How To Maximize Your Finances Using Self-Directed IRAs (SDIRA) With Derreck Long

August 31, 2022




CWS 215 | Self-Directed IRA (SDIRA)   There are different ways to maximize investments, and one way to do that is through self-directed IRAs. But how does it work? Today’s guest is Derreck Long, a Senior IRA Specialist at Quest Trust Company. In this episode, he joins Lauren Wells and Chris Seveney to explain how SDIRA works and how you can benefit from it. He compares IRAs vs. 401(k) and offers a digestible explanation of the difference between each account and how you can use them to improve your finances. Tune in as he guides you with valuable tips on managing your investments for greater profits. Don’t miss this insightful episode and get golden nuggets on how to create wealth long-term.

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How To Maximize Your Finances Using Self-Directed IRAs (SDIRA) With Derreck Long

In this episode, we have Derreck from Quest Trust with us. We wanted to bring on Derreck to talk about self-directed IRAs, why, what they are, who needs them, who doesn’t need them, and how you can invest with them.

Thanks for having me. I’m excited to be here. I have done business with you guys for a long time. I love your guys’ members and your teams, and I love seeing their investments come through with their IRA. I’m excited to be here on your platform. I speak with a lot of people who are always asking about different ways to invest in tax ramifications and self-directed IRAs. It’s either you know what it is or you don’t know what it is. That’s what I’m finding. That’s not my area of expertise. I know what it is, so I’m in the know. For people that don’t know, I thought it would be good to have an episode talking about it. When I thought about Chris and I speaking about it, I was like, “We should probably bring someone on who this is what they do.” I thought about you and figured we would let you explain. I will ask you some questions that I hear often. If you want to introduce yourself first, tell us a little bit about you and Quest. For starters, I do represent Quest Trust Company. We are a self-directed IRA provider, but everything that I, Lauren, and Chris could be talking about applies to every self-directed custodian out there. You can take this information straight to whoever you are already working with. If you want to work with me, that’s great, but this is info for everybody. A question I get a lot is, “What’s a custodian?” Custodians are Fidelity, Charles Schwab, Merrill Lynch, and Vanguard. Those are probably the ones that people know about a lot. They are someone that holds your money and does investments for you but doesn’t give you a checking account or a savings account. They don’t give you that debit card. At quest, we are self-directed custodians like Fidelity. It’s the same thing. It’s just changing the bank. Do you have to have any special requirements to be a custodian? To tag along with that, people ask if their money is FDIC insured. Nobody can turn around and say, “I’m going to go be a custodian.” The answer is yes and no. At Quest, we are one of those custodians that have full FDIC insurance for everyone out there. What’s unique is a lot of times, these custodians that can pop up, what they did is they bought a franchise. If they separate from the franchise, which you can do, they may not fall into those same types of regulations because they are not holding as much cash or assets under management. It’s because of that that certain ones out there may not have full FDIC insurance. Any of the big ones. They are the ones that you have heard of, whether it is Quest, Equity Trust, Directed IRA, or Kingdom Trust. All of us do have full FDIC insurance. We are highly regulated. Most of us get audited five times a year, which is insane. We have our regulation offering only twice a year. We handle financials though. That’s a lot. You led me down a rabbit hole. We probably needed to do a whole other episode on things to look at when you are looking at a custodian. That’s good to know. Can you explain what a self-directed IRA is? I get this question all the time. They are made up. They are fake. It doesn’t matter. You can look everywhere you want in the IRS tax code, which falls under IRS publication 401, little A or big A depending on which type of IRA you are looking at. You will not find the term self-directed in there. What it’s supposed to represent is a marketing term. When you move an IRA over to a company like Quest, what we are going to do is we are letting you take your IRA and invest in what we call private assets, not public. Most self-directed custodians will not allow you to do public assets. That’s the stocks, bonds, CDs, and mutual funds. That’s what Fidelity is for. At Quest. We will only let you do things that are real estate related. A lot of our clients will use it to buy those non-performing notes or discounted notes or be the lender instead. That’s what they work with you for. Notice they use us to use their IRA for the notes, but they use Fidelity to buy something like Apple stock. Notice there’s not one that’s better than the other. They are just different. When I want to buy Apple stock, I have to go to the non-self-directed custodian. When I want to buy a note, I have to go to the self-directed side. When you hear the term, it’s made up. It’s not a legal term. We use it more for marketing purposes. If somebody wanted to set up an account at Fidelity versus Quest, I’m guessing it’s probably almost the same process. It’s just a matter of where you are looking to invest your money. That’s how I understood that if that’s correct. A custodian is someone that holds your money and does investments for you but doesn't actually give you a checking account or a savings account. Click To Tweet Not only is it similar to the same process, but it’s also the exact same process. An application with any custodian could be your name, social, date of birth, who inherits the account when you pass away, and a signature, and then you are good to go. Anyone can set you up a self-directed IRA or a normal IRA to buy your mutual funds or stocks. When you are out of college or a few years out of college working for an employer, did they offer them? Not typically. A lot of times, when we get a job, our employers will offer us incentives. They are like, “We are going to give you a 401(k), 403(b), a pension plan, or a TSP.” Employers give you these because the employer gets a lot, and I do mean a ton of tax deductions for offering these to their employees. It’s because of this reason that they have to hold that typically at a public style company, like Fidelity or Charles Schwab. The company itself is not going to be investing your money. Fidelity is. Even if it’s by Fidelity or Charles Schwab, you are not getting to direct what you are investing in if a company holds it, correct? You don’t. I have a 401(k) here at Quest, but I don’t get to self-direct my own 401(k). Why is that? It’s because it’s held to the company. The company’s the one investing in it. They might ask me some questions like, “Do you have a higher risk tolerance or a low-risk tolerance? Are you moderate?” They ask for something basic, but I’m not choosing my investments. It gets put into those Fortune 500 stocks or maybe a big hedge fund. When you leave your job, have a separation of service, or get old enough to retire, we can take that 401(k) and move it to an IRA. Anytime you have the ability to do this, you want to do it, even if you are switching jobs. The main reason why it comes down to an IRA is I have more control. The 401(k) is controlled by the company. The IRA is controlled by the individual. I have switched jobs in the past. When you switch, they only tell you you have two options. They forget to include option number three, which you said. The two options I have always been told are 1) Leave it at that company, or 2) Move it to your new company. Never ever has anybody said, “You could also turn this into an IRA,” which then you could put at Quest and go buy a single-family rental if you wanted to or invest in a mortgage note. Do you know why they never tell you that? Most of the time, the person on the phone doesn’t know those options. When we talk about this space, there is very limited information out there. You usually want an expert, someone like me, or someone who has gone to school that has certifications from the IRS and the banking commissions with it. How many people out there have that? Usually, you are dealing with someone that gets $10 or $15 an hour on the phone and they are reading from a script. They are like, “You can do this one or this one.” They also gave me information from Fidelity who’s probably also administering the plans at both companies. They just want to keep the money in-house. You said if you are switching jobs, but here’s another question. In your first job or first 401(k), would you do the company 401(k)? Is there a better option? Would you do the company or self-directed? I love this question because if you can afford it, you should do both. People don’t realize how powerful a retirement account is, whether it is a 401(k) or an IRA. Did you guys know that your retirement account is labeled by the IRS as a tax-exempt entity? It files the same tax return a church would. This is how the IRS views it. If I can set up a 401(k) with my company or I can set up a personal IRA and do some investments with it, I get to avoid all of the taxes. This is why it’s so powerful. Normally, if you do an investment, the IRS says, “You are a taxable entity. You set up an LLC. The LLC is taxable, but the retirement account is truly labeled as non-taxable.” If you can afford to set up both, please do so. Set up an IRA and set up a 401(k) through your company. A lot of times though, unfortunately, especially for the younger generation, they can’t afford to do that. They are living off $20 of $25 an hour. $5 an hour is going towards their 401(k). They can’t put another $5 into the IRA. I’d love to see them do it, but it’s not as practical. As we get older, we make more money. We are also more interested in saving and not just beer and parties.
CWS 215 | Self-Directed IRA (SDIRA)

Self-Directed IRA (SDIRA): A 401(k) is tied to an employer, therefore, the employer is the one that controls the account. An IRA stands for individual retirement account, so an individual has control.

You used the words IRA and 401(k). Can you use those interchangeably? Can you explain to me the difference between the two? For someone who’s newer, maybe they are right out of college or a few years into their first job, I feel like those terms are thrown around. What’s the difference between the two? The biggest difference comes down to who can control the account. A 401(k) is tied to an employer. Therefore, the employer is the one that controls the account. They control the investments. They control how much you can contribute and how much they contribute. They control everything on it. Whereas an IRA stands for Individual Retirement Account. An individual has control. A lot of times, though, what ends up happening is you can’t contribute as much to the IRA. You can only put $6,000 or $7,000 a year depending on my age whereas, in the 401(k), you can put it up to $61,000 a year. There’s a huge advantage on both sides. If I’m brand new, I’m like, “I’m going to start saving money in my retirement account. I want to use it to start looking at buying some notes, finding some distressed properties, or looking at some rentals.” That $7,000 or $6,000 in the IRA is not going to go very far. That could be difficult to utilize. It might take you 2 or 3 years before you want to move it over to a self-directed custodian. Can you explain the contribution limits? Is there a difference? Is it across both of them that you can contribute a certain amount? How does that work? I put retirement accounts into three categories. One, I would label it as Individual Retirement Accounts. This is going to be your traditional and Roth IRAs. Traditional IRAs are more popular with the older generation. Roth IRAs are more popular with the younger generation. The Roth IRA was created in 1997. It wasn’t even around pre of that. I was in junior high at that point in time. I was getting ready to go to high school. You got to think about it. In 1997, my parents didn’t know about a Roth. They didn’t know anything about that. That’s the generation that is at retirement age. We break it down to individual accounts first. Traditional and Roth. As an individual, I can only contribute $6,000, under $50,000, and $7,000 over $50,000. The next category we have is what I call employer plans. These could be 401(k), 403(b), SEP IRA, or SIMPLE IRAs. There are all sorts of ones out there. There are TSPs if you were in the Military and 457s if you worked for the government. There are all sorts of different plans, but they all say you can still contribute the same amount. That’s $61,000 a year. The reason it’s so high is two people get to contribute. One person is the employer, the company I work for. The other person is the employee. When you combine both of these, that can’t exceed $61,000. Notice that because I put them in different categories, I can max out my Roth and IRA contributions. I can max out my 401(k) contributions. You then have some specialty accounts that are weird that a lot of people will utilize like a health savings account or an education account for college. We won’t dive into those. In most companies, an individual for a 401(k) can contribute roughly $20,000, and then the companies can contribute less. Most companies that I have worked with in the past might contribute 3% to 5% or a max of 50/50. If you can put $18,000 versus $6,000 with an IRA, it’s still a powerful vehicle to invest in. That’s one of the reasons why with our regulation the A+ fund that we launched, we had a low minimum. We have a $500 minimum in there because if somebody’s getting started with an IRA and has $6,000, it’s difficult to get into real estate with $6,000. You might be able to buy a partial or a sketchy note possibly. You can also invest in a large pool and get a decent return. That was one of the areas that we looked at. We thought there were a lot of people I have spoken with in the past that were getting started with IRAs. They were like, “What can I do with this?” I’d be like, “I can’t help you right now.” Lauren and I figured that out a little bit. A lot of people are sometimes hearing IRAs for the first time. We throw out Roth and traditional. Can you explain briefly the differences between the two? It all comes down to how the earnings come back to the retirement account. The traditional IRA is more popular. It grows tax-deferred, meaning I get to defer my taxes until I’m old. That’s a great way to look at it. If I have $100,000, at 36, I can defer any taxes on this money until I’m 72. The IRS says, “It’s 72. You are getting old. You could kick the bucket soon,” and they make you pull the money out. If you think I’m lying, they give you a death chart. They have a chart for every single one of us that says when you are going to die. They make you pull out that money that you grew in certain increments and pay your taxes. They are like, “We are estimating that you should be passing away here. You have got to take out that money because we want to get paid.” If I take $100,000 at 36 years old and I grow it to the age of 72 at $1 million, that’s not unrealistic. I got almost 40 years to do this. Especially in notes and real estate, that’s pretty easy to do. If I’m in a 20% bracket, I owe $200,000 in taxes. This is the traditional IRA. This is the account that grows tax deferred. This is the number one account that people have. The 401(k) is controlled by the company. The IRA is controlled by the individual. Click To Tweet The Roth IRA is the reverse of this. The Roth IRA is the one that everyone says truly grows tax-free. I’m going to take that same $100,000 and pay taxes on it. I take that $100,000 and move it into my Roth IRA. Let’s overestimate your tax bracket. Let’s call it 40%. There’s not even a 40% bracket, but we are going to call it that. You owe $40,000 in taxes, but that $100,000 truly grows tax-free. You will never owe taxes again. It’s not just for your life. It’s for the life of your heirs. There’s a big problem with my story. There’s a reason that everyone uses the traditional. What do you think the problem was? Did you catch it by chance? I gave you a $40,000 tax bill. Most people are like, “I don’t want to pay that.” What am I going to do? I’m going to kick it down the road. I’m going to defer it. I’m going to push it down. I will be like, “I will do it next year.” That $100,000 didn’t stay at $100,000. It grew to $110,000 or $120,000. Instead of $40,000, you owe $50,000. You are like, “I will wait until next year.” At $120,000, it grew to $150,000 or $170,000. It keeps going. Eventually, people never do it. Do you have a traditional or a Roth? I have a Roth. I work in this space. It would be crazy if I didn’t have a Roth or leveraged a Roth. I do 99% of all of my investing inside a Roth IRA. I do have a SEP IRA because I do have some self-employed income, but anytime we make a contribution to it, we immediately do a conversion. I have a traditional. Chris and I met with someone who analyzes all of the different custodians, options for you, and what you are looking to do and invest in. We asked him. We were like, “Which one makes more in the end?” He was like, “Honestly, they have done research on this. They knocked it out. They are pretty equal. You are putting more money in because you are growing it. You are able to grow it more even though then, in the end, you are paying more taxes. With the other one, you might grow slower, but you are not having to pay taxes. They equal out.” What’s sad is he goes off an interest rate between 4% and 6% rate. This is very common. The numbers that your financial advisor went through were 100% correct when we are looking at what would be considered public assets, stocks, mutual funds, bonds, CDs, and watching the market go up and down. Most real estate investors, if you told them, “We will pay you 6% on an annual basis.” They are going to laugh in your face. What happens when we increase that number to 8%, 10%, or 12%? You will see the big shift. For our industry, the Roth IRA makes so much sense for any type of real estate investor. Most in the US are not doing real estate deals. They are not trying to be savvy investors. We all say we want to be wealthy and we all want to do these and take these steps, but a lot of times, it’s tough. That’s something that a lot of times, people will never take that leap and do. That’s common. There’s another side to it. My grandma is 87 or 88 years old. She will never do a Roth conversion. Do you know why? She says, “I will be dead before I spend this money. You deal with the taxes.” To give people an idea, because we are talking about IRAs and people may or may not have heard of them, what is the overall amount of money in IRAs? Is there a number that people have stuck in IRAs? US-wide, it comes out to be somewhere between $24 trillion and $25 trillion. With Americans, the majority of their money is sitting in their retirement accounts. If you are out there and you are reading this, think of yourself as an individual. Do you have more money in your checking account or more money at that 401(k) or IRA that you have been shoveling money away in for years? This is also why sometimes I think it’s sad. As people go, “I like this investment. Lauren was walking me through all these things, but I don’t have the capital to do it,” they probably do. They just need to think outside the box a little bit and realize that they can use those 401(k)s. You can use those IRAs to buy that property or do those notes. Once you realize that, that’s where the biggest change starts to happen. That’s what prompted this episode. I was talking to someone who is close to retirement. He has money. It wasn’t with Charles Schwab, but it was someone along those lines. He was looking to invest. He was interested in the fund, but he’s like, “I would have to liquidate my traditional account.” This is where I was like, “I want to talk to all about self-directed IRAs and why you should be doing this. You do have the cash, but you don’t have it in a vehicle that allows you to invest in this type of asset or in anything Fidelity wants.” Could somebody take money from Fidelity? Let’s say I have $100,000 at Fidelity. All of a sudden, I was like, “I want to invest something in real estate.” Could they transfer from Fidelity to an open account at Quest and transfer money between two IRAs?
CWS 215 | Self-Directed IRA (SDIRA)

Self-Directed IRA (SDIRA): You need to think outside the box a little bit and realize that you can use those 401(k)s, you can use those IRAs to buy that, to do those notes. Once you realize that, the biggest change starts to happen.

To top that, can they transfer less than the whole thing? Could I say, “Take $100,000 of that $150,000 and put it in a self-directed account?” You can, and this should hold true for any custodian out there. Remember, I work for Quest, so I talk about them, but everything we are talking about holds true for any self-directed custodian out there. First off, you can always transfer cash from a Fidelity, Vanguard, Charles Schwab, or whoever it is over to an IRA or a self-directed custodian. All you are doing is changing the bank. Bank A lets you invest here and bank B lets you invest here. If you want to change your investments, change that cash over. This also means you don’t need to move over to the full balance. That’s always a common misconception. If I’m looking to buy a note from you guys or purchase a property, or invest into your fund, I can say, “I want to go ahead and put in $20,000 into this fund.” I transfer over $20,000. That’s what I’m going to utilize. It’s very simple. How hard is that process? It’s already sitting there. Would I want to go through the process and hassle to get it to the other custodian and the paperwork? Is it a headache? What is that process? If you have a good custodian, they should make it simple for you. They should help you fill out any paperwork that might need to come into play. The hardest thing to do, unfortunately, is when you have to call Charles Schwab or Vanguard to say, “I want to sell those stocks.” You are not saying, “Sell the stocks.” You are like, “It’s one for this,” and then you wait and hold. You are then like, “It’s two for this. Press five for that. Press zero ten times. I want to talk to someone live. They hung up on me.” It happens all the time. That’s the hardest thing about it. For the most part, the overall process is easy. What I would like to talk about is how to go through the investment. I have one more question. What does the timeline look like? I had funds I wanted to move over and get set up. How long before I can utilize those funds to invest in a property, asset, or fund? When it comes to setting up the account, most custodians will usually do this in 24 to 48 hours. That’s what Quest sticks to when it sets up the account. Once the account is set up, by banking regulations, you can’t do an investment for the first seven days. They give you what they call a rescission period. The account access will be open and established for seven days before it is allowed to buy anything. That holds true no matter where you go. After that seven days, it should be good to go to do an investment. At Quest, our goal is to set up the account, and during that seven-day rescission period, go through those investment documents and request the funds from Charles Schwab, Fidelity, or Vanguard. If they are in an IRA, it’s going to take 3 to 4 days to transfer the cash over. If they are in a 401(k), give yourself about two weeks. With 401(k)s and 403(b)s, for whatever reason, the IRS and the department of labor haven’t caught up with this. They only allow them to send a check. That means you have to wait on the mail and a check hold from the bank. We went through this with my husband, transferring his old employer’s 401(k) to a solo checkbook control 401(k). Everything was great, and then we had to wait on Fidelity for two weeks to send funds. Who uses checks anymore? Two weeks still isn’t that bad. You are not waiting six months. You are maybe waiting for three if you are on it. The traditional IRA grows tax deferred. The Roth IRA is the one that everyone says truly grows tax-free. Click To Tweet If you want to go on a worst-case scenario, you are talking a three-week timeframe. Give yourself 7 days to 3 weeks, somewhere between there. Let’s say I get off the phone with someone. They have a self-directed IRA and they want to invest in our funds. What does that process look like on their end? As far as when it comes to investment, understand when someone sets up a self-directed IRA, that IRA is its own entity. That IRA will have its own name, own address, own tax ID number, and even its own level of asset protection. As an investor, I’m not going to go through anything different. I’m still going to fill out the same paperwork I would. Instead of me putting Derreck Long on there, I will put my retirement account’s name on there. It’s not my address. It’s my retirement account’s address. This is also where I see a lot of people make mistakes. Your group does a great job of this. For those of you who don’t know, before Lauren even launched any funds or was selling notes, she sat down with me. He said, “I want to make sure it’s easy on my investors.” You went through the motion of making sure that we could set up a good portal where they could type in the right things and click the right buttons. It’s sad that a lot of people won’t do that. A lot of syndicators, people selling notes, or even people that have funds won’t take that extra step before they even reach out to their clients. You guys did such a great job at that. That’s something that people should be looking for with their IRA. They should be like, “If I’m going to use an IRA, does this person understand what I’m going through? Do they know the process?” With you guys, you made it really simple for them. People fill out W-9s and put their Social Security number when they mess with an IRA. We have been through that enough to be like, “Don’t do this because my CPA is going to see that.” All of a sudden, they send you an interest statement that’s like, “Based on your social, you need to make sure you have all your IRA’s information. Please talk to your custodian.” That’s so true. Remember, your IRA is a tax-exempt entity. If you are a taxable entity and you put your social, you receive the profit. You pay your taxes. If you put the IRA’s number, you will have no taxes. That’s a big difference. When it comes to fees, how do custodians make their money? Any self-directed custodian makes the money on the fees. This is where you want to make sure you have a good custodian that’s not charging too much or too little. Some custodians out there are cheap, but they charge you the fees upfront. What this means is they are not on the same side as the investor. Imagine for a moment that you sent a client over to me. Before I ever started the investment paperwork with them, we already charged them their transaction fees. What is my incentive as a custodian to get that deal funded? There isn’t one. At Quest, what we do is charge our fees after the deal is funded. This puts us in the same boat as the client. However, I am going to let people know that Quest is not the cheapest. You can find a lot of cheaper custodians out there than us, but we don’t want to be. We do things and try our best to make sure that we are giving you a better level of customer service. We don’t want to be Walmart. With that being said, we do things like having a non-automated line. When you call, someone answers. Lauren, you did this to me. I was on the other line. As soon as I hung up the phone, I could call you right back. Every time someone answers, I’m always directed or they are like, “They are in a meeting. They will give you a callback.” There’s no, “Press 1. Press 2,” or, “Enter your account number.” There’s none of that. That’s one of those minor things that we try our best to do to make sure that we can provide some good customer service. Don’t always shop around for the best fees. At the same time, your fees should never be making or breaking an investment decision. We charge you $125 to do a deal. This brings into something you mentioned earlier. They are like, “I only have $500. If I only have $500 to put in this, it might not make sense to use a self-directed custodian because the fees could eat away at that.” You do want to make sure that you understand there has to be some sort of balance. Make sure your custodian is very upfront with you. If you only have $500, there are additional things you can do to minimize the fees. One of them comes into what I label as a partnering aspect.
CWS 214 | Investing With A Sponsor

Self-Directed IRA (SDIRA): When someone sets up a self-directed IRA, that IRA is its own entity. That IRA will have its own name, its own address, its tax ID number, and even its own level of asset protection.

How I got started in IRA investing was my dad would invest $98,000 into a deal. The $2,000 would come from my IRA. What that means is the fees are the same. It’s still only $125, but my dad covered the fee and I was able to get my $2,000 working. You can do a lot of creative things. We teach classes on that as well. That’s one of the things that with Quest. Regarding the amount of education that your firm provides, I haven’t seen any other custodians provide that level of education. When we, as sponsors, have worked with a lot of other custodians, if I just see the name of some of them, I start cringing. I’m like, “We had a deal. We had a deal and we needed to fund this deal in two weeks. The person said, “I used XYZ.” I was like, “That’s never going to happen. I have dealt with them periodically. I can tell you that you will fill out the paperwork and they will tell you everything’s good. It will then go to somebody else.” If you had the same deal twice, you get two different answers. One may fund it, but somebody else won’t, and it’s the same paperwork. They are like, “Now, you need this form,” or, “Now, you need that form.” You can never get a human on the phone either. I do have to give kudos to Quest. When Lauren has a question, she picks up the phone and she’s like, “I talked to Derreck.” I’m like, “You talked to Derreck? In the morning, he talked to me.” One thing that is unique and what’s sad is, unfortunately, where those problems are coming from on the other custodian side is educating the staff. Quincy, our President, and Nathan, our CEO, are big on our staff doing real investments. You can’t read a book on how to fix a car and then think you are the best at fixing cars. Go fix the car. That’s the best way to learn. I will have me as an example. I own seven promissory notes. I have two oil and gas investments and two rental properties. Not all of that’s in my IRA, but the seven notes are and the two oil and gas investments, the rental properties are outside of the IRA. With that being said, what this does is it gives me knowledge of what my clients are going through. The first time you have to work with a title company and walk them through how to draft up their own documents, you will be surprised. Until you experience it, you don’t know what the client’s truly going through. That’s where our staff has a big advantage. There are a lot of us. More than 70% of us do our own investments. One thing we wanted to touch upon, is whether there is ever a reason why an IRA is not right for somebody. Yes. My mom should never use a true self-directed IRA. This is because, unfortunately, some people out there get sold on some. Self-directed IRAs can be very dangerous because what ends up happening is option one, I can go to Fidelity. I talk to a qualified Fidelity rep and say, “I have no clue what I’m doing.” They are like, “That’s great. We are going to put you in Fortune 500 stocks and we are going to ignore you.” You will watch your account fluctuate up and down, but no one has stolen your money. On the self-directed side, what has happened multiple times is that same person, and this will be my mom, goes to someplace and meets some guy. He’s wearing that yellow t-shirt and is like, “I will pay you 15% of your money. Give me an unsecured note and I will show you and I promise you I will pay you back.” My mom goes to the deal, does the note, and the guy took the money and ran away. I see it all the time. The people that it’s not for are the ones that aren’t educated. Make sure you know who you are working with. Make sure that you can call or email them. Make sure that you have a chain of reference. You can do some due diligence. That’s one of the things I like about your notes because it’s all there. It’s a legal document. It gets filed with the county. There’s a deed of trust, mortgage, interest rates, payments, and a schedule. That’s what I should be looking for when I’m looking for a deal and when I’m looking for where to park my self-directed IRA. That’s a great point because I have seen horror stories where somebody who had invested with me wanted to try and do it on their own. They ended up buying a note that originated for a property in Detroit. They never ran title. They never had somebody go look at the property. They are like, “This company is a reputable company. They sold me the note.” The house hadn’t had the power turned on in seven years. It was a $50,000 note at 12%. They paid power for it, so they paid $50,000. In the foreclosure auction, the house may have sold for $4,000. They lost $46,000, which when you look at $50,000, you are down to $4,000. To get that money back will take more than a lifetime. It will take probably 30 years to get that money back. You want to make sure you are working with good people. They are people that you can talk to consistently. A lot of times, with those groups, you never can get ahold of them. That should be a red flag. Here’s a question. Is there anything I can’t invest in with a self-directed IRA? If you have a good custodian, they should make it simple for you. Click To Tweet Yeah. Yourself. I always hear people say, “I want to use my IRA. I’m going to buy a house and live in it. I’m going to use my IRA and lend my business money.” You can’t do that. That’s not what you are trying to do. That’s what they think they are trying to do, but they are not. Remember, your IRA is its own entity. The IRA does the investment. Therefore, the IRA receives the profit. This is why the IRS allows it to be tax-exempt. They are going to give you a true tax-exempt entity, something that’s going to avoid all the taxes. Whether you are doing a fix and flip, rental, or note, it doesn’t matter. They are going to give you an entity, let you do all your investments, and void all the taxes. They are going to give you some strict rules that you must follow. Those rules all come down to you as an individual. You can’t use your non-taxable entity to invest in yourself, your spouse, parents, kids, or any of their companies. If they catch you, they take it away. What’s sad is some people are like, “How do I get around this? Give me the rules to go ahead and go through.” There are plenty of ways to hide it. Set up an LLC, label someone else, and go try to lend yourself some money. I have seen people do it. The problem is if you get audited and the IRS catches you, that’s when they are going to take away everything. That’s what’s scary. You can see this happen in a court case that ended in November 2021. It is labeled McNulty v. Commissioner if you want to look it up. Is this about the gold? Yes. That was part of it, but there were three different parts to the gold. It was A) Where did they store the gold, B) How did they report the gold, and C) What did they do with the gold in between that points in time? Between those three factors, there were a lot of fishy things that went on because they were taking their IRA and benefiting themselves. Remember, that’s not what you are trying to do. We can still use that entire retirement account and invest in anything you are looking at. You can’t use your IRA and give it to yourself. I can use an IRA and buy a note. That’s no problem. I can use an IRA and buy a house. That’s no problem. If I was 70 years old and I had a house, which is a beach house that was a rental that had an IRA, at that point in time, you take it as a distribution, right? That’s correct. That’s where that Roth starts to make sense. Imagine you had a $300,000 beach house. If you had that beach house in the traditional IRA, what would happen is that you take a distribution. If the house is out of the IRA and you want it personally, you can go live in it or stay in it. You can do whatever you want, but that $300,000 is taxable whereas if we did that in the Roth IRA, you truly can be 100% tax-free. Here’s what’s even crazier. If you did that in the Roth IRA and you sold the house, moving forward, not only is it always tax-free, but every deal you do forward is 100% tax-free. You can live off the money. I can do ten fix-and-flips a year and none of it is taxable. I can own ten rentals and none of the income’s taxable. I don’t even have to report it. I can pull it out and spend it how I see fit. You can invest in yourself. You can invest in the vertical familial of your parents or kids, but you could technically lend to a sister or brother. The IRS gives you a very specific list. They say, “Use spouse, parents, or kids,” on the surface, or anyone who potentially inherits your wealth. I’m married. My wife, if I die and kick the bucket, inherits the money. I love my sister to death, but she doesn’t get anything. My wife gets it all. For me, that answer makes sense. Ask me five years ago before I was married. My sister was my beneficiary. At that point in time, I could not use my IRA and lend her money or buy a house and let her live in it because she was the one who inherits my wealth. On the surface, it’s always, “Use spouse, parents, or kids,” because that’s how wealth gets passed according to the IRS. If I labeled Lauren my beneficiary, she’s disqualified to me, but rarely is that the case. I love my sister, but she isn’t getting squat. What about the new fad of NFTs and crypto? Is either one of those available to be invested in? Crypto, yes. NFTs, not directly, but that doesn’t mean there are no ways to go about it. If you do want to invest in one of these use unique alternative assets. Whether it is crypto or NFTs, you normally want to establish an entity in the middle. Remember, your IRA is its own person. It has its own name. Have the IRA create an LLC or create a trust. According to your custodian, they will call the LLC the investment. The LLC can go out and buy that NFT. The LLC can go invest in the crypto at that point in time and set up a wallet. That’s usually the best option to go through. There are some other things in the middle there and some debates on who can hold the checkbook or be the manager. We are not going to get into that, but that’s usually the best option. Your custodian can walk you through what it looks like.
CWS 215 | Self-Directed IRA (SDIRA)

Self-Directed IRA (SDIRA): Your IRA is a tax-exempt entity. If you are a taxable entity, if you put your social, you receive the profit and pay your taxes. If you put the IRA’s number, no taxes. Big difference.

Can you talk to me about checkbook control? Self-directed is a marketing term. Checkbook control is also a marketing term. What this means is exactly what I was mentioning. I like to label it as your IRA has a bank account not tied to the custodian that holds the retirement funds. How does my IRA set up a bank account outside of Quest, Equity Trust, or Kingdom Trust? What has to happen is the IRA has to create an entity in the middle. They can call it an LLC or a trust. We have seen C corporations as well, but the IRA has to create something in the middle. From there, if it was an LLC, the LLC can have its own bank account. Notice that the IRA is labeled as the owner of this entity. You will see a lot of attorneys get used to taking the shortcut, but anytime my attorney sets up an LLC for me, he labels me as what he calls the managing member. These are technically two different roles if you read through Schedule A. There is a member labeled as an owner and a manager. The manager’s the one who is doing exactly what we are calling it, managing it. In this specific case, the member must be labeled the IRA. The IRA is the one that sets up the LLC. The manager needs to be someone else. There’s debate on that topic. Until the McNulty court case, it started to make it a little bit clearer. Some people say you can be the manager. Quest says you have to have that non-disqualified person be the manager. There are different levels. We can all walk through those types of things. Notice that the LLC has its own bank account. As it has its own bank account, they call it a checkbook. That term was created right around ’93 or ‘94 during the Swanson v. Commissioner court case. That was back when checkbooks were legit. Now, it’s a debit card, but we still call it checkbook control. The last question I was going to ask is I know there’s been a lot of talk in Congress about changes to IRAs. The IRS hired 80,000 people to start doing more audits and so forth. Have there been any updated rules and regulations that people should be aware of because it’s constantly changing? Yeah. Until 2019, self-directed IRAs were almost never mentioned in Congress. Retirement accounts and self-directed IRAs have been around since 1974, which is where the ERISA Act came in. What was unique was that 2019 was the very first time we ever heard about this at the Seller Finance Coalition. At this point, a lot of people in Congress started to realize the power of these self-directed IRAs. In 2020, another big thing happened where Congress was trying to get rid of IRAs doing any type of syndicated-style investments, LLC investments, or trust investments. It was going to be put into stocks or mutual funds. We had to fight. I had the privilege to speak in front of Congress on six occasions during this level. We got that abolished. The SECURE Act 2.0 came out, and what’s unique is Congress is finally looking at these in a positive light. If you want to look at the SECURE Act 2.0 and go through sections 101 through sections 386, you will see seven different bills there. All seven of them are pro-self-directed IRAs creating more things for Roth and allowing the IRAs to be more lenient in doing real estate-style investments. It used to be cut and dry. If you did something wrong with your IRA, you would lose the whole thing. You can see that in the McNulty case. What is unique is they are trying to be more lenient because real estate can be tricky sometimes. That’s what I like about this. With that being said, with them bringing on 80,000-plus auditors and Congress is well-aware of self-directed IRAs and they are being mentioned so much more, it’s not the time to do something shady. It’s not the time to do something where you are playing in that gray area. Remember, this is most of your money. Usually, we have more money in a retirement account than we do in our own checking account. That other stuff that was like the Peter Thiel rule they were trying to implement where he made $6 billion off of PayPal off of a minor investment. Peter Thiel has $21 billion in a Roth IRA. That’s 100% tax-free. Congress has no rights. The IRS has no rights to any of that money. It’s all tax-free. I fought for that. I fought for them not to go ahead and go after someone like Peter Thiel because, honestly, that’s how the rules were written. You can be mad at him all you want, but if you were in his position, you’d be like, “I did what you allowed me to do. I just did it better.” Your fees should never be making or breaking an investment decision. Click To Tweet With that being said, the way he did his investment would not fly now. The way he went through those investments is impossible to get through with any type of custodian, checkbook control, or solo 401(k)s. It doesn’t matter. You would not be able to get through that type of investment now, but when he did it, which was 1998 or 1999, our CEO calls it the Wild Wild West. It was like, “We are going to go out and see what happens,” and no one knows what was going on. Something you said should resonate. It resonates with me. I bet resonates with a lot of our readers. There are a lot of people who want to get started in real estate or invest in something outside of the stock market. I feel like it’s like every other call I have, but they don’t think they have the money. They do. It’s just not in the right type of account that allows them to utilize that money. I want to tell more people about self-directed IRAs. I feel like there should be a class in college on how to grow your wealth. One of the best things, especially out there, is to leverage YouTube. You can learn a whole language by watching YouTube and never take a class. At Quest, we have so much education out there. If you go to our channel, you will see that there are a lot of short classes and long classes that go through everything that you are talking about. You can schedule a free consultation with any of our IRA specialists at any point in time. They can go through those types of things without selling you anything. None of our IRA specialists get a commission or anything along those lines for setting up accounts. They don’t have any skin in the game. They are there to give you good info. The other component to it is once people get it set up, you need to do something with it. You can’t just let it sit there. You mentioned stat in the past. I forgot how much money is sitting there. At Quest alone, we have over $500 million. If we look at it US-wide, it’s somewhere right around $28 trillion or $26 trillion. It fluctuates. It’s not invested sitting there? That’s correct. At Quest, we are little fish in this big, old pond. We got $500 million. Imagine that. What percentage is sitting there overall? We have right around $2.5 billion in assets. It’s 20%. $500 million or $2.5 billion is 20%. That’s a lot. That’s probably why you are having Quest Expo. Our expo is right around the corner. If you haven’t gotten your tickets, let me know. I can help you get in. It will be a great event too.
CWS 215 | Self-Directed IRA (SDIRA)

Self-Directed IRA (SDIRA): You, as an individual, can’t use your non-taxable entity to invest in yourself, your spouse, your parents, your kids, or any of their companies. If they catch you, they take it away.

We are going. We are sponsoring. We will be there. Will you be there? Yes. I’m ready to speak on 40 different topics. Can you give a little plug about everything? I went pre-COVID to one of the events. There were a lot of people there. It is in every aspect you can think about in real estate. One of the unique things about the Quest Expo is we are a retirement company, so we don’t have anything to sell you. That means any speakers we have going up there are not allowed to sell their programs or anything like that. They are strictly there to give you an education. It’s a great, safe place if you are either a brand new investor or an experienced investor to come in and learn a new topic or meet your new business partner. We have 38 or 39 different vendors. We don’t try to bring in 30 of those vendors being lenders. That doesn’t work. Everyone wants something different and needs something different. We also have an open bar. Not only can you get great information, but you can meet new business partners and meet new vendors. It’s a safe place where you are not being sold a coaching program or anything along those lines. We have all been there. Come have a beer and meet so many other investors. In 2019, which is the one that you went to, we had 1,100 people at the peak there at one point in time. It’s incredible. Most conferences you go to are more catered to a specific topic and there might be 200 to 300 people there. If you hit 400 to 500, that’s good. I was there and, I thought the number was over 1,000. It was overwhelming in the sense that there are a lot of people. There’s so much opportunity to network, meet people, and also share stories or hear what other people are doing. It’s a great opportunity for people. It’s centrally located down in Texas. Whichever coast you are coming from or wherever you are coming from, you can get there in pretty much under three hours. Do you want to give the details on when that is in case anyone’s reading? The expo is from September 23rd through the 25th, 2022. It’s a Friday, Saturday, and Sunday. At first, I didn’t understand, but now, I get it. Most people probably are working during the week. I’m assuming that’s why. It’s in Houston? Yes. It’s going to be in Houston. It’s going to be at CityCentre. It’s a big venue. It’s connected to a mall. What’s nice about that, too, is if you need to get away to get some cheap food, you can do that. Do you have any final thoughts? My biggest thing as a takeaway is to get started. If you want to invest in one of these unique alternative assets, you normally want to establish an entity in the middle. Click To Tweet That was going to be my question. What would be the one action you would recommend someone take? If they are reading this episode and they want to invest in real estate or they have a 401(k) with their employer, what is the action? I always feel like we want to give action steps for people to take rather than a ton of education. What action can they take? Get out of the analysis paralysis mode. There is too much information out there to some degree that can become overwhelming. Do the deal. Listen to your coaches. Listen to the group that’s there to help you out. Let us help you set up a self-directed IRA to buy a note, do a loan, or invest in some form of real estate. We are here to help you guys out for free. Chris and Lauren are here to help you. All of us are here to walk you through those motions at no cost to you. That’s the biggest thing. People don’t take advantage of it. They get scared, stuck, and over-analyzing everything. They want to know, “What does the IRS publication say to this?” I will be like, “The IRS publication 401(a) on page 35 says you can do X, Y, and Z,” but they still don’t make a decision. Just do it. It’s that or they are looking for the perfect deal and it doesn’t exist. I feel like until you set up an account, set up the funds in a way that they are able to be access to invest in something. Nothing’s going to be perfect. If it is perfect, you are hustling to try to get everything in place so that you can fund whatever deal. I feel like you set yourself up for failure if you don’t set up the account first and then start looking for the deal. I love that thought. Get the IRA set up. At least at Quest, we don’t have an account minimum so we can easily get your account set up and then figure out the details. Thank you so much for joining us and talking and helping educate our audience on what a self-directed IRA is and how it is a powerful investment vehicle for people and who can utilize it. Thank you, Lauren and Chris. I appreciate you having me on. Thank you. Lauren will see you down in Houston. Unfortunately, I can’t be down there. I have a family member’s wedding that weekend. Here’s a question about the expo. Two of my colleagues are joining me. One of them was asking, “The second night is a cowboy casino night. Does that mean people will be dressed up in cowboy attire?” It was a debate we had. Yes and no. There are a lot of people that going to be like, “I will show up normally,” but we have a lot of cowboys. This is Texas. On that note, thank you again for joining us on this episode. If you enjoyed the show, share it with a friend, subscribe, and leave us a review. Thank you. Thank you all. Thank you, Derreck.  

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About Derreck Long

CWS 215 | Self-Directed IRA (SDIRA)Derreck Long, Senior IRA Specialist at Quest Trust Company, first served in the military from 2010 to 2014. After leaving the military, he went to college at Northern Arizona University and received a degree in global marketing. After graduating college Derreck worked with the FBI Translating Russian documents, but realized there is more to life, and started searching on how to become an investor. This is when Derreck started experimenting in notes, and has been a private lender ever since. Derreck has done a large range of notes from equity appreciation, 2nd lien notes, to the traditional 1st lien and more. As of today, Derreck works with Quest Trust Company as a Senior IRA Specialist and on a government relations committee where he researches tax code and new bill/law changes at the congress level.

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