Or let’s say I’m a mortgage broker. I’m probably going to feel really comfortable loaning money to someone and doing things like that instead of the stocks and bonds and mutual funds. So basically, it gives you the potential to invest in an area that you’re already familiar with and something you’re already really comfortable with.
And something that I think is best, by utilizing self-direction, it truly gives you a larger range of investments. You’re more diversified. We would certainly never tell someone not to do stocks, bonds, mutual funds. It just allows true self-direction.
Jason Hartman: Why not?
Jennifer: I’m not allowed to.
Jason Hartman: Can you tell I’m bitter?
Jennifer: So basically, it allows you to invest in whatever your area of expertise is. If you want to invest in real estate, you can. If you want to do notes, loans to people, private companies, you absolutely can do so.
When I spoke before, the IRS will not tell you what you can invest in. They’re just going to tell you what you cannot invest in, so that would be everything we spoke about today, except for life insurance or collectible. When we’re speaking about a collectible, the code is talking about things such as an art collection, a wine collection, antique cars, rugs, things of that nature.
Jason Hartman: Right, and the reason being here is that the value, No. 1, is somewhat amorphous. Nobody really knows with a lot of these collectibles what the real value is. But No. 2 is it’s not going to be arm’s length, so you can’t hang beautiful art on the walls of your house and do that inside of your plan. Also, you can’t really do the precious metals. Well, you sort of can. Here’s where I just want to make a distinction about that because I saw a commercial for a gold dealer today and they were saying ask about investing within your IRA and buying gold. But you can’t hold the gold, and you know what, folks? I think that type of investing in the metals is nothing more than investing in fiat money. If you can’t hold it – by the way, folks, I don’t keep any of this stuff in my house, so don’t try to rob me – but if you can’t take possession of it, I don’t like it as an investment, just personally.
Jennifer: And you’re right, absolutely, with the gold. You can’t hold onto that, so it would have to be attached to something else.
Jason Hartman: Right because it wouldn’t be arm’s length. It would violate that rule.
Jennifer: Exactly, which is actually perfect timing because that’s what we’re going to lead into is those prohibited transactions. Now, keep in mind I think a key to understanding prohibitive transactions is understanding who’s disqualified to your IRA. So please know in just a moment, I’ll go into more detail about who’s disqualified to the IRA.
But prohibitive transactions are what the IRS says we cannot do in our retirement plans. So the key thing to remember is that neither you nor anyone disqualified to you can have any sort of present-day benefit from something going on in your IRA. Back to that condo scenario, if I had a condo in my IRA, I couldn’t live in that condo. I couldn’t vacation to it. I couldn’t put my college age kid into it, things like that.
Jason Hartman: Because it wouldn’t be arm’s length obviously.
Jennifer: And perhaps even someone disqualified to me, which we’ll speak about, would be getting some sort of present-day benefit from something going on in my IRA.
Jason Hartman: Right and you’re going to talk there about relatives and so forth.
Jennifer: I will. So in just a moment, I’ll go into the disqualified people. So you can’t sell, exchange, or lease any property between yourself and your IRA, or anyone disqualified to you. So let’s just Jennifer Williams is a person that owned a great condo in Hawaii. I couldn’t vacation to it. Let’s say I decide I want to sell it in a couple years. I’m getting really great rental income from that and I want the tax benefit of that being in my IRA. Do you think I’d be able to just sell that to my IRA or put it into my IRA?
Jason Hartman: No.
Jennifer: No, absolutely not.
Jason Hartman: Not arm’s length.
Jennifer: Exactly. You also can’t lend money or extend credit between yourself and your IRA or anyone disqualified to that. So an example of that would be let’s say I have a daughter who was recently laid off from work and she really wants to borrow some money. I wouldn’t be able to loan her money out of my IRA. I could certainly loan her money as an individual, but not from my retirement plan. You also can’t provide goods, services, or facilities between yourself and your IRA or anyone disqualified to that. So an example of that would be let’s say I had a piece of raw land that needed to be excavated and my son had an excavating company.
Jason Hartman: How convenient.
Jennifer: I could not hire his company to excavate that property for me. He couldn’t do it for free and he couldn’t charge me fair market value for that either.
Jason Hartman: Right. I think, folks, generally, the rule of thumb here in your thinking about this disqualification stuff is if the government does it or if Wall Street does it, you can’t do it. I’m just grinding that axe.
Jennifer: You also can’t use the income or assets in your IRA for personal gain.
Jason Hartman: So if the government or Wall Street does it, you can’t do it, sure.
Jennifer: You can say it. I can’t say it. So an example of that would be let’s say I’m a realtor again, so I want to go out and find that piece of real estate that I want to hold in my IRA. I can absolutely do so as the realtor. I can write the contract. I can do that all day long. I just can’t take the commission on it because I get a present-day benefit from something going on in my IRA.
So, like I mentioned, a real critical aspect in determining whether a transaction is prohibited or not is understanding that disqualified person to you. So let’s talk a little bit about that. You are disqualified to your IRA, as well as your spouse. And then you want to picture your family tree. It’s your direct ascendants and descendents and their spouses, so it would be your parents, your grandparents, their spouses, your children and grandchildren and their spouses. It’s that real arm’s length distance that you’re referring to.
Jason Hartman: But your cousin or your uncle, what about those?
Jennifer: Brothers and sisters, aunts and uncles, for the most part, are fine according to the code, if you read the code. Brothers and sisters are fine. We tend to really treat that as a gray area, though.
Jason Hartman: I would, too.
Jennifer: Personally, would I do it? Probably not, but as far as the code is truly written, brothers and sisters, aunts and uncles are fine. But definitely, you want to analyze that, perhaps speak to Entrust about that first, maybe speak to an attorney about it first, just to make sure that you’re not connected on too many levels.
Jason Hartman: Right. For example, if you have a terrible relationship with your brother or sister, then it might be okay because you can justify that.
Jennifer: Well, perhaps to live with that sibling still or to work together.
Jason Hartman: That would be bad.
Jennifer: Right. If you’re connected on too many levels, you have Power of Attorney over some aspect of an uncle or aunt’s life, then the IRS could argue that you might have undo influence over that person.
Jason Hartman: The point is do your business with outside strangers and keep it clean.
Jennifer: Yeah, just keep arm’s length distance, absolutely. So now let’s talk a little bit about the different types of accounts you can have. We’ve already touched on them a little bit in the sense of the IRA plans, the traditional, the ROTH, the SEP account. And then we also touched really briefly on the qualified plans. So if you have a qualified plan, that would be something such as a 401k, 403b, 457, something like that, defined benefit plans. So, if you have those types of plans or a traditional ROTH, SEP, or a SIMPLE account, you can open a like-kind account with Entrust, and then we can self-direct it for you.
Say if you have a 401k or a 403b at an old employer that you’re no longer employed at, that would be a pre-taxed account in most cases. So you can open up a traditional account with Entrust and we can roll those funds over for you, and then you self-direct it. Or say you have a traditional ROTH account at Charles Schwab, B of A, Wells Fargo, you can open up that like-kind account, that traditional ROTH, SEP account with Entrust. And then we can transfer those funds over for you.
There are three different ways you can fund your account. One would be a rollover; one would be a transfer, or an annual contribution. A rollover, an example of that, would be if you have that 401k at an old employer. You can open your account with Entrust, we can get your account established, get your vesting and your account number for you, and then you would contact that old 401k company that you’re no longer employed at and let them know that you want to roll those funds over into a traditional IRA. If you’re doing it to a traditional IRA, it’s not a taxable event. And they can send those funds directly to Entrust on your behalf, and then you’re not touching the money.
The second way that you can fund your account, as I mentioned, was a transfer. So if you have a traditional IRA at one of those other custodians that I was mentioning, you could open up a traditional IRA with Entrust, and then we will send that transfer form to your current custodian for you, and then they can send those funds directly from their account at that other custodian directly into your new Entrust account. They can wire those funds directly or send us a check. And again, you’re not touching the funds, so not a taxable event for you.
The third way that you can fund your account is through that annual contribution. So let’s say that you’re really attracted to the idea of self-directing, but you maybe perhaps don’t have a retirement account yet, or you have a 401k, but you’re still employed there and they won’t allow you to take those funds. You can just do your annual contribution. You can open the account with Entrust or whatever custodian, and then just send in a check for your current year contribution and we can get it started for you.
Basically, opening a retirement account, from beginning to end, so you can start buying real estate in your IRA is pretty simple. It’s basically a three-step process. The first step is just filling out that application and getting the account established so you have your proper vesting. And we’ll help you with that process. We’ll walk you through those forms in person, or we can even do it with you over the phone.
Jason Hartman: And this is what I did last week with you. It’s real easy.
Jennifer: Yes. And then we’ll have your account open and established within 48 hours, which means you have your proper vesting. The second stage of that three-stage process is actually funding your account. If you’re doing a rollover from that old 401k, for example, you’re responsible for contacting the old 401k company, letting them know you want to roll those funds over to Entrust. But again, we’ll hold your hand through that and make sure you understand that verbiage to make sure you’re not touching the funds and it’s really clean and clear in the eyes of the IRS.
If you’re doing a transfer, like what you’re doing, you give us the transfer form. We send it to your custodian for you, and then we initiate that on your behalf. That can take anywhere from 2 – 4 weeks. It is completely up to the current custodian on how quickly they want to get those funds over. It’s a little bit of a gray area, but there are definitely some tricks to try to speed that up for you. But we’ll help you with that.
Jason Hartman: Okay, so I had a little snag on that with my account and before we started recording, you brought that in. What they said is that they wanted me to go to an actual branch of their institution and get what’s called a “medallion stamp” so they’re not going to transfer to Entrust without that little stamp.
Jennifer: Without that medallion stamp.
Jason Hartman: It’s sort of like a notary in a way, I guess.
Jennifer: Yeah, and not all custodians require it. The key thing is to call your custodian, which Jason, you did. We called your custodian. We asked.
Jason Hartman: And they said they didn’t require it, but they do suddenly. Obviously, they want to hold onto my money a little longer.
Jennifer: You just want to ask those questions. Are they going to require a medallion stamp in order to transfer funds to another custodian? And it really varies. It’s completely based on your current custodian if they’ll do it for you or not. It’s a little bit of a gray area there with that second stage.
But that third and final stage is once we have your funds, once your Entrust account is funded, you’re ready to start purchasing assets. And again, it’s just utilizing a two-page bi-direction letterform, and we’ll hold your hand and walk you through that process. We actually even have a department in our operations office that specializes in real estate, so we’re really there to make sure that you understand the process, whatever title escrow company you’re using understands what it means to be investing with an IRA.
Some of the benefits to utilizing Entrust and doing self-directed IRAs is that we have one of the largest online educational libraries on self-directed IRAs. We take a lot of pride in making sure that our clients and potential clients are really educated on what they can and can’t do in their IRA. I feel like a well-educated client is going to be a much happier client. They’re going to understand what they can and can’t do.
And we have a local presence. No matter where you live, most likely, we have an Entrust office local to you, if you like that personal presence. You don’t have to have that personal presence. Everything can be done over the phone and kind of guiding you through emails and such. But if you do want a local place to go into, you absolutely can do so. And our customer service, we’re going to be there to help you understand the process and hold your hand through the beginning to end steps so that you can invest in real estate and hopefully be quite successful.
Jason Hartman: Good to hear. What else do people need to know about the account, though? One of the criticisms that I hear from time to time about this kind of account, and I really found this was unwarranted so far – and this is one of the reasons I brought my account over finally – is that there are a lot of little nickel and dime fees because you can’t write your own checks. Entrust has to write your checks. So if you have one of your properties go vacant and you need to pay the utility bill in between tenants, Entrust has to write that check. You can’t put it on your credit card, you can’t write a personal check; you don’t want to comingle funds here.
Jennifer: Correct. And that’s the real key is you don’t want to comingle your funds, right.
Jason Hartman: So it has to be treated as a totally separate entity.
Jennifer: And like I mentioned, all those funds, any expenses and income, has to come in and out of the IRA, so you can never pay, like you’re saying, those expenses out of your pocket and such. But if you like, I can go into the fees associated with an account. Would that be helpful?
Jason Hartman: I think people would like to know that because it’s really not that big a deal. I thought it was. I was sort of falsely misled I think by one of your competitors, very frankly.
Jennifer: Good to know.
Jason Hartman: Tell us about what’s involved, the mechanics, the fees. It’s $50 to set up the account. That’s no big deal.
Jennifer: Yes, so it’s a one-time fee of $50 to open the account, which means you just send in a check made out to Entrust for $50 when you send in your application. And then we have what we call an annual recordkeeping fee, and we provide you with two different options on how you want to be charged that fee. So it is an annual fee, but you’re going to actually receive the statement every quarter, so you can decide every quarter if you want to pay that fee out of your IRA, or if you want to send in a check or a credit card to pay those fees.
Like I said, there are two options. The first option is a flat fee of $250 per year, per asset in your IRA, meaning let’s say you bought a condo in your IRA. That’s one asset, $250 per year. Then maybe down the road, you decide you want to make a loan to somebody. That loan would be that second asset, so if you kept Option 1, that would then be $500 per year.
Jason Hartman: And I just want to note my position here that I don’t think you should make loans to people. That’s my advice. I like being a borrower much better than being a lender. It seems like every time I’ve been a lender because I’ve traded notes and bought trust deeds and so forth, I’ve been less than happy with the outcome, shall I say. I know there are people that do it as a business, but I just like owning the property and borrowing the money better than lending it.
So each asset, $250 per year.
Jennifer: For Option 1, yes, each asset.
Jason Hartman: I know you’re going to give that other option, which could be better depending on the person.
Jennifer: Depending on what you want to do. So yes, Option 1 would be $250 per year, per asset. So if we’re speaking real estate, each property that you own is one asset. Now, the second option is a sliding scale based on the total dollar value of all the assets in the IRA and all the undirected funds in the IRA. Basically, what it comes down to is you want to figure out the total dollar amount you want to be transferring over to Entrust, and then how many different assets you think you’re going to hold in your IRA at one time. And we can help you with that, by the way. Just call me or email me. I can run the numbers to figure out what’s going to be the most economical for you.
But again, that’s just the annual recordkeeping fee. There are other smaller fees that are more transactional based. Any time you buy an asset in your IRA, that third step of the process that I referred to, you’re going to fill out a two-page bi-direction letter, letting Entrust know what you want to invest and where to send your funds. So each time you buy an asset and do that bi-direction letter, there’s a $95 fee to process that, so meaning when you want to buy that home, you’re letting us know you want to buy that home or fund it, it’s $95.
Then any time you receive a wire into or out of your account, meaning the first time you initially fund your account from Charles Schwab, Wells Fargo, B of A, if you want them to wire the funds to your IRA, $30 to receive a wire/send a wire. If they send you a check, there are no fees for you to receive a check in your IRA. But if Entrust sends a check on your behalf, like you mentioned that property tax bill for a property, or a gardener, a new roof, whatever it might be, there’s a $5 fee for Entrust to cut that check on your behalf.
Jason Hartman: What about financing properties within your IRA? This is the reason, listeners, that I really didn’t like this very much four years ago or three years ago. And let me just tell you why because it may seem so sort of illogical at first, but there is a method to my madness. Here was the thing. In the fast, roaring days of real estate, you could buy properties with no money down. The interest rates were extremely low. Of course, no one even looked at your mortgage application. They just approved any loan, which ultimately was a really stupid thing for the general economy. But as an investor, we liked that. We liked the fact that we got to put very little down on properties and get long-term, fixed-rate financing. As long as the properties made sense and you were prudent and careful with your leverage, you did well.
But when it came to financing inside of an IRA, the financing was pretty crummy by comparison. Now financing inside of the IRA could still be considered somewhat crummy, but by comparison, because the other financing has gotten worse, it’s not so bad. So there’s the sort of roundabout logic that I have on that. And that’s why I think it’s pretty good.
And the other thing is a lot of our clients right now have maxed out on their number of properties. Depending on whom you talk to, they’ll say you can only have four loans or ten loans, or one of our sources says 17 loans. And if you have 20 some odd properties, like I do, you’re done. You can’t buy another property unless you just buy it with all cash.
And now what we’re doing is we’re looking at some of these properties that we’re buying literally as a bond. If you pay cash, which I’m not in favor of, but some of them are such great deals that it actually makes much more sense to just pay cash for the deal and evaluate it in comparison to a bond.
And we call this an income property bond. You’re getting returns on your investment that are equivalent to junk bond rates, which is phenomenal, and the risk is almost nil because first of all, you’re familiar with the transaction. You get a real tangible asset. You’re not subject to the graft and corruption and crookery – not that I have an opinion about that – of some executive board of directors at a corporation where you’re buying their bonds or their mismanagement or whatever. A lot of these bonds will be defaulted on; even the municipal bonds that people think are so secure. They’ve already been taught a lesson on that and there will be a lot more lessons coming in my opinion.
But the return you can get is phenomenal, just buying cash, and the perfect place to buy with cash is inside your plan. That’s the excellent place. But as far as financing, again, like I said, by comparison, it’s not that bad.
Jennifer: No. It just needs to be considered a non-recourse loan.
Jason Hartman: Right. And that’s why the down payment is higher and the interest is higher because it is a non-recourse loan. Now, Jennifer, I know this isn’t necessarily your expertise. It’s somewhat tangential to what you do, but you do deal with it a little bit. For the listeners, some loans are recourse and some are non-recourse, and this recourse and non-recourse is slightly different than that, right?
Jennifer: It is, yes.
Jason Hartman: Here in California, for example, what’s called a “purchase money loan” is considered a non-recourse loan. It doesn’t have to be inside your plan. You just go buy a house tomorrow and that purchase money loan is non-recourse in California, last time I checked. I’m not a lawyer, disclaimers applicable, but that’s what I know. If you refinance that house or you put a second loan on that house, that becomes a recourse loan because it’s not purchase money. And in some other states, it varies by state by state, and sometimes all loans are recourse loans, meaning that if there is a deficiency and you default on the loan, the lender can theoretically – although I think they rarely do it, but they could, so you never want to hang your hat on something they might not do – they could come after you for the deficiency in a lawsuit type of situation.
But inside of a plan, recourse and non-recourse have a little different meaning, don’t they?
Jennifer: It is. The main difference is, kind of keeping in mind what we spoke about in the beginning, it’s two separate entities, you and your IRA. So with a non-recourse loan associated with that IRA is that if there is that deficiency, they can only come after anything in that IRA. They can’t use your personal information as a judgment if you get that loan in your IRA or not. And along those same lines, if there’s a deficiency, they can only come after anything in that IRA. They can’t come after you as an individual or your assets. It’s just things in the IRA.
Jason Hartman: Just what’s in the plan, okay; let’s talk about that for just a moment because there are some advance strategies here that we may want to kind of touch on. No. 1 is since with this loan, they’re not using your information, do you literally mean you can get a loan, or your plan, I should say, can get a loan without a credit report?
Jennifer: I’m told, and it really varies based on the person you’re going to to get that non-recourse loan, so keep that in mind that everyone’s a little bit different. I am told, at times, they still will pull your credit just to see what that is, but they can absolutely not use that as a reference for determining if you’re going to get that loan in your IRA or not.
Jason Hartman: That’s kind of odd.
Jennifer: Kind of odd, but that’s kind of that – yeah, that’s what’s been expressed is that sometimes they’ll pull the credit, but they can’t use it as a source for reference if you’re going to be approved or not.
Jason Hartman: So they don’t verify your income. They don’t verify your personal bank account. Just so long as the money is in the plan, you’re done. So some people have intentionally defaulted on loans, I know, in order to get loan modifications and they’ve seen their credit damaged because of that. But I know people are literally using that as a strategy nowadays. It’s risky to say the least.
Jennifer: But it’s the strategy that’s being used.
Jason Hartman: People are doing it. These are very different times we’re living in right now. And if they’ve messed up their credit, this could be an opportunity to do stuff inside of a plan.
Jason Hartman: Talk about – and we didn’t debrief on this, so I have no idea if you know about this, but I’ve about where people are putting an entity inside of their plan, like an LLC, for example, or a corporation. Most likely, I think, an LLC.
Jennifer: It’s an LLC, correct.
Jason Hartman: And so the plan will own the LLC, and then they’ll put property into the LLC or they’ll keep their cash money that’s un-invested in the LLC and the property just in the plan. So if the property should ever go bad or default, there’s nothing in the plan that’s not protected by an entity, right? Is that how that works?
Jennifer: Correct. That’s exactly how that works. And you’re allowed to have an LLC in your IRA absolutely. I’m told that it is a little bit of a gray area with the IRS, the LLC law, the way things are written. So if you’re going to do that, you just want to make sure you’re speaking to an attorney that not only understands an LLC, but that really understands how the IRA world works because there needs to be a specific language in that LLC as it pertains to the IRA. And then you just want to make sure that you, as the individual that has the IRA really understands what you can and can’t do with that LLC, kind of keeping hands-off and things like that. So definitely make sure that you speak to an attorney who understands the IRA world.
If anyone wants more information on that, Jason can always put them in contact with people or I can as well.
Jason Hartman: Yeah. So just note that like it is outside of your plan, if you have a claim against the property, say there’s a lawsuit that’s generated out of a property – and personally, I think the liability, when it comes to real estate investing, is pretty low. It’s easy to insure around. I’ve never, in 23 years of investing now, had anyone sue me over a property I’ve owned or anything like that. I kind of think a lot of this stuff is really overplayed, scare tactics done by lawyers and insurance people.
But I would hate to say that and have you go and buy a property tomorrow, and then get sued because it could happen. You insure around it. But the other thing you have to remember is sometimes things aren’t covered by insurance, or maybe you accidently let your insurance policy lapse. The stuff happens. It’s rare, but it does happen, folks, occasionally, so you may want to consider a more advanced strategy of using an entity inside your plan, or outside of your plan, on your properties there, for this reason. But again, ask your lawyer about it. Make sure you have a competent attorney because believe me, there are a lot of stupid attorneys out there. I’ve worked with many of them, I feel like, and they still seem to over bill at the same time.
But the other thing to ask your attorney about is what’s called a “Series LLC,” and those are a newer, more advanced form of LLC that does provide some pretty cool features. And again, these vary state by state, I believe, but a Series LLC has separate compartments so you can have one property in each compartment of the LLC without having to set up a bunch of LLCs. That can be another vehicle. You just want to ask your attorney about it. Again, we’re not experts about this. Jennifer?
Jennifer: Yeah, absolutely. And again, just making sure that attorney you speak to is an expert on the IRA world as well, so that you’re really protected. Not just the LLC, but that it connects well with your IRA so you’re protected with the IRS.
Jason Hartman: How do you know about this? Do you have some referrals at Entrust that you can give on these kinds of things?
Jennifer: Absolutely. I’m not allowed to refer to you just one attorney, but I can give you a list to choose from. So absolutely, anyone can contact me and I can give you my contact information and I can email you a list of attorneys that understand the IRA world and are experts in the LLC world as well.
Jason Hartman: If you’ll send me that list, I’ll put it in the Members Only section of our website so all listeners can go there.
Jennifer: I can do so, and if you like, I can give you the non-recourse lenders as well.
Jason Hartman: Okay, great. That’s excellent. Thank you. Okay, Jennifer, what else should people know about this?
Jennifer: I think the key thing to know is that it’s just a really great tool. Self-direction is just a really great tool to allow yourself to be really diversified and truly take control of your retirement account and take control of your future. And Entrust is there to help you and make you successful.
Jason Hartman: What’s the website?
Jennifer: The website is HYPERLINK “http://www.EntrustCalifornia.com/OC” www.EntrustCalifornia.com/OC.
Jason Hartman: EntrustCalifornia.com/OC for your office, and they can contact you directly there. Do you want to give a phone number?
Jennifer: Please. My phone number is (949) 788-2970.
Jason Hartman: And Jennifer speaks at our seminars and events. You’re speaking Saturday at the Creating Wealth Bootcamp we have coming up to tell that audience about it.
Jennifer: I am.
Jason Hartman: So call any of our investment counselors. They can put you in touch with Jennifer as well. Thank you so much.
Jennifer: Thank you, Jason.
Jason Hartman: Folks, gain control of your investments and don’t let Wall Street control them. Get in control with a self-directed plan. Thanks for listening.
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Duration: 46 minutes