Understanding Self-Directed IRA Strategies Ft. Mat Sorensen | Aspen Funds
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Understanding Self-Directed IRA Strategies Ft. Mat Sorensen

Mat is a wealth lawyer who has advised thousands of entrepreneurs including professional athletes, actors, Grammy award winning artists, and investors. As a best-selling author and expert on the field, he shares his approach to IRA investing strategies and how to access untapped potential.

Connect with Mat Sorensen on LinkedIn https://www.linkedin.com/in/matsorensen/

Connect with Ben Fraser on LinkedIn ⁠⁠⁠⁠⁠⁠https://www.linkedin.com/in/benwfraser/⁠

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Introduction and Guest Presentation

Ben Fraser: Welcome back to another episode of the Invest Like a Billionaire podcast. I’m your host, Ben Fraser, and we’ve got a very awesome guest. I’m excited to chat with Matt Sorensen. He is the CEO of Directed IRA and Directed Trust Company. He’s an attorney and a bestselling author on a book, basically the Self Directed IRA Handbook sold over, I think he said 50,000 copies before. Which is pretty incredible, especially at a topic like IRAs. I’m really excited to have you on. Directed IRA is one of the fastest growing IRA custodians. You guys have an amazing track record and are really pushing out the education about what you can do with your IRA, right?

And we’ve talked about this a little bit on our podcast. A lot of our listeners are real estate entrepreneurs, so they’re familiar with this, but I’m really excited to dive in a little bit more because I don’t think people fully understand really what’s available to them. Matt, thanks for coming on, man. Excited to dive in. 

Podcast Overview and Aspen Funds

Ben Fraser: This is the Invest Like a Billionaire podcast where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you’ll learn from this podcast will make you a better investor. And help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra wealthy, discuss economics and interview successful investors.

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Guest’s Journey into the IRA Industry

Mat Sorensen: My pleasure to be here. I was a tax lawyer by trade. And I was helping clients from the very beginning, just for me trying to figure out, “Oh, what can I do with my IRA?”

And we had a lot of real estate clients, business owners, they didn’t want to buy stocks and mutual funds. And so we got into this space of helping clients buy real estate, invest in private funds and companies. And so long story short, we get to Directed IRA. We are the fastest growing. We’re on the Inc 5,000. 730% growth rate.

Got an amazing team, 1.5 billion in assets, 14,000 accounts. We’re growing quickly. But we’re just trying to get this message out, which I, thanks so much for having me Ben and I want to just get the message out about what’s possible and let people know. And for some people it might be for you. It might not, I don’t know, but a lot of people just never even knew this was on the table. 

Ben Fraser: And before we get into it, it’s amazing that you started as an IRA custodian because I’ve been in this space for a decade and worked with a lot of different IRA custodians.

It’s not a glamorous business and you get thrown out of the bus a lot because you’re the one that’s in the middle of these transactions and it’s a hard business. So the fact that you started it is mind blowing to me.

The Birth of Directed IRA

Mat Sorensen: Can I tell you why I started it? Cause you’ve self directed IRA already, you will appreciate this hopefully.

I was a lawyer. I did write the number one book on self directed IRAs. Like every major company in the space uses my book to train their employees. The national association in my industry uses my book as the only required book as part of a national certification training program to train people in the industry.

Like it is like the Bible in our industry. I’m super proud about that. It took me years to write. I was a lawyer helping clients for 10 plus years, figuring all that crap out. I started getting a lot of clients. People would email me every day. I’d get five emails. Hey. Where should I set up my self directed IRA?

Who do you recommend? And I would send them to people and it was like the best of the worst, and eventually I got tired of sending my clients to companies that wouldn’t take care of the customer. And so I’m like, I could do this better. I love self directed IRAs already. We need to just handle this part of the service instead of just providing the tax and legal advice about it.

That’s what we did in basically 2018 was we just got our own license. You have to be licensed with the banking department. It’s not easy to do. And then, we just went full steam ahead at it and just tried to drive exceptional customer service. That’s really what it is. 

The Importance of Customer Service in the IRA Industry

Mat Sorensen: Like many businesses , the secret sauce is how are you delivering the service, like we don’t have any revolutionary product.

The next company has a Roth IRA. I can do a Roth IRA is how you deliver the service and how you educate and train and all that. And so we’re just trying to be better, it’s like Nordstrom. I can walk into any store and get shoes and clothes. And I don’t know, it’s just like how you deliver the service really makes a difference.

But it’s a simple concept, but hard to execute. It really is, but we are super laser focused on it. And that’s why we’ve had success.

Ben Fraser: No, I love that. It’s a perfect entrepreneurial spirit to see the problem. And then if you don’t have a good option, just create it. And I think that’s amazing.

I would agree. Especially in your space. Customer service is the foundation of everything because it’s, you’re selling a commodity. It’s not nothing like rocket science, but you can do it a little bit better. It creates a huge competitive advantage. 

Mat Sorensen: I’ll just give you an example. This guy shared this with my team the other day. So we had a financial advisor that advised over a hundred plus investors. And this advisor was like, and she still directed her own IRA, but she had 100 plus clients. And she’s like, all right, I’m going to try you guys out.

We spent a lot of time working with her, answering her questions. She knows the space, she’s worked with a lot of the companies and she started testing our team. She would just call up like a random customer. And she was like testing response time and what were the answers and all of this.

And she wrote to us and said, dude, you guys crushed it. Prepare for your industry. Like you guys crushed it just because. You answer the phone, you’re helpful. Your people know the answers to the question. They don’t pass me around. I’m not in a call queue getting dropped somewhere, and so I think those small things really add up to someone making the decision to use your service, whether it’s a self directed IRA or anything else.

And but, and I think sometimes business owners get a little detached from that, especially as you grow, like we have, and we’ve scaled significantly. You can get super detached from what’s happening on the front lines. And the initial customer experience. And so you’ve got to be really in tune with that, I think, to win.

Ben Fraser: Yeah, absolutely. 

Understanding the Concept of Self-Directed IRA

Ben Fraser: Let’s shift a little bit to just the opportunity. Like, why should someone, what is a self directed IRA for those that aren’t familiar? Yeah. And why is this a big deal? Why is this so cool? 

Mat Sorensen: Okay. There’s 33 reasons why this is cool, Ben. It’s actually 33 trillion reasons.

There’s 33 trillion in U. S. retirement accounts. There’s no more money anywhere to invest in anything than U. S. retirement accounts. And if you’re someone out there that’s got your little sliver of that 33 trillion, I want to talk to you about how you can invest it. And basically, Wall Street’s told you, we’re your only choice.

You gotta buy a stock or a mutual fund or some publicly traded asset. That’s all you can do. But the reality is that’s not it. You can invest in real estate. Like you could invest in something you guys do, bigger commercial real estate. You can invest in a private fund. You could buy a single family rental.

You could buy, you could be a private money lender. All these things can, you can do with a retirement account in real estate. You can invest in a small business. You could own crypto. These are all assets your retirement account can own. Wall Street just doesn’t sell it. So they never told you about it. 

Ben Fraser: It’s pretty eye opening to this, the statistic of $33 trillion. That is a mind numbing number. And most people have some retirement accounts, right? If you’ve been working in the corporate world at all, you’ve been contributing and getting a match and. So you build up a little nest egg.

And generally if you’re, if it’s an employer provided account and you only have a few options you can invest it in. But if you leave that employer or you retire, you now have free reign with this cash and, Hey, maybe you already have a heavy allocation to public markets or you just don’t like the rollercoaster.

You want to, get into other alternatives, get more diversification, do something that you’re. Passionate about doing, and so talk about some of those options and, just give some examples of things you can do and then we can go into the different types of retirement accounts and some different kinds of nuances there.

Mat Sorensen: Yeah. I think this is in a high net worth investor area for a while because it did take some sophistication. And frankly, the self directed IRA companies weren’t big enough. They didn’t have a lot of traction. And so you had to have some really smart advice. Like the classic one is Peter Thiel, so I didn’t ever hear the news of Peter Thiel, he’s a very famous venture capitalist.

Real-Life Examples of Successful Self-Directed IRA Investments

Mat Sorensen: One of the original board members, not original, but early board members of Facebook and a large South side shareholder for a long time there. But Peter Thiel, and then after you’ve seen the movie, The Social Network, by the way, about Facebook, how it started, there’s a whole scene that depicts this, what happens, okay?

Facebook needs to raise money. At this point in the time of Facebook, there’s still TheFacebook. com. You could only get on it if you were at some Ivy League school. It wasn’t widely adopted. But they were running out of money and Eduardo Saverin’s family was funding this and they’re like, we’re not dropping any more money in your dumb computer company, whatever business they thought, they didn’t really understand it.

And they’re like, crap, we need to go really raise money for this. So they went and got their first venture capitalist, to drop in money. And it was one guy. And it was an angel investor, essentially. And his name’s Peter Thiel. And he did it with a Roth IRA. So he dropped Roth IRA money and he was like, why would he go buy a mutual fund or go buy Microsoft or Hewlett Packard or I don’t know, Oracle or whatever big software company was out there at the time.

Peter too was a tech guy. He was one of the regional co founders of PayPal and involved in so many other cool things. He’s Hey, I believe in this business. It’s going to grow. I’m going to use my Roth IRA to buy these shares. And, we invested about 500, 000. His account is worth six billion dollars, and because he just invested in what he knew and so this is a concept we teach a lot of our clients is, you can invest in what you know.

Now, Peter Till did it with the Roth IRA, and his tax returns got disclosed with Warren Buffett’s and Donald Trump’s and all his people’s famous people whose tax returns got disclosed. And this is the big thing on his that was all in the news as someone has a 6 billion Roth IRA. He did it by self directing.

Oh my gosh. And a 6 billion Roth IRA, if people understand what a Roth is, that’s coming out totally tax free. So a Roth account comes out totally tax free. And for him, making a huge investment where you can hit a home run, that was a huge advantage. And so we have a lot of smart clients that like to use Roth accounts for tax advantage benefits.

But that’s just one example. My largest client has a 300 million Roth IRA and he invests only in real estate. He does real estate. He’s done it for 20 plus years in the account and very successfully. He’s in syndications, he does his own deals and he’s just grown it by, by being very good at what he does.

And this client. Was a real estate guy and he was like, why would I go buy mutual funds or stock? No one loved real estate. I believe in this asset class. I feel like I could pick the winners and losers of individual properties or asset sponsors better than I can. What mutual fund or stock I should be throwing my money at.

And so he just invested in what he knew and what he believed was going to grow. And he used the retirement account as the vehicle to make those investments. 

Ben Fraser: I absolutely love that and agree. Like Warren Buffett is the one quoted “Invest in what you know.” If you don’t know what to invest in what you know, that’s the simplest and best advice you can do.

So many people have EIDL funds sitting in their retirement accounts, right? And another little thing too, I used to be a commercial banker. There’s a cool program called Rob’s Rollover for Business Startups. You can actually leverage some of your retirement funds to start a business, right?

If you’re watching, start a business, there’s some really cool stuff you can do there. And if you look at the ultra wealthy if you study what their portfolios look like, for most of the research I can find, Most high net worths are only investing, say, 25 to maybe 50% in publicly traded investments.

Yeah. But half or more, it’s in private equity, businesses, real estate, hedge funds. It’s all these different things that you can’t get through public markets. What better way than to do it through a tax deferred or a tax free vehicle, right? And so it just, it really opens up the whole gamut of things you can invest in.

Mat Sorensen: Yeah. And so I think for a lot of people, they’re like, all right, Matt, we get you excited. 

The Process of Transferring to a Self-Directed IRA

Mat Sorensen: You could do this. You could buy real estate. You can do all these things. But a lot of people usually are like, all right, Matt I called Fidelity where I have my IRA. And they said, I can’t buy real estate with an IRA.

You’re full of crap. And that’s not because IRAs can’t buy real estate. That’s because fidelity IRAs can’t buy real estate. So you need to move your account. This is the first step, really, if someone’s like, all right, I want to do this. But you need to move your account from a broker dealer IRA, which is where most people’s IRAs are at, over to a self directed IRA.

And our company, there’s 30 companies that do what we do. We’re the best, so you don’t need to know the rest. And you need to move your account to a self directed company like us. And now when you’re. The money’s there, it’s just a transfer. You have a Roth IRA at Fidelity, you can move it to a Roth IRA at Directed IRA.

You have a traditional IRA at TD Ameritrade, it’s a traditional IRA at Directed IRA. You got a SEP IRA at your local bank, it’s a SEP IRA at Directed IRA. You can just move it and it’s no tax, it’s just a transfer of the custodian of the account. But accounts with a self directed IRA and like our company at Directed IRA, we’re going to say, all right, you want to invest in a private fund?

You want to invest in a syndication? You want to invest in a startup, you want to invest in a small business, you want to go buy a duplex, you want to buy a short term rental, like those are all assets that people own in IRAs, here, every day we’re processing one of those investments into someone’s account, and but that, now your account owns that, so think about your IRA owns, Apple stock, let’s say, and okay, I can sell and get a gain if it goes up when there’s dividends, those go to my IRA, right?

And I’m growing my account. That’s how I’m growing my account. There’s dividends that might come from the stock. But otherwise I’m really hoping that it appreciates and goes up over time. The same thing happens with real estate. You buy real estate in an IRA or a private syndication. The income coming through goes to your IRA.

And it’s growing the account, the cash flow coming in. When that asset appreciates or when it sells, you sell it, that gain goes into the retirement account. It’s not on your 1040. It’s not, it’s not your personal money. This is your long term wealth building in your IRA. So just think of how people have already invested their IRA and 401ks buying stocks, bonds, and mutual funds.

We’re just changing the asset. The rules still apply. The retirement account gets the income, the retirement account gets the gain, and it’s not showing up on your taxes, it’s not taxable, it’s all growing tax deferred if it’s traditional, or tax free if it’s Roth. And again, if everybody has their little sliver of that 33 trillion this is an option.

Don’t feel like you’re just stuck with ticker symbols in your online account or on your app of what to buy. Like you can break free of that and get to a self directed account. 

Ben Fraser: So one of the things you said there with Fidelity or Schwab, like the real big custodians, because this has happened so many times where we have an investor that will say I talked with Fidelity and they said they have a directed IRA program.

Yeah. I don’t know what they’ve called it, if it was even called that, but they’re like. Yeah, they said they have that, but then, I can’t invest in, are you guys on their platform? And, yeah, no, it’s like why do they not allow this? 

Mat Sorensen: There’s a few confusion points. The first is a lot of, and first of all, if you call 1 800 Fidelity or 1 800 TD Ameritrade, you’re not getting the sharpest tool in the shed. Let’s be honest. And they’re, and frankly, I think the industry’s intentionally tried to confuse the heck out of everyone.

Yeah. And in fact, I think the training is designed not to give you the right answer, because they call it a self directed IRA because you can pick whatever stock you want. 

Ben Fraser: Okay, so they do call it that, which is confusing.

Mat Sorensen: Yes, they do. I know it stole the term to say we have self directed IRAs.

You can buy whatever stock you want. And so that’d be like a brokerage self directed IRA, if we’re going to call it anything, but but then the other thing is they’re all, there are a lot of alternative assets that are on place, not a lot, but there’s some alternative assets that are on like a fidelity Schwab is a little bigger in this space, but they’re very closed fund.

They’re like a million dollar minimums. You have to have an advisor to get access to it. You can’t just individually go in without an advisor. And so those funds are very limited. And we run into it a little bit, but for the most part, people wanting to do real estate, invest in private syndications, funds, small business, any of that stuff, the main street America investing, what I consider like the real alternative assets.

They need to use a self directed IRA. They’ll need to get to a self directed custodian. Or, you’re going to need an advisor that, by the way, is going to at least take one % of your account value a year to manage, that’ll then use, that’ll, that can then help you get on to, then look at alternative assets that might be on like a Schwab ira Fidelity.

Ben Fraser: They’re using the same terms, but they’re not necessarily the same things. And, I thought too, because I think another confusion point that I’ve run into with folks is, they call Fidel and they call Schwab and then they get the runaround, right? How do I actually get my money out?

First they might not even realize that they can transfer, right? Cause a custodian is just that, they’re the custodian of your funds. It’s your retirement account. You can do whatever you want with it and you can custody it wherever you want, regardless of what they say. And maybe they say there’s restrictions on transfer or whatever.

And then we’ve found it sometimes. It can take weeks, if not months, to get the transfer because they have no, at this point, financial incentive to make a transfer because now they’re losing out on future revenue. So what are some tips or things like that you would say to investors that are, Hey, I want to get my money out of jail here and I want to open it up to a lot of different options.

But I’m getting some pushback or I’m just confused on why it’s so hard to roll it over. What tips would you give people? 

Mat Sorensen: So I always tell people it’s a three step process to do this. And step one is you need to open the account at the self directed custodian. So you can go to https://directedira.com/ schedule a new account, call one of our reps.

Once you have the account opened, it’s pretty easy because we’re going to handle the transfer enrollment. And this is different from a lot of companies, they’re going to be like, all right, go figure it out. Or go to our website and do the form. We have an onboarding team and transfer team that is focused on this.

Because I don’t want to just open accounts, I want them funded and invested. Our goal is to have an account invested in something, what good is an account open if it doesn’t do anything? So we want to open the account and then we’re going to help the client with the transfer. We actually submit the transfer, so that it can go from institution to institution and that’ll arrive.

Now, if it’s at a Schwab or Fidelity, they’re actually pretty good. They’ll send it in three to four business days. Okay. If it’s like an LPL financial or a. Any of the Wall Street firms, like a JPMorgan or something, or particularly where there’s an advisor involved, it’s going to take two weeks, for a number of reasons.

One, they’re typically not going to release funds until the advisor approves it. And if you have an advisor, the kind of the traditional Wall Street advisor, they’re going to try and talk you out of it, right? Because they lose money, they’re not making fees on this anymore. And so you might need to get organized if you have an advisor on the front end, make sure they know what’s going on, because they do have to release it in many ways.

If you don’t have an advisor, which is a lot of people that are self -directed, then, frankly, most people it just depends on your institution. But the big ones are actually pretty fast with the exception of LPL. So it should be here within a week. And so that’s step two is you got to fund the account.

Again, most people that are self directing their IRA are just moving existing retirement account funds. When I mentioned that 33 trillion, the actually the largest piece of that 33 trillion, a lot of people think it’s 401ks. It’s actually in our IRAs already. It’s just in broker dealer IRAs.

The majority of retirement account funds now are already in IRAs. And when you want to be self -directed, it’s easy because there’s no rules. You can move your account to whatever custodian you want. 

Transferring Your IRA: The Basics

Mat Sorensen: You want to go from Schwab to Fidelity. You want to go from Fidelity to direct IRA. It doesn’t matter. There’s no transfer rules.

No restrictions, no penalty, nothing. You can move whenever the heck you want. 

Why People Choose to Move Their IRAs

Mat Sorensen: And so most people are coming from an existing IRA. They’ve just decided, I don’t want to just be 100% in mutual funds or stocks. I’d rather do something else or get a little diversification, get into some private real estate funds or a real estate asset or small business or startup, whatever your thing is, and so they get over to self directing the other category that’s popular in moving is.

An old employer 401k, a lot of people just leave their 401k, we see that a lot people like, Oh, I heard about this and I’ve, I’ve got my IRA or my current job 401k, but I had this job 10 years ago and there’s 50 grand sitting in the 401k and I just never moved it. It’s just it’s like now I got a reason to grab that money.

I’m like, it’s crazy. Like I just did all the 10, 000 plus calls of how many people are like, Oh yeah, I want to invest 50 grand in this. I don’t have 50 grand. Oh yeah, my spouse had this job 10 years ago, and this 401k that’s just sitting there, it’s at Vanguard, and they don’t even know what it’s invested in, but we can grab that and go into this deal.

Old 401ks are good. 

The Challenges of Current Employer 401k

Mat Sorensen: The big roadblock where people are like, alright man, I want to self direct, but I called my 401k at my current day job. Generally, your 401k where you work, if you’re still employed, and you’re not yet at retirement, age 59 and a half, they’re going to say, you can’t move it.

You’re stuck. As long as your employee is here, We got the Vanguard 401k plan. You’re stuck at Vanguard, we got the John Hancock 401k. You’re not doing anything, but whatever John Hancock lets you do. And so for employees at a day job, you are locked down, unfortunately, until you leave or until you hit retirement plan age of 59 and a half, at which case you can roll it out even if you’re still working there.

sO talk a little bit about. 

Investing Your Self-Directed IRA: The Next Steps

Mat Sorensen: The next step. You made the transfer, it all worked out, you got cash in your self directed IRA, but this is another problem too, right? I don’t know what the number is, I the number, but there’s a ton of cash sitting in self directed IRAs that’s never been deployed, right?

What do you do? What’s the next step? Like I got excited, I’m going to make the rollover, I can now do all this stuff. But then people get excited and then they don’t actually invest in it. Which is the point. 

It’s crazy that it happens more than we would like. So yeah, that third step is you need to invest the account.

So open the account, rollover. And then third is to invest in the account. And when you’re investing the account, a lot of people come to us with a pre planned deal. Like they’re going to go into an aspen fund. You guys are raising, they know what they’re going to do. They open, they roll over, they’re like, I’m going to go into that deal.

Some people, and I would say the majority of people have a pre planned investment already in mind. That was the impetus of setting up the account. But we do get a lot of people, I don’t know the percent, but millions, tens of millions if not a hundred million dollars, that is what do I invest in? And they were sick of the stock market. They wanted to get off the roller coaster and they were like, I’m going to find something and or they sold a deal and they got money in their accounts. There’s a lot of people that have money in accounts and they’re looking for alternative investments.

The one thing that a lot of people have been investing in the stock market or mutual funds is. They get on a tick, they get on the website of their broker or dealer or their app and they just throw in a ticker. And if they don’t know, they buy the S& P 500 or something like that, and so there’s always like a little default investment that people can make in the stock market.

But when you’re self directing, these are unique assets. You’ve got to go out and hunt these things, and some people just don’t know where to do that. And so we’ve tried to provide lots of opportunities, educational resources. We have an all assets summit. And things like that, but that’s, I think Ben, where you guys have a great relationship with us is people need to be able to find these investment assets, quality sponsors that have experience in the field that have raised, that have had investors that have it down.

And that provides that opportunity to actually then invest those dollars. Because at the end of the day, that is the thing. That third step is the whole point of it. That’s the whole goal. 

The Importance of Being Proactive in Your Investments

Ben Fraser: Talk about that too, I think a lot of people don’t understand. As a custodian, you legally cannot recommend investments, right?

Some people might think I’m going to go work with Directed IRA. And, they can tell me the best things to invest in. But you’re not advisors, right? You can’t make recommendations. And Most of what you can do is provide education. You can provide introductions, but I think it’s important for people to understand you still need to do your own due diligence.

You still need to go and determine what’s the right strategy. And the cool thing is you can create your own destiny. You can choose your own adventure in this, but there still is an element of being proactive that you have to do. And obviously you guys are one of the best at this, of providing the education, of doing these events, of doing webinars and trying to just expose people to what’s available.

But at the end of the day, they still have to make the decision. They are the investors. 

Mat Sorensen: And that’s where there’s, you have to develop some skills if you haven’t done this before you need to get comfortable doing due diligence, you need to start learning how to analyze deals and read numbers and everybody gets better as they go.

And I’ll tell a lot of people, Hey, if you’ve got a 500,000 account, maybe invest 50% on the first deal, and just get a feel for it, understand what you’re doing. Let’s get some reps in before you like to drop the whole thing into one, one investment. And so I thought to tell clients this is a learning process and a journey really.

But the returns on alternative assets proven to outperform the stock market, and that’s when you’re talking about high net worth people, like there’s an Ernst and Young study I show in my regular presentation on this that shows 80 % of ultra high net worth people have their money in alternative assets.

They’re only allocating 20% of their net worth. To the stock market. If you take the quote unquote mass affluent, which is someone who has a hundred thousand to a million of investable money, the mass affluent have 70 % of their net worth in the stock market, and it’s very slim, but the people that have money.

Are a little more focused and a little more smart and savvy on where they’re putting it. Let’s be honest. And it does take a little bit of work. And it’s not hard. And I think it’s actually fun. The nice thing about self directing and why I got drawn to it from the beginning. Cause I self direct my own account.

I’m like, I do this myself. You know what I mean? I’m not the only one who should do this. Like me, I do this myself because I like it. It’s because it’s a little bit connected to your money. Totally. And like all that 33 trillion that’s in retirement accounts, so many people are disconnected from it.

I’m telling you that the average person could not even tell you the fund that their money’s invested in. They could have a half a million dollars in it. They don’t even know the name of the fund. They have no idea what the fees are. They have no idea of the performance of it. They’re just totally detached from it because Wall Street told you to set it and forget it and they love that, right?

Ben Fraser: Yeah, it’s not a conspiracy, but it definitely benefits them for you too. Be confused, not think you can do anything about it, and set it and forget it, right? It’s just, it’s out there in the ether. You can come back here when you’re 59 and a half. And see what balance is there.

You never gonna figure out what your return is, but it’s probably more than you put in, so we’ll just call it good, right? It’s so opaque. And people, it’s so funny because… We’ve talked with some folks that have advisors that are saying, Oh, you shouldn’t be going into alternatives. You shouldn’t go into self-direction because it’s so risky.

And they’re not, they’re just throwing that out there because they’re just not defining what risk is and ultimately they just don’t understand it. But then use the kind of same level of diligence and process that you’re looking for. You apply that to advisors, the public trade markets, you’re not going to get any better answers generally, right?

It’s very one sided. And so it’s something that’s frustrating to me because we’re on the side of it and we get thrown the big, Risky, like it, that just covers over, it’s just, shouldn’t do it too risky, but I agree with you. I think it’s, you still need to have a level of ownership of it, right?

But you, it’s also fun. It’s really fun to grow your money. And I say all the time, this podcast, people work so hard to earn. Yeah. They’re artistic, right? They work so hard to just save a little bit, invest a little bit and to help it grow. And they spend so much time in their career, earning the money. And they spend almost no time learning how to grow it and multiply it, and it’s so much easier to multiply money, I think, than to actually create the nest egg in the first place, if you know what you’re doing.

Yeah, I love what you guys are doing. Let’s shift a little bit, because I want to talk about some of the roadblocks, potentially, in IRAs, and things that, conversations we hear all the time. 

Understanding Prohibited Transactions in IRAs

Ben Fraser: And first, what I think… You have to cover the prohibited transactions, right? There are things you can’t do in retirement funds through self directed vehicles, right?

Can you talk a little bit about where those bright lines are? 

Mat Sorensen: Yeah, there’s the biggest rule that everybody needs to know is what’s called the prohibited transaction rules. And this rule doesn’t have to do with what you. What, like what assets you can buy with an IRA. A lot of people are like that, so what’s restricted?

What can’t I buy with an IRA? The only thing on that is collectibles, life insurance, and S corporation stock. Those are only three things you can’t buy with an IRA. Everything else is fair game. But the big rule you need to know is who can your account transact with, and that’s what the privy transaction rule is about.

If my IRA is buying real estate, who’s it buying it from? If my IRA owns real estate, who’s it leasing it to? And so for example, if I have real estate I personally own, I can’t sell it to my IRA, or if my IRA buys a rental, I can’t have my kids go stay at it. This is called the prohibited transactional, and it basically is designed to prevent you from trying to just benefit from your retirement account, personally, and take advantage of the money in there for your own personal use before you get to 59 and a half.

So what I always tell clients is your IRA needs to be for investment purposes. Don’t be buying assets or investing in things because you personally make money or get to use the asset. So if you’re like I’m investing in this property on 123 Green Street, I don’t know what he was involved in. I’m investing in the XYZ fund.

I don’t, I’m not involved in that. That’s what most people are trying to do, but we always get like the Wheeler dealer clients. And I don’t say that in a negative way. I freaking love them. But we get the kind of Wheeler dealer clients and they’re like I want to buy this and it’s for me it’s in a college town. My kid’s going to and my kid’s gonna stay there you can’t do that.

The retirement account, like that, causes this prohibited transaction. And so as long as you’re not personally getting involved in benefiting from the property or deal or business personally or your spouse, kids, parents, there’s all these people on the list who can’t benefit or transact.

It’s you, your spouse. For anyone in Utah, that’s all your spouses, kids, parents, okay, those are all disqualified people. And so your account cannot transact with them. Nor can you financially benefit from another common example that could be prohibited is let’s say you buy a property you want to fix and flip it, you can’t go do the physical work or your construction company can’t go do the work.

If you’re the real estate agent, you can’t go get the commission like you can be the agent for your own IRA buying property, but you can’t go get the commission because these things financially benefit you to personally make money. There’s a lot there, but that’s the gist of the rule. Not everyone runs into it, but if you’re wheeling and dealing and doing your own deals.

That’s where we’ve spent a lot of time in our law firm. I have a law firm, Kikilis Lawyers. We have four offices representing clients across the country and we do tax and business and we advise clients all the time on this. If they’re doing a weird deal that they’re involved in, their IRA is involved in or they got a partner thing or whatever, like we can help advise and structure that and make sure they avoid those issues.

Ben Fraser: I love how you said at the beginning where it’s not what. Prohibit prohibition on what you can invest in, but on who you can transact with. I think that’s a really helpful distinction. And basically if you’re benefiting somehow, some way on this, it’s probably shouldn’t do it. It’s probably prohibited.

But again, it’s, again, if it’s an investment, there’s a lot of things you can do. This is a point of clarification. So you said, Hey, you have Airbnb in a college town or whatever, and someone stays at it or you go on vacation there. That’s prohibited. But. You can have an Airbnb that you rent out 100%, not to yourself or to your family.

So you still can do that. It’s just, you can’t stay there. 

Mat Sorensen: Yes, exactly. And I’ve had clients that like a lot of clients that do short term rentals, they like to have use of it every once in a while themselves. And that was part of their strategy or as a quasi second home, Airbnb short term rental type deal.

You can do that personally, but you’re not going to do that in your IRA. It’s going to be 100% for investment. Rental purposes. And we have hundreds of clients that have short term rentals in their IRAs. Very popular strategy. 

Ben Fraser: So the other kind of, big, bad thing that we hear all the time and we hear from investors is UBIT, right?

So unrelated business income tax. Talk about that. What should someone think about it? What are ways to. Manage it, avoid it but if you’re explaining what it is first and then talk through some of the nuances there, because I think it’s become this big thing that people think is a worse thing than it actually is, but maybe you might disagree.

Navigating Unrelated Business Income Tax (UBIT)

Mat Sorensen: There’s, so there’s a tax called UBIT and there’s really two versions of UBIT. There’s what I call traditional UBIT and there’s UDFI UBIT and these are different things. So these are, this is a weird tax that can hit your IRA. So traditional UBIT is a 37 % tax and basically when retirement accounts were created, the rule was your IRA can get investment income, rental income, capital gain income, interest income, dividend income.

As long as it gets investment income, the IRS says you don’t pay tax when you make money in your IRA. But if your IRA gets business income and this UBIT stands for unrelated business income tax. If your IRA gets business income, then you have to pay this tax. Business income would be like your IRA owns, let’s say it owns one third of a restaurant, it’s, and it’s an LLC, there’s no corporate tax being paid.

It’s passing through ordinary income on a K 1 to your IRA. That’s it, that your IRA is going to end up paying tax on that. Now, most publicly traded companies are selling goods or services, but they’re all C Corps. This is one of the reasons why they significantly have ownership, retirement accounts own a lot of these companies or a big piece of them.

And so, in a C corp, the corporation pays a corporate tax, then distributes a dividend. When an IRA gets a dividend, it doesn’t pay tax. That’s on the investment income side. And so that’s like traditional UBIT is business income. There’s no corporate tax paid and operating business income is flowing to the IRA.

Now there’s a lot of clients that invest in startups. They’re just LLCs. They’re not paying corporate tax and they might have a little bit of UBIT, but they’re trying to, the company’s trying to sell and get capital gain income on selling the business. That’s how they’re really going to make money.

Not by owning and operating it. You know what I mean? There’s some planning that can be done there if you’re investing in something that creates business income. For example, my client I mentioned has a 300 million Roth IRA. He does a ton of real estate development. His Roth IRA does it. He uses an LLC, taxed as a C corporation.

He pays a 21 % federal corporate tax. And then it goes to his Roth IRA, no tax. So he’s paying 21 % tax instead, he lives in California. So he’s paying 50 % tax when he’s making money. For him, that’s he’s cut this tax bill in half. And so everybody comes at this differently, but I’m just trying to give some examples.

There is a way to block it in this traditional UBIT fashion. Now the other version of UBIT that you guys might run into more commonly, or we see a lot of real estate clients run into more commonly, is called UDFI. And that stands for Unrelated Debt Financed Income. Basically what UDFI says, hey, you can use your IRA to invest in real estate.

Or any asset really, and you can actually have it leveraged with debt, whether your IRA buys it directly and you get a loan and leverage it or your IRA invests in a fund and they’re using debt to leverage to buy a bigger asset, they raise 2 million and they buy a 6 million building or asset, you know what I mean?

In the eyes of the IRS, they’re like 1 3rd of that was the IRA’s money, 2 3rds of that was debt, or 1 3rd of that was investor money, which comprised the IRA for their piece of it, 2 3rds of this is debt. wHat the IRS does is they’re like, all right, when the IRA gets profits, and let’s say the IRA owns 1%, okay, just so I can run math here, let’s say there’s a million dollar profit coming down, the IRA owns 1%, so 10, 000 bucks is going to go to the IRA.

The IRS is going to look at that and say two thirds of that is and let’s say this is the sale of the property, by the way, there’s 10, 000 goes to the IRA, they’re going to say two thirds of that is from the debt. One third of that is represented by IRAs money and the other investors, and this is the IRA share of it.

So you don’t pay tax on that, but the other two thirds of this 10, 000 profit is debt. Now the gain on the debt, you get a capital gains rate, 20%. So you’re going to pay 20 % of, in that example, 6, 600. So what is that? 1, 200 approximately. You’re going to end up paying in tax on a 10, 000 gain. That’s way better than you’d get personally when you’re investing.

And what I always tell clients is because some clients are like Matt, I had to pay tax with my IRA. That’s crazy. Look at the total return, don’t worry about where they’re paying tax or not. Look at what the total return is. And at the end of the day, if you’re getting a better overall return, you’re far better off.

Now that example is on the gains. So you’re going to take long term capital gains rates. Again, it’s, you only are paying on the debt part of the deal. And there’s, I, there’s a lot more resources we have on how to do that. There’s a whole chapter in my book, the Self Directed IRA Handbook, there’s a lot of strategies to minimize it.

We don’t have enough time to get into all that but there’s some tax planning there if you want to get into that conversation. The other thing though, I get a lot of questions is what about the rental cash flow? Generally the K 1s are going to pass through a loss, even if the property’s cash flows.

We just see this on the K 1s that come through for people’s IRAs that are invested. And if there’s a loss, there’s no UDFI to pay. And in fact, that loss gets to be carried forward. And used when the property sells to offset that gain I talked about earlier on the sale of the property. But that’s UDFI in general.

It’s a tax on the leverage piece of a deal. You’d ever pay tax on the investor or IRA portion of the deal that’s the actual cash invested. And you’re able to buy a larger asset than you otherwise could. And so we’ve, I’ve gotten debt on deals for my own retirement account and I’m focused on the total return at the end of the day, not whether there’s a tax involved.

And so people can get a little distracted by that or like their tax account or their CPA will be like, ah, because frankly their CPA doesn’t want to deal with it, and so they just try to talk them out of it because they’re like, they either don’t know this rule. They’re like, ah, crap. I got to file another form of return for you.

But that’s UDFI and how it works. Like I said, there is a number of strategies to get out of it. 401Ks are exempt from it on leveraged real estate, including solo Ks. If the debt is paid off before the property’s sold, and there’s no debt for 12 months before the sale of the property, there’s no UDFI to calculate on the sale of the property.

We’ve had a lot of creative strategy deals with clients where they’ve brought in joint venture partners to get rid of the debt for a year and then they sell the property and they distribute a little bit of profit sharing to that joint venture partner and they can have no debt on the sale of the property.

Just giving some quick ideas here. Another one that’s common, we’re seeing a lot more private funds going to REIT status. One of the bigger ones that we work with here at Neighborhood Ventures and they’ve gone to REIT. We’ve seen Grant Cardone go to REIT. You’ve seen a lot of these people that are raising large sums.

They’ve gone to a REIT. One of the reasons is they’ve got a lot of IRAs and REITs that are exempt from UDFI, and so there are some other little things there and there’s a lot of exemptions or strategies to try and extinguish it. They don’t always work, but there are some little maneuvers 

that could sometimes happen.

Ben Fraser: I think that’s super helpful. And if you have questions, more in depth, definitely check out Matt’s book, a self directed IRA handbook. And you said you have resources online. Yeah. 

How to Get Started with Self-Directed IRAs

Ben Fraser: So with that, talk about what’s the best way for folks to get ahold of you and get into.

Your ecosystem of education and training and just other things you guys are doing. 

Mat Sorensen: Best place to go to https://directedira.com/. You can book a free call right there with one of our senior account executives or one of our managers over self directing how it could work. What funds do you have? And you, again, we don’t tell you what to invest in.

So you have to come with what you want to invest in or figure that out on your own. But we’ll help make sure you get the account open, the funds transferred and rolled over. So you’re ready to actually go invest in that alternative asset. The other thing is we do have a learn page. So if you go to direct ira.

com, there’s a, one of the menus is learn. We have a monthly webinar. We have our directed IRA podcast, which is a hundred episodes deep. The top 3 % podcast. There’s my book, the self directed IRA handbook you can find on the site. We have articles. We’re just. No one delivers as much content on this subject as we do.

Get over to the site if you want to read up more on it, whether it’s podcast consumption, webinars, which are recorded and you can watch the videos. We’re going to do a webinar with Ben, by the way. And then and then also just articles and stuff you can check out. And then of course, if you want the deep dive.

There’s my book. 

Ben Fraser: All right. Matt, thanks so much for coming on, man. This is really helpful and I’m sure it will be very valuable for our listeners. So probably have you back on at some point and appreciate you coming on. 

Mat Sorensen: All right. My pleasure. Thanks, Ben.


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