MASTERCLASS: Self Directed IRA - September 2018

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  • 50 mins 00 secs
Self-Directed IRAs put retirees in control when it comes to managing their outcomes and offers a variety of opportunities that are unavailable to traditional IRA accounts. A panel of experts join together to discuss the advantages of self-directing and the forces that are shaping the industry from the role of the custodian to the disqualified person.

  • Tim Kuhman - General Counsel/ Chief Compliance Officer at Kingdom Trust Company

  • Beverly Z. Edwards - Senior Vice President and Counsel at Mainstar Trust

  • Brittany Pickell - Director, Marketing & Sales at Next Generation Services, LLC

  • Terry White - President/ CEO at SunWest Trust Inc.



Sarah: Welcome to Asset TV, I am Sarah Makuta.  Self-Directed IRAs put retirees in control when it comes to managing their outcomes and offers a variety of opportunities that are unavailable to traditional IRA accounts.  Today I am delighted to be joined by a panel of experts to discuss the advantages of self-directing and the forces that are shaping the industry.  From the role of the custodian to the disqualified person, we are going to cover it all.  Welcome to the Self-Directed IRA Masterclass.  Everybody, welcome to be here on Asset TV with us.  Alright, Terry, we’re going to start with you, map out for us the history and the evolution of Self-Directed IRAs.

Terry White:  Well, actually Congress instituted the idea of Self-Directed IRAs in 1974, to give people the opportunity to invest directly themselves.  And so from the very beginning you had the opportunity to do what we call now Self-Directed IRAs.  But that became more in vogue in the 90s probably when people started realizing that they could invest in things other than stocks, bonds, mutual funds.  So over the time between 74 and now, the banks and brokerage houses have better advertising than we do.  So really only about 3-5% of the people out there know that they can invest in things other than the stocks, bonds, mutual funds.

Sarah:   Excellent.  Bev, you wanted to follow up with that.

Beverly Z. Edwards:  The industry did get a big bump in early 2000s with the real estate boom because people were becoming more educated about them simultaneously with the real estate boom and a lot of investors wanted to flip houses through their IRAs.

Sarah:  Interesting.

Tim Kuhman:   And another bump in 2007, 2008, 2009, when the stock market crashed and people were leaving the market in droves and coming to self-direction to invest in things that they already knew about.

Sarah: Brittany, coming to you, what are some of the advantages of Self-Directed IRAs?

Brittany Pickell: So, obviously they allow people to invest in alternative assets outside the stock market.  One of the advantages of that is having the ability invest in things that they know and understand, like real estate for example, which we touched on.  It also puts them more in control over their retirement account by being able to make their own investment decisions.  So that obviously kind of gets away from having to be at the mercy of stock market volatility.  And then also in addition to that, having a custodian with a Self-Directed IRA, presents benefits other than just administrative.  So with a custodian in this scenario, they usually provide education as well and other types of personalized services to the investors, related to IRS guidelines, which are extremely important with these types of investments to be aware of.

Sarah: Bev, what are some of the pitfalls?

Beverly Z. Edwards: Ditto, the fact that self … that the investor is making the decisions, it is self-directed, they can get into trouble.  They may not take time to research and understand the rules.  They may be tempted to do a transaction with their IRA which is prohibited.  And I would just say that the tax advantages of having a well-managed Self-Directed IRA are tremendous, there’s really no reason to try to break the rules and skirt the rules.  But it does happen once in a while and that can be disastrous, there are penalties associated with doing that.

Tim Kuhman:  And I think that one of the keys is something that Bev started off with is that self-direction equals personal responsibility.  You know if you’re going to self-direct you have to be willing to accept that personal responsibility and that includes doing all of the research and things.

Beverly Z. Edwards: That’s not to say that there’s no role for a financial professional, an investor can seek advice from, and often does, from a financial professional.  When we say self-directed or personal responsibility, it’s really making the point that the custodian is not responsible for doing due diligence on your investments, you or someone you trust is responsible for that.

Tim Kuhman:   Yeah.  And self-direction is really a team sport, it’s, you know, the investor himself or herself, their financial advisor, their tax advisor, a good attorney who knows the IRS rules and regulations and custodian.  So it really is a team sport.

 Sarah: Definitely.  And, Terry, who should self-direct?

Terry White:  Well, that’s a great question because every one of us has talked about it a little bit.  If you self-direct you’re accepting the responsibility for the investment that you make.  So what I see a lot of times is people jump into an investment and they don’t really understand it.  So I think it’s so important to make sure that if you’re working with an investment advisor that it’s somebody you trust.  I think it’s important that you have that team of people that you can look to.  But ultimately the responsibility is the IRA owner, the custodian, and I know all of us probably provide as much education as we can, but that education is only good if you watch it or look into it or read it.  So I would encourage people, I think the perfect person would be someone who understands investing outside of an IRA, maybe they have experience investing in real estate or precious metals or private businesses, those kinds of things.  And they understand how those different investments give a return.  The place I see problems all the time is people jumping into something because they’re promised a great return and they have no idea, no understanding of exactly how that works, how is that going to give me back a return?  So I think it’s important that the individual realize that they have this huge freedom, but with that freedom comes the responsibility of taking care of themselves and making sure they make an educated decision.

Sarah: And what should someone who decides to use a Self-Directed IRA understand about investing?  I know you said it’s important to understand, but what should they really understand?

Brittany Pickell: Most traditional custodians, they have the capability to hold these types of assets, but they just don’t want to because of the complexity that’s associated with the guidelines.  And so it’s important to have a custodian that can educate you on that.  And basically they need to be able to tell you what an IRA can and can’t invest in.  So, essentially an IRA can invest in almost any asset outside of life insurance and collectables.  But then there’s another level of understanding to that which is how can it transact or how can it invest?  And so an IRA can’t invest with individuals that are considered disqualified persons.  So defined by the Internal Revenue Code, those are typically the IRA accountholder personally, certain family members and fiduciaries of the account.  So, for example, you could use your IRA to purchase a rental property from an unrelated third party seller.  But you wouldn’t be able to buy it from your spouse because your spouse is considered a disqualified person.  So if that were to happen it would constitute a prohibited transaction.

Sarah:  Great.  Anyone want to follow up with that?

Tim Kuhman:  I think there’s sort of a laundry list of things, to answer your question.  Find a good custodian, that’s always the first place, right.  And you find a good custodian by doing your research and finding one that’s experienced in what you’re interested in investing in.  Know the IRS rules, you know, you should.  And if you don’t want to know them yourself, know a good attorney who does.  Do your homework, not only on your custodian but on the investment, the investment sponsor, all of the individuals involved in it.  And it’s so readily available today, you know, that it’s hard not to do it, you know.  Know a good IRA who deals in alts, that’s key.  Really read the investment documents, as Terry said, it’s most people don’t, they just sort of sign on the dotted line and send their money.

Beverly Z. Edwards:   The IRS rules, they haven’t changed for decades.  There are court cases of course that add nuances to them, but it’s not a quickly moving body of law.  But I also wanted to point out that it’s important for older investors particularly, if an investor is reaching the age where that investor would be required to take Required Minimum Distributions, then liquidity is a big concern because with alternative investments they often are not liquid.  So throughout their portfolio of IRAs they should be cognizant of that and have either liquidity elsewhere or cash within that portfolio to meet their Required Minimum Distribution.

Terry White: One quick thing I’d like to add and I think everybody would agree with me is the custodian that you find is important.  And they’re going to do the best they can do to help point out prohibited transactions and stuff.  But you can’t depend on them to do that because they don’t know an individual’s entire situation.  So, I always use as an example, if an IRA account buys a piece of property and then they rent it to someone, a daughter whose last name may be different, the IRA custodian may not realize that’s a prohibited transaction.  So it’s always very important for the individual to either know themselves what those prohibited transactions are or have the professional team that can help them guide them through that.  And I think everyone also will probably agree is that where we see problems, there’s a huge amount of things that people can invest in, where we see problems is when people try to skirt that line.  “Well, I can’t do this, but could I do this?”  And I think it’s always safer just to say, “No, there are plenty of good investments out there that don’t come close to the prohibited transaction or disqualified party rules and look for those.

Brittany Pickell:   I also think it’s important to be aware of what happens if a prohibited transaction occurs.  I think sometimes investors don’t fully understand, as we said, if they’re not fully educated on the consequences, they don’t maybe take it as seriously as they should.  So if a prohibited transaction occurs the IRA basically becomes disqualified as an IRA.  So the entire thing is distributed back to the owner personally, which as you can imagine, comes with penalties, taxes, you know, other types of financial ramifications.  So it’s a very serious consequence that I think people need to be aware of before they try to skirt that line, as you’ve said.

Sarah: Okay.  Bev, can we understand the rules of Self-Directed IRAs a little bit more, like disallowed people, kind of explain a little bit more what that all means, define it.

Beverly Z. Edwards:   Well, if you keep in mind the basic purpose of IRAs, that they are to enable investors to save for their retirement.  They are not intended to enrich either the IRA owner before retirement age or a family member.  If you keep in mind that basic premise you’re on the right road.  So you would not be able to transact or get personal enrichment because you yourself are a disqualified person.  For example, if I am the investor and I purchase a rental property in my IRA I would not be able to rent that property regardless of whether rent is paid or not to my daughter or my son or my spouse.  Nor would I be able to pay myself for fixing up the property because that would be personal enrichment.  So if you just keep the basic guideline that it really is for your retirement in the future, not to enrich yourself or any of your relatives or your spouse or your spouse’s relatives, you’ll stay on the right side of the rules.

Sarah:  And, Tim, some other rules, exclusive benefit rules separation of funds, [inaudible]?

Tim Kuhman:  All of that is in 26 U.S.C. 4975 and it lists out who you can … primarily it’s linear family members and then businesses with which you’re associated.  And I think Bev addressed the inclusive benefit part of it as well.  The idea behind a retirement account is that you’re saving for your retirement.  You shouldn’t derive a benefit from it prior to retirement, nor should the rest of your family.

Beverly Z. Edwards:   That touches a little bit on the complexity and why more traditional custodians maybe don’t want to get involved.  You mentioned not being able to transact with an entity that you own or admit or control.  If you purchase public stock there’s no way you’re going to break that rule because your ownership is going to be miniscule compared to the amount of stock out there.  But if you own stock in a privately held corporation, you may very well have more than 50% and it’s up to you as the accountholder to understand that transacting with that entity then is disallowed.

Sarah:  Brittany, let’s talk about some of the … let’s talk about what marketplace trends are you seeing as it relates to Self-Directed IRAs and to alternative assets, talk about some trends.

Brittany Pickell:  Generally I think there is a shift toward increasing alternatives, or exposure to alternatives, just because of all the volatility we’ve had in the stock market.  And a recent survey conducted actually indicated that 73% of advisors plan to increase their clients’ portfolios exposure to alternatives by at least 25%.  And actually private equity, lending and real estate were … encompassed 82% of the assets that they were considering.  So obviously those were things that could fall into a Self-Directed IRA.  The other thing, and alarming is the proportion of older Americans that are filing for bankruptcy protection.  Actually a New York Times article recently also indicated that the number of older Americans, I think was aged 65-74 filing for protection or seeking relief, tripled in the last two decades.  So I think what that’s saying to us is that the retirement landscape is not the same as it used to be, right, so pensions aren’t kind of easy to come by anymore.  There’s a large shift toward 401(k)s, I think people are not sure what to do with old 401(k)s sometimes.  So I think it’s suggesting that, you know, we really need to start looking at things differently in terms of, you know, retirement planning.  And I think that Self-Directed IRAs could potentially be a good diversification tool when it comes to that.

Tim Kuhman:  And you can take that even further, if you look at confidence in the organized pensions that currently exist, I think probably all of us have heard the sad saga of the Central State’s pension fund and they are thinking of cutting back to like 30% of what the out pay was supposed to be to those retirees.  And there’s really nothing that they can do, and if they had something like a Self-Directed IRA that they could have been contributing to, and doing so and investing on their own in things that they knew, they might have something to fall back on.

Beverly Z. Edwards: That brings up the point that in Self-Directed IRAs, yes, you can hold alternatives, but you can also hold traditionals, you can hold public stocks and bonds, the same thing that your 401(k) might hold.  So you can diversify within a Self-Directed IRA, which is important to a lot of savvy investors.  In addition, many custodians will hold both taxable and non-taxable accounts.  So if an IRA has an investor that wants to put some money into an asset through a tax exempt vehicle, but also leave some outside that in a taxable account, custodians will be able to accommodate that, but flexibility is the key I think.

Tim Kuhman:  I agree.

Terry White:   I think also one of the advantages of Self-Directed IRAs is the ability to truly diversify.  I mean you can buy a mutual fund but you’re still in the equities market.  So if the stock market generally, if the stock market goes down the entire market goes down some.  So I encourage people and I see a lot of people go into a Self-Directed IRA and they put all of their retirement funds into it.  I encourage them not to do that.  I think it’s important to truly diversify, maybe, you know, we’ve talked about real estate a lot, but maybe buy some local real estate where you live that you understand, you know about.  And you also keep those mutual funds or individual stocks so that hopefully if one’s going down, the other one’s going up, so you’re going to be protected.  The other thing that’s really nice about Self-Directed IRAs that I’ve found is it’s hard for people to really grasp a share of stock that they own.  We have clients that own pieces of property down the street from where they live and so they can go down there and see it.  Now, they have to be very careful and not work on it, not manage it, there’s some very fine lines there.  But it’s a tangible asset that they can touch and hold and they feel like if everything goes bad in the stock market or something, this is house is right down the street from me, I know what the neighborhood’s like, I know those kinds of things.  So I think that’s really an important aspect of Self-Directed IRAs.

Sarah: Excellent.  Terry, regulated custodians and Third Party Administrators…

Terry White:  Administrators, yeah, we call them TPAs in our industry.

Sarah:   Okay.  Regulated custodians and Third Party Administrators, what is the difference between the two?

Terry White:  Well, in order to take title to the assets in an IRA you have to be a custodian.  And the IRS says that it either can be a bank or someone regulated by the state banking body, regulating body.  So that’s where trust companies come in.  So all of us are trust companies and we are regulated by the various states that we’re chartered in.  What that means is that the state that we’re chartered in has various capital requirements, they have auditors that come in at least annually I assume, every state I know, in New Mexico they come in annually.  They also require that we have other audits done, so there’s someone looking over our shoulder to make sure that we’re complying with the rules, most specifically with the cash that we hold and that kind of thing.  A TPA is a Third Party Administrator, typically that’s a company that just administers, keeps the records of the IRA account, but they have a custodian that actually holds title to it.  The concern there is just that that TPA is typically not a regulated entity.  In other words there’s someone looking over their shoulder, not to say that there’s a problem with that.  But I would just encourage people to know the difference and make sure they understand the difference.  And if you’re using a TPA and they do a good job, that’s perfectly fine.  But just you need to understand what the difference is and why there could be a problem.

Sarah:  Anybody want to add anything to that?

Beverly Z. Edwards: I happen to be with a company that has both models, Mainstar Trust is a trust company obviously.  But we have also contracted with a number of TPAs.  And I call it the active oversight model, right, you need a custodian in the background who is reconciling assets, in our case our TPA’s assets are included in our oversight from the banking commissioner.  They are … they do have to have an audit.  But that’s maybe not always the case with the TPAs.  So you just need to do your homework and make sure if you’re going with a TPA that you’re in the active oversight model, that there is a solid custodian in the background doing what a custodian should do.

Terry White:  I would agree with that 100%.  And I think that comes in with what we talked about initially about the individual doing their own due diligence.  Find out if the TPA you’re using, who is their custodian and what oversight does their custodian have.  Because we all know of situations where custodians didn’t have enough oversight and it created problems.  So I think that’s a great model, but just again, you know, and I hate to be the one with the wet blanket, but it’s up to the individual to know what they’re doing and who they’re doing business with.

Tim Kuhman:  Yeah, I don’t consider that to be a wet blanket, that’s good advice.

Sarah:  Brittany, what kind of education does your firm offer to interested investors?

Brittany Pickell:  There are a lot ways to get educated and a lot of resources, and it’s probably similar to what everyone here might say as well.  Our website has a ton of information, we have a blog online that we contribute to weekly.  People can call the office and speak to someone immediately, if in the tristate area, we’re in New Jersey, so they could potentially come in physically as well to meet with somebody.  We also do free webinars on a regular basis, we present at local meet-up groups, there are a lot of real estate meet-up groups and others for individuals interested in different types of investments, that often network and get education on these sorts of thing, so we do that as well.  And there are a lot of, you know, trade shows and other conferences that we’re at and I think everyone probably has that kind of exposure as well.

Terry White:  I think Asset TV is probably one of the best educating.

Beverly Z. Edwards: A good plug.

Sarah:   Yeah, definitely, that’s a good plug, that was a good one, guys.

Tim Kuhman: Did you pay him for that?  You get the mug.

Terry White: Yeah, I get the mug on the way out.

Sarah:   Bev, we’re going to move into self-direction for IRAs.  What are some common misconceptions about Self-Directed IRA providers that IRAs should know?

Beverly Z. Edwards:   I think that there is some confusion in the financial community; some might think that custodians, trust companies are competing with the financial professional.  And that couldn’t be further from the truth.  We are not fiduciaries; we do not offer investment advice of any kind.  We don’t do due diligence on the assets.  We don’t look at an investor’s total portfolio and give advice to put or not put money into an IRA or not or a particular asset or not.  That’s the role of the financial professional.  And I’m sure all of us here partner not in the capital P, but work with … there, that’s a better word, work with financial professionals, for example, say that a financial professional is interested in offering a particular asset to his or her clients.  And he knows that many of those clients, it would behoove them to purchase this asset through a Self-Directed IRA.  Well, he could come to a custodian and get the asset pre cleared, if you will.  In other words, a custodian could decide in advance, this asset would be administratively feasible for us to hold, all things being equal.  So then when that financial professional’s clients come to open up a Self-Directed IRA, the relationship is between the custodian and the accountholder, there’s no contract with the financial professional.  But the financial professional can make it easier having given the custodian the opportunity to pre clear the asset, for example.

Sarah:  Got it.  And what should the IRA and investor look for in a self-directed plan provider?

Terry White:  I think the first thing they need to look for, which you kind of touched on was will that custodian handle that particular investment?  Even though we’re all non-traditional asset custodians, there are certain things that we don’t allow our customers to purchase.  I think we may probably touch on Bitcoin here pretty soon.  And so I’m interested to find out what everybody thinks about that.  At my firm we have decided at this point we don’t allow people to own Bitcoin directly in their IRA, frankly, because I’m an old guy and I don’t really understand what it is.  But I’d be interested to know what other people think.  So the first thing is just to make sure, do your due diligence and find out what particular investment you’re wanting to make and will the custodian you’re looking at allow you to make that investment.

Sarah: Tim, does this prevent any kind of client dialog, all these levels?

Tim Kuhman:   It does and it doesn’t.  And I say that because there are some registered investment advisors out there who don’t want you talking to their customer, they don’t want you advertising to them, offering them education, that’s their job, and so they don’t want you to.  But we have a number of RIAs that we work with, all of them understand that that client is our customer, the IRA is under our custody and that we don’t give investment, legal or tax advice.  So we’re not treading on their ground but we have to communicate with that customer, our regulators and the IRS require us to.  And so long as they understand that, there’s no issues.  But as Bev said, we’re not competing them, we’re simply holding an asset.

Brittany Pickell:   I think in some cases they’re actually appreciative of our ability to provide education if it’s a relationship where they understand the complementary benefits, because they want to do what they’re good at and advise on investments, which is actually what we don’t do.  And they want to be able to connect their clients to a company that can help them quickly and easily set up an account, they want them to have a good experience.  But I don’t know that they necessarily want to know the IRS guidelines and understand the ins and outs of the process.  So I think they’re appreciative to have, you know, access to or be aware of custodians that they can offer to their clients to connect them as a convenience.  And it also builds credibility for them to just be aware of that and be able to connect them with the right resources.

Sarah:   Terry, you wanted to follow up with that.

Terry White:  Yeah.  I just think it’s important to note as far as the IRAs are concerned, a couple of things, number one is we kind of appreciate them because they help the investor understand what they’re investing in, the investment side of it which I think is vitally important.  The other thing is we don’t compete with them because we don’t sell anything.  None of us sell a product; we provide a service as custodian for the IRA.  So we’re not competing with them, we’re not going to contact their client and say, “Hey, this is the latest thing, we’d like to get you to invest in.”  I’m sure we all stay as far away from that as we possibly can.  So the IRA has to understand that we’re just facilitating, maybe is a good word for them to … their client to make that investment, it’s something that’s not marketable, that’s not handled by a normal traditional custodian.

Tim Kuhman:  We do all the ministerial tasks necessary to acquire that asset, that’s all we do.

Beverly Z. Edwards:  And most of us, I’m sure probably all of us do allow for an accountholder to designate a financial professional to get statements for example, or, you know, whatever the case may be, you can have a financial professional listed on your account.

Sarah:  Got it.  Bev, when would an IRA consider a self-directed option as an additional tool?

Beverly Z. Edwards:  I think whenever they have clients with wealth who want to have a tax exempt option, who want to diversify into taxable plus and non-taxable and who also may want to diversify into alternative assets.

Sarah:   Brittany, we didn’t really touch on this before, but what is the role of the custodian per se, and how do they work with the IRAs?  Like just kind of break down that relationship better for us.

Brittany Pickell:   Well, so I know that Terry touch on the role of a custodian.  So maybe from a more logistical standpoint, I know sometimes investors are curious as to who does what.  A custodian’s job is to hold the plan and title to the assets within the plan.  And they usually also do the tax reporting or provide the tax forms, the IRS tax forms for tax reporting, which typically include the 1099 and the 5498.  And then on the administrator’s side, they’re providing the customer service to the account, that those are typically the people you’re going to speak to if you’re calling with a question about your account.  And then their job is to review investment documents for feasibility and to actually process those transactions.  So as far as how the process logistically works and kind of how an investor needs to understand who’s doing what, that’s the distinction there.

Terry White:   I think that, and also the custodian can’t change the title into their asset or anything.  I mean we’re all directed custodians and meaning that we only do what the client … what the IRA accountholder tells us to do in writing.  So we can’t, you know, if someone is concerned about, well, my asset is held by Sunwest Trust as custodian for this person, that doesn’t mean I can change that to another person or anything.  We are, you know, we only do what we’re told in writing by the IRA accountholder, or in the event of them giving that responsibility to an advisor or something then we would have something signed by the accountholder saying that the advisor has these specific roles that they can play in the administration of the IRA.

Beverly Z. Edwards:   I listened to a lawyer recently who I thought explained it really well.  And he said, “The custodian, imagine a big black safe, and a custodian keeps the safe, paints the safe, opens the door, closes the door but the decision about what goes in that safe and when that door gets opened for it to come back out, they’re the accountholders along, you know, getting advice from their financial professional or their lawyer.”

Sarah:   Excellent.  That’s a good visual understanding of it.  Bev, let’s just talk about the versatility of Self-Directed IRAs.  You talked a little bit about that before, but just talk a little bit more about it can hold public assets, private assets, you mentioned those before, [inaudible].

Beverly Z. Edwards:  The universe is so wide open, there are only a couple of things that you cannot invest in, everything else you can.  I thought it might be kind of fun to talk about marijuana, because we have a lot of investors or financial professionals thinking that that’s where they want to guide their clients.  And I will just say because it’s illegal under federal law and also under Kansas law, that we as a Kansas custodian will not accept direct investments in marijuana if we know what it is.  You know if it’s an LLC with an ingenious name and none of the documents disclose that the intent is to grow marijuana we wouldn’t know.  I think there is some risk until it’s legal under federal law, if that becomes the case of investing in marijuana directly.

Sarah:   Anything to add about versatility from anybody else?

Tim Kuhman:  Versatility, as Bev said, there’s a world of things out there.  And I think if you started at that end and just moved all the way down the line here we could come up with some really creative things that we have seen, from intellectual property, signs on restaurants, things of that nature, cattle, racehorses, private seat licenses, there is a world of things and you just have to be creative.

Terry White:  Basically like I think everyone’s kind of touched on it, the IRS doesn’t tell you what you can invest in, they just tell you what you cannot invest in.  And they say life insurance and collectables, and then you have these disqualified parties and prohibited transactions you’ve got to worry about.  But given those few rules, the sky’s the limit.

Beverly Z. Edwards:  The sky’s the limit.

Tim Kuhman:  It is, be creative, that’s what we always tell people, be creative.

Terry White:   One other thing to be careful about though too is running a business in your IRA because even though an IRA is either a tax deferred or a tax free vehicle, depending on which kind you have, if you’re running a business or if you have debt in your IRA there could be some taxes that your IRA has to pay.  So again, going back to that team approach, you need a CPA that understands or a tax professional that understands those rules and knows, you know, if you’re running a business or if you’re doing something that could require some additional tax filing and maybe some additional tax.

Beverly Z. Edwards:  On the versatility we’ve talked about real estate several times.  And two primary ways to do that, you can own the real estate directly where the IRA has title to the real estate.  Or the IRA could hold an interest in a Limited Liability Company for example.  And that company in turn holds the real estate and they buy and sell real estate, so that’s a versatile way to own real estate.

Brittany Pickell:   I would say also the message isn’t limited only to IRA holders, I think it’s also beneficial for others to know that IRAs can invest into private companies or start-ups for example.  So there are a lot of entrepreneurs out there that are looking for investments or capital.  And they can look to Self-Directed IRA holders potentially to invest into their organizations as long as they can accept that IRA as an investor.  So outside the holders themselves there are others that can really benefit from just being aware and it’s a whole other resource to tap into, so.

Sarah:  Fantastic.

Beverly Z. Edwards:   So if that start-up company is a Subchapter S, that’s another little nuance, Subchapter S’s can only have individuals as investors, so that prohibits them from accepting an IRA as an investor.

Tim Kuhman:   As a shareholder?

Beverly Z. Edwards:  As a shareholder.

Sarah:   Great.  Tim, I know you want to drag us into 2018 here, we’re going to talk about cryptocurrency, I know Terry is excited about this.  Can you hold cryptocurrency like Bitcoin and other digital assets in an IRA?

Tim Kuhman:  Absolutely, as long as your custodian will allow it.  It’s simply another asset class.  Now, there are some different nuances in how you hold it and what you hold.  But you can certainly hold it in your IRA, Bitcoin, Ethereum, a number of others.  There are very few custodians out there currently who are doing it.  I know we are.  We know Sunwest is not.

Terry White:  No, we don’t, but we … there are ways you can do it and I’ll wait till we finish.  But we won’t hold it directly simply because I just, like I said, I couldn’t sleep at night thinking I had lots of money on this little fob or something.  There are young people out there that are saying, “He’s crazy, he doesn’t know what he’s talking about, it’s not a big deal.”  But I just don’t, I don’t get it yet.

Tim Kuhman:  And that little fob that you’re talking about, that the key to holding digital assets is how you hold them.  And it is more expensive at this point to hold digital assets than it is other asset classes because the security that you have to have to really maintain the security of them is that much greater, the cost of it is that much greater.  Everybody always says, “Well, it shouldn’t be that difficult because I can grab a little flash drive and I can stick my private key on it and I can lock it in the drawer of my desk.”  Well, good luck, how many of us have had flash drives that have just crashed for no reason, and then it’s gone.  You know, so it can be held, you just have to go to a custodian who knows how to hold it and can hold it securely.

Sarah:   And how do you hold something that’s really just a string of numbers in cyberspace?

Tim Kuhman:  The way that we hold it is we do use some flash drive like devices, called wallets.  We also use cold storage servers, so what cold storage means is that it’s not connected to the internet in any way, shape or form, so it can’t be hacked.  But we also keep duplicates in various geographical locations across the country.  And it literally takes six different people to access it, different people to get into the vault, and different people to get into the part of the vault that holds the servers, somebody else to access the servers and somebody else to key in part of a code, somebody else to key in another part of the code etc.  So the way we hold it is pretty secure, you’d have to compromise a whole lot of people in order to get at them.  And if you broke into the building late at night, and happened to be able to get to the vault and get into the vault you still couldn’t take it.

Sarah:   Pretty amazing, that sounds like a lot of layers of security, yeah.  Anything else we want to add about say cryptocurrency?  What do you think of putting cryptocurrency, having it in an IRA?

Beverly Z. Edwards:  We’ve determined that it’s not administratively feasible for us to hold.  And part of it is, even though we all agree that a custodian is not the fiduciary, should not be responsible when assets lose value.  We see the potential for lawsuits or class actions based on a … not that the custodian did anything wrong or lost the asset but that the asset itself rapidly lost its value.  And in the state of the world today, if you are dragged into one lawsuit, even if you are dismissed out of that lawsuit, it’s still extremely expensive to defend oneself.  So for us we have decided not to go down that road.

Sarah:  Brittany.

Brittany Pickell:  Yeah.  We don’t directly hold it either but it can be held through an LLC that’s owned by the IRA.  So that’s one way to do it essentially, if a newly formed LLC is created and the IRA owner invests into that LLC, they can be listed as a manager of the LLC and have access to that LLC’s business checking account and they can set up a digital wallet that way as well.  But again, as Bev, I think you mentioned earlier, when assets are held within the LLC that’s owned by the IRA, the custodian doesn’t really have much knowledge or transparency into, you know, into seeing what kind of activities are taking place there.  So it could also pose risk of prohibited transactions.

Terry White:  Yeah.  I think the important thing to note is when someone uses that strategy where they have an LLC owned by the IRA; all the rules that apply to the IRA apply to the LLC.  There might be people out there that are making people think you could do something different in an LLC than you could in an IRA, and that’s not true.  So we would also allow people to hold it in the LLC.  And I think the main advantage of that is that then they can control it.  The problem with the volatility of these things right now is an investor might contact us; send us a direction of investment and say, “Buy Bitcoin.”  Well, Bitcoin this week has changed value well over a $1,000 and the value of it at any given time.  So they may think they’re buying it at one price and when we actually get it bought, it’s a whole different price.  So we have exposure for litigation there, that’s where the LLC idea allows them, they know what price they’re buying it at, they’re doing the transaction in their own time.  But again the key is just making sure that that LLC abides by the rules that apply to the IRA already.

Sarah:   Terry, let’s understand the regulations around precious metal investments.

Terry White:    Again, with the LLC idea, and some of us, are we all members of REDA?  I’m not sure if we are not.  But one of the big things that they talk about there is there are companies out there, precious metal companies selling things that say you can hold the precious metal yourself.  And the idea that they put forth is that you create this LLC, you have your IRA, buy the membership into the LLC, the LLC goes out and buys the precious metals and then you can bury it in your backyard or put it under your bed.  We don’t support that at all, we think that that does … that violates the Internal Revenue Code.  So at a minimum if someone in an LLC owns the metal, at a minimum I think they should hold it in a safety deposit box at a bank.  I’m not sure what everyone else thinks, at best would be to be held by a depository like Delaware Depository or somebody who’s a trust who has the right to hold IRA assets.

Sarah: Is there such a thing as a self-directed HSA?

Tim Kuhman: Absolutely.

Sarah:  Yes?

Tim Kuhman:   Yeah, absolutely.  We don’t offer HSAs but I know people that have them.  I know a guy who’s got an apartment building in his HSA.  He partnered with other people, because HSAs are usually low dollar accounts, at least initially.  But he partnered with a bunch of other HSAs and they own this apartment building and that’s how they fund their HSA.

Beverly Z. Edwards: And we were actually talking about this earlier, it’s surprising, there’s kind of a misconception about HSAs, I think most people look at them as almost like a piggybank for out of pocket medical expenses.  And they contribute to their HSA and they just kind of park cash in there.  But I don’t think people think about strategically using those funds to do other types of investments and get creative or even just be more strategic about what they’re doing with the money in those accounts.  And absolutely there’s … I think there’s a lot of potential in HSAs.  We do offer them, because of, I think, the misconception there aren’t a ton of accounts that we have that are HSAs.  But I think there’s a lot of room for growth.

Sarah:  Terry, you wanted to add something.

Terry White:  Well, I just, you know, you mentioned that it’s a small, I think it’s $2,000 a year contribution, so if someone is going to use that as a self-directed, my opinion is that you probably wouldn’t use it to pay yourself back for the bottle of Tylenol that you buy or the copays or that kind of thing.  And so just because you have an HSA doesn’t mean you have to use that money to pay your out of pocket medical expenses.  Someone could contribute to an HSA and over time build it up to be a large amount of money.  But I think they could only do that if they didn’t use it to reimburse themselves for all those incidental medical costs that they have over time.  So just so people understand, just because that’s what it’s for doesn’t mean that every time you go to the doctor you have to pull money out of it to pay that doctor.  You can pay them out of your own pocket.

Tim Kuhman:   Yeah.  And the nice thing about HSAs is that you can do exactly that and 10 years down the road you can pull out that receipt and reimburse yourself.

Terry White:   Exactly, so keep the receipts and keep a good file.  Again it goes back to this whole idea of Self-Directed IRAs is there’s some responsibility on the individual’s part.  So keep those medical receipts, those reimbursable things.  And then I know one person that talked to me about them, we don’t handle HSAs either right now.  But they would pay all these little bills out of their own pocket and then once a year/once every two years they would take the money out of the HSA to cover those and they’d use that for a vacation.  So you don’t feel that $10/20 when you go to Walgreens and buy Talon oil, it’s not good.  But then all at once you have a few thousand dollars that maybe you could use for something else.

Tim Kuhman:  Absolutely.

Sarah:  That’s great, that sounds very versatile for sure.

Tim Kuhman:  And good tools.

Sarah: Yeah, absolutely.  What do we think the future is of Self-Directed IRAs?

Tim Kuhman:  I think there’s a huge future for it, as people get more and more familiar with the concept and get comfortable with it, I think you’ll see more people putting their money into it, especially people more our age than, you know, than the younger generation.  But I have four kids, they all have Self-Directed IRAs, they all know what to do with them.  And maybe it’s because I’m involved in the industry, but they talk to people, you know, they go to classes; they do all sorts of interesting things.  So they’re spreading the word.  And I think with, not necessarily the lack of confidence, but skepticism as to the viability of the market and its ability to generate a consistent return over time.  I think you’ll see more people coming this way and investing in things that they understand.

Sarah:  Excellent.  Brittany, you wanted to add to that.

Brittany Pickell:  Yeah.  So I’m a marketing person, so I’m going to comment on this from a demographic standpoint.  So I know we talked about this before, there are two areas that I think that have a lot of potential for growth, millennials, you’ve just kind of touched on it, and we talked about the fact that retirement’s going to look different for millennials in the future.  You know, we don’t have those pensions; we don’t have a lot of Social Security, who knows what it will look like, right.  So I think, and I think millennials don’t understand the importance of starting now to look ahead to plan for retirement.  So I think being able to find ways to reach them in the ways that they want to be communicated to from a technology standpoint obviously is important.  And so that’s something that we’re looking at.  And I think also women, I know, you know, I have looked into our numbers and 70% of our accounts are held by men, only 30% by women.  But we know that statistically women make a lot of financial decisions.  And so I think that where the gap there is maybe the way that we’re marketing, and I think traditionally it’s been targeted to men, and not that we don’t want to continue to do that, but we want to expand our marketing in a way that reaches women, in the way that makes them feel comfortable and confident in, especially with self-direction, being able to kind of call the shots and kind of jump in and take over, so.

Sarah:  Definitely.  Yeah.

Terry White: So I’m an accountant, not a marketing person, so I’ll give the numbers.  And these are, they’re not exact because they’re tough to keep track of, but there’s over $9 trillion in IRAs, and around 42 million households have IRAs.  And the best we can tell, self-directed make up about 3-5% of that.  So there’s a huge opportunity for the custodians in this business simply because the market is so big.

Beverly Z. Edwards:  And I would agree, I’m not an accountant, I’m a lawyer, and I see that, I do think that the IRS is going to be a little more interested in the future and that’s because there is going to be an influx and a growth in the dollars and the number of households.  And unfortunately even though it doesn’t make sense to try to skirt the rules, because the penalty is so great, people are going to skirt the rules, there are going to be some lawsuits, and not to throw a wet blanket on it but I think the IRS is going to sit up and pay attention.

Tim Kuhman:  Yeah, they definitely will.  I know Bev and I both know an attorney who does a lot of work in this area.  And an IRS lawyer told him to his face that there isn’t an IRA out there that doesn’t have a prohibited transaction in, they just need to find it, so they’re going to be interested.

Beverly Z. Edwards:  Yeah.  All of the rules, that’s the best advice.

Tim Kuhman:   Yeah, absolutely, do your homework.

Sarah:  Well, this was an amazing conversation, thank you guys so much, I’m going to leave our audience with closing remarks from all of you, leave our audience with final thoughts about self-direction, Self-Directed IRAs, Brittany.

Brittany Pickell:  I would just reiterate the … and again because I’m a marketing person, you know, educate yourself, and there are so many resources out there, and we just shared a lot of information, there are ways to get connected, there are books out there, just obviously make sure that you’re looking at the right sources and using the right sources, but just learn and get creative and use the knowledge you have to make, you know, interesting decisions that can impact your future.

Sarah:   Excellent.  Tim.

Tim Kuhman:  And for me it’s, I would reiterate all of that and be creative, and get that team together, get a good group of people that can help you do this, that’s how you’re going to be successful.

Sarah: Great.  Bev.

Beverly Z. Edwards:   And as I understand the potential audience for this show, the financial professional, it would really behoove that group of people to educate their client base and, you know, there are many investments that it would be appropriate to hold through a Self-Directed IRA with the help of a financial professional, there’s great growth potential there.

Sarah:  Excellent.  Terry.

Terry White:   So I’m the last one, I think the theme is education and I agree with that 100%.  I think not only education about the Self-Directed IRA and what you can do in it, but I think sometimes even more importantly is education about the investment that you’re making because we all see situations where amazingly people buy things from a phone call, and they don’t really know anything about it.  Don’t do that, you know, there is so much information available out there now, that it wouldn’t take you 10 or 15 minutes to find out something concrete about an investment and know more about whether it’s something that would fit your goals or not.  Don’t just chase a return because somebody tells you it’s guaranteed or it’s insured or it’s secure, because those three words I think I would … it would probably be a red flag if someone told me those.

Tim Kuhman: Giant red flag, yeah, giant red flag.

Sarah:   Excellent.  Well, so have fun, be creative, educate yourselves; sky’s the limit, [inaudible] from this conversation for sure.  Thank you all so much for being here today.  And thank you for tuning in, I’m Sarah Makuta and this was the Self-Directed IRA Masterclass.