MASTERCLASS: Self Directed IRAs - September 2019

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  • 55 mins 30 secs
Self directed IRAs allow investors to make their own investment decisions. This may be a retirement vehicle for investors who like to roll up their sleeves and be proactive.  SDIRAs have been around for decades but education regarding these IRAs has not managed to keep up. The advantages and disadvantages of self-directed IRA are highlighted along with the myths surrounding the investment options. 

In this panel discussion, 2 experts discuss SDIRAs:
  • Beverly Edwards, Senior Vice President and Counsel, Mainstar Trust
  • Terry White, CEO, Sunwest Trust

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MASTERCLASS: Self Directed IRAs - September 2019

Remy Blaire: Welcome to Asset TV. Self-directed IRAs allow investors to make their own investment decisions. This type of retirement vehicle may make sense for investors who like to roll up their sleeves and be proactive. These IRAs have been around for decades, but education remains shallow. Today, I'm joined by Beverly Edwards, Senior Vice President and Counsel at Mainstar Trust, and Terry White, CEO at Sunwest Trust. Well, thank you so much for joining me today.

Beverly Edwards: Thank you.

Remy Blaire: Well, first and foremost, starting out with a very basic question, Bev, can you explain what a self-directed IRA is?

Beverly Edwards: It's very simple, really. It's a vehicle that was created by Congress, to allow Americans to create wealth for their retirement, maybe outside of an employer plan. So, the IRA is an account that is held by a custodian, that, account holders can hold both public and non-traditional or private assets in this account to build retirement wealth.

Remy Blaire: And I think, with the topics such as self-directed IRAs, it's very helpful to start with the foundations. And as you mentioned, some of the different types that are out there. So, Terry, moving on to you, this may seem obvious, but, what's the difference between a self-directed IRA and a traditional one?

Terry White: Well, actually, every IRA is self-directed. Meaning that, even if you have an IRA with a bank, or a brokerage house, you choose what investment you want to go into that IRA. So, the difference between our companies and what has come to be known as the self-directed IRA industry, is that, we allow you to invest in those non-traditional, if you will, assets. Meaning, real estate, those kinds of things. So, the IRS, basically, doesn't tell you what you can invest in, they tell you what you cannot invest in. And they say, you cannot invest in life insurance or collectibles. So, then, it comes down to the custodian that you're dealing with, what they will offer or allow you to invest in within their custodianship.

And so, self-directed IRA companies such as ours, will allow you to invest in all those non-traditional things like real estate, gold and those things. I'm sure we'll talk a little more about that.

Remy Blaire: And, Terry, before I move away from you, can you tell me about some of the popular alternative investment options that are out there right now?

Terry White: Well, at my company, the majority that what we have is real estate or real estate related. But we also allow people, they can invest in precious metals, like, directly own a piece of gold. Now, they can't hold it themselves, like you might have heard on the radio or something, but we don't believe they can. But they can hold that, they can invest in private companies. If you have a friend down the street or a business in your town that you would like to invest in. In fact, I've invested in a company, a brewery in my town through my IRA. So, you can invest in those kinds of things, debt. Again, it's wide open, with this exception of life insurance and collectibles.

Remy Blaire: And do you notice any trends in terms of how these products are popular in terms of the alternatives? Are you seeing any distinction?

Terry White: Well, I see, again, real estate, the thing I think that, to me, anyway, is valuable, and Bev may have a little different take on it. But, is that, I think a lot of times, people, maybe they understand an investment better. I tell people in the stock market, if you want to do well in the stock market, follow me and do the opposite of what I do. Because, I've never done well in it, I leave that to a professional. But I understand real estate, and I understand real estate debt. So, I think it's an opportunity for people who know how to invest themselves in a particular thing, to take a portion of what they have in their IRA and invest it in that. I would always strongly recommend that they don't put... the old saying, don't put all your eggs in one basket.

So, they should always just look at a portion of their IRA maybe, to diversify into something that you can touch and see. A piece of real estate or something like that.

Remy Blaire: I think you've brought up a lot of important points regarding self-directed IRAs. Now, Beverly, I know that you want to highlight some of the benefits of these types of IRAs. So, can you tell me a little bit about that, as well as the contribution limits and eligibility requirements?

Beverly Edwards: Well, the contribution limit continues to go up every year. I believe, it's 6,000 for 2019, or 7,000, if you're over 50 years old. So, that's a chunk of money. And investors are becoming more and more savvy, and they want to take, at least, a portion of that money and have more control over it. And as Terry mentioned, that's one of the good advantages, if you know an area very well, maybe you've spent your life in a particular industry, and you feel like you could or want to invest in that industry, you can always do that through public means. It might be an LLC or a privately owned company that you want to invest in.

We're seeing a lot of interest, and I don't know if you are as well, in two areas right now. One is digital currency, and the other is cannabis related assets. Lots of inquiries, not only from potential account holders, but from the investment professional community, on whether we will allow our account holders to invest in the cannabis industry.

Remy Blaire: And Beverly, later on in the segment, you'll be talking more about the cannabis segment. So, now that we've covered that, Terry, if you could tell me about withdrawing funds. We know that, with a lot of investment vehicles, especially that focus on retirement, there's always the issue of timing. So, what are some of the do's and don'ts when it comes to self-directed IRAs?

Terry White: Yeah, there's always those pesky rules that you have to deal with. The number one rule is that you cannot withdraw the funds without penalties, prior to 59 and a half. There are some exceptions to that with Roth and those kinds of things, which may be a little more detailed than we want to get in this thing. And then, the other thing is, you have to start withdrawing from a traditional account, when you're 70 and a half. Bev got some information that that may change soon. But, right now, the two key numbers are 59 and a half and 70 and a half. And as far as those relate to self-directed IRAs, I think one of the most important things for people to understand, is that, by nature, self-directed IRAs are typically illiquid.

And so, they need to be careful as you approach that 70 and a half timeframe, that you realize that you're going to need some cash, and that you may have that in another account or in some other account that's more liquid, so that you can turn that into cash and take the RMDs, required minimum distributions, what you're supposed to once you reach 70 and a half. We see a lot of people, who are 69, 70 years old, and they buy a piece of real estate. And then, unless that has a huge cashflow or they have some money somewhere else, which could always be the case, it's going to be difficult to get their RMDs out the way they're supposed to.

Beverly Edwards: And you make a good point there. I don't think that there is good understanding amongst the investment public that that RMD can come out of any account, any other retirement account. So, if you've got 10 self-directed IRAs, some of which are in cash or very liquid assets, and one that holds this big piece of real estate, you don't have to disturb that piece of real estate if you've got that other bucket of money.

Remy Blaire: I think that distinction is very important.

Terry White: I think it might be important too, to point out, and I'm not an expert in this area, but how those RMDs are calculated. Because, if you have $100,000, let's say, in your IRA, that doesn't mean, at 70 and a half, you have to take out 100,000. That number, the value of your account, is divided by the life expectancy, based on the universal life table. So, it's 70 and a half nowadays, I'm just guessing. But, I think, for a man, it might be 16 years or something like that. So, it's not one big chunk of money all at once, it's a little bit every year. The idea being that you get it all out before you pass away and you pay the IRAs their share, before you pass away.

Beverly Edwards: Right.

Remy Blaire: Terry, we've covered the basics. So, I do want to move on to the management. Can you tell me how self-directed IRA management might differ from traditional IRA management?

Beverly Edwards: Well, I think the main distinction is the word self. That the account holder, him or herself, is choosing investments. And I think there's some confusion there amongst the investment professional community, that maybe there's not a role for them to play. But, actually, that couldn't be further from the truth. Most people who, well, I don't know if the word most is right, that many people who have self-directed IRAs, do rely on an investment professional to vet assets and give them advice, whether it be in the public or the private world. So, there's definitely a role for the investment community, the investment professional community to play with self-directed IRAs.

Remy Blaire: And I think this may be an obvious question. But, can you invest in the same financial products that you do within a self-directed IRA, that you can with a traditional one?

Beverly Edwards: You can, you can. You can hold publicly traded stocks in a self-directed IRA, or any other of those traditional assets can be held within a self-directed IRA as well.

Terry White: I think the key there, I'm sorry, I think the key there is just, know the custodian that you're dealing with, and determine beforehand what that custodian will allow you to invest in. Because, I think, a typical brokerage house probably would not let you invest in real estate or American Eagle coins or something like that. So, I think it's important to let people know, do your research, and make sure that the custodian you choose will allow you to invest in what you're looking at.

Remy Blaire: And before we move on to the segment covering the value proposition of these types of IRAs, there are many viewers in the audience who are financial professionals, and we know that there might be some interesting views regarding these types of IRAs. So, what would you say to them, if you could discuss some of the myths or misconceptions out there?

Beverly Edwards: Well, I think that that segment of the industry would not be wise to ignore self-directed IRAs, because, as the investment, public becomes more and more savvy. They're going to be asking questions about, “I've heard about it on the radio, or I've seen it on the web. And I want to invest in my best friend from high school's business, why can't I do that inside my retirement vehicle?" Well, the answer is, you can. So, to have a well-diversified portfolio, which people are looking for, I think the investment professional can really help their clients by being aware of this option.

Terry White: Yeah, I would agree. I think, the thing is, is that, there's a certain number of people, and I think it's fairly small, I think Bev would probably agree with me, tell me if you don't. But self-directed IRAs right now only make up three to 5% of all the IRAs. So, there aren't very many of them. But, if you're a registered investment advisor or investment professional, and your client comes to you and says, "I want to invest in my high school buddy's business." It seems to me that the best thing to do would be know how they can do that, as opposed to them going out and finding someone else that will help them do it.

So, I think the value is just knowing how to do it, whether the majority of your clients may never do it. But those that want to, you can still be an asset to them. And I know, both of our companies strongly recommend that you have a team of professionals that you work with, a lawyer, a CPA, an investment advisor. And so, those people can all help them in that journey to have a portion of their IRA self-directed.

Remy Blaire: And, Terry, I know you've highlighted some of the value of these types of IRAs. But, what would you say makes a self-directed IRA unique?

Terry White: Well, I think the most unique thing about it, is, it's something that you can feel and touch, in a lot of cases. Like I said, you can't own gold and put it under your mattress. But, depending on the custodian you use, you can actually go see it, or touch it. You can't hold it; it has to be held at a bank or a trust company. But, the real estate, I can drive down the street in my town and see a piece of real estate that my IRA owns. I can see a piece of real estate that maybe my IRA lent the person the money to buy that. So, I just like the... I don't know if tangibility is a word or not. But I like the feeling of knowing that I can go see what I own, as opposed to an arbitrary ownership in a company that I'll never meet the CEO or never know anybody there.

Remy Blaire: And, Bev, this may seem obvious to you, but for those in the viewing audience, they may not be aware of how custodians work with IRAs, when it comes to self-directed IRA. So, can you explain that to us?

Beverly Edwards: Yeah, I think there is some confusion there. Custodians are definitely not a competitor of IRAs. In fact, we can't be. We are a custodian, in the sense that we do not provide investment advice of any kind. And that's what the investment professional community is all about. So, we are not providing investment advice to our clients. So, it's not a competition at all. In fact, custodians can partner with IRAs in various ways. First of all, if you know of an asset, if the investment professional knows of an asset, he really wants to advise his clients to invest in this asset. Let's say, he's got 100 clients, he can approach a custodian and maybe get a cut of some maybe the setup fee on an account.

The IRA can offer to, or the person who's pushing or selling the asset, may get the asset. Go to the custodian advance and find out if that asset is administratively feasible for that custodian to hold, thereby shortcutting the time it takes to open an account. If you have an account holder who has money that he wants to invest both in a taxable and non-taxable account. Many custodians, I know we do, Mainstar Trust, us, hold both types of accounts, and you can get all of those assets under one statement at one place, and that's attractive to a lot of investment advisors as well.

Remy Blaire: And, Terry, do you have any additional insights when it comes to custodians?

Terry White: No, I think it's, again, just important that you do your due diligence. We love working with registered investment advisors and investment advisors, simply because, we see so many people who don't necessarily know how to invest or what they're investing in. So, that gives those individuals the opportunity to work with a professional that can guide them a little bit, and it makes our job a lot easier, because then, we can't give investment advice, but I know we get calls all the time, people trying to get some investment advice from us. And we just can't do that because of the huge number of investments that we deal with. I mean, we have everything from resources to real estate, and so, it's impossible for us to do any advising.

And so, the nice thing is to have that other person there, on the individual account holders team that can help them with that.

Beverly Edwards: And this might be a good time to mention that, depending on the custodian and how they're set up, an account holder can assign a registered representative spot on his account to an investment professional. So, the investment professional can see the account, and depending on what the account holder decides, direct investments, much like they do in the public space. It all depends on how much authority the account holder wants to give the investment professional. But they certainly can have lookup capability and see exactly what's happening with that account at all times.

Remy Blaire: Well, I think that's very helpful for some of our viewers to know about. So, thank you for that insight. Now, Terry, what are some additional special considerations when it comes to self-directed IRAs?

Terry White: The other thing that I would mention, and this goes to this question also, is that, when you're looking for a place to put your self-directed IRA, and this is just for information purposes only, there are what's called third party administrators, and there are custodians. So, now, the difference between those, is a third party administrator cannot hold title to the assets, they have to have a custodian do that. And then, a custodian, like we both are, actually holds title to the assets. So, I would just... and there's nothing wrong with either one of them, I don't want anybody to misunderstand, but just know what you're dealing with, and know who's actually holding title to your asset, for the benefit of the individual.

So, I think that's very important, and I don't know that that's necessarily clear in every case.

Remy Blaire: And as we head into the next section, Bev, you mentioned cannabis related assets in the beginning of the segment. So, can you tell me a little bit about holding these assets in self-directed IRAs?

Beverly Edwards: There is definitely a lot of confusion and hesitation in the marketplace, because several states have legalized marijuana, but the federal government has not. So, nevertheless, we have both IRAs and individual account holders wanting to invest in cannabis farms, hemp farm, CBD oils, and all of the various things. So, there has not been clear guidance on this. So, different custodians go different ways. We happen to be headquartered in Kansas, that has not legalized marijuana. Custodians in California are in the exact opposite situation. But it has not been legalized under federal law. So, what we have decided to do, and I don't know what Sunwest has decided to do, is, we will hold cannabis related assets.

We're not scientists, we don't know if a particular asset is for medical research or what, that's not our decision. But, if we're directed to hold a cannabis related asset, and if it's otherwise administratively feasible to hold, we will not deny it, simply because, it pertains to some part of the cannabis industry. However, we do ask that the account holder sign quite a lengthy form, describing the risk and making it totally clear that we're not approving of the asset, that the law could go either way, we have no idea. But that the account holder is taking the risk of holding that asset.

Remy Blaire: And while this may be unrelated to cannabis, there's a lot of uncertainty regarding crypto and digital currency as well. So, do some of the same rules regarding risk, apply to the crypto space?

Beverly Edwards: Definitely, they apply to risk. It's a little bit different because cryptocurrencies are not illegal under state law, or in a state that I know of, anyway. The difficulty with cryptocurrency is having a custodian that understands how they are held in lockers with a key. We don't, at Mainstar Trust. So, we have decided for our company that they are not administratively feasible to hold at this time. Other custodians vary. So, if you have an account holder interested in using retirement assets to invest in cryptocurrency, you need to do your research and finding a custodian who is capable of holding this.

Terry White: Again, I think this comes under the umbrella of doing your due diligence. Because, for instance, we will not let someone hold cannabis in there, own part of a cannabis farm, because it is federally illegal. The fine line that you have to deal with is, at least, we've seen is, someone will call and say, "Well, I own the company that provides the grow lights to the cannabis farm." Well, in our opinion, that's okay. Because, lights are legal, federally, statewide, everything. So, that's what we'll do. But, if they actually have ownership in the actual marijuana or a cannabis plant, we don't allow that at this point in time. Simply because of the federal issue.

And then, as far as cryptocurrencies, I agree with you, a hundred percent. I mean, we've looked at that for years, and we're just now getting to the point where we feel like we found a place to safely hold those. The key to it, to me, was, you've got this... First of all, I'm an old guy, so, I don't even understand most of it. But you've got the seed key, and then, you've got some other key. And then, you've got air gap, cold storage, and wallets and stuff. So, I think it's important for anyone considering investing in that, let's don't even talk about the security or the soundness of the investment, I have no idea. But, just make sure that it's held safely and securely, because that's important.

Currently, today, we don't do it, but we're working on a way to securely hold those.

Remy Blaire: Well, given all the interesting crypto and digital currency, as well as cannabis related products, I think it's very helpful to get that perspective. And while we're talking about the federal government, as well as regulation, let's move on to taxes. Now, when it comes to tax considerations, Terry, why do investors need to be educated and have a team? I know you touched upon that earlier.

Terry White: Well, the most valuable thing about an IRA, is the fact that the income created inside the IRA is either tax deferred or tax free. The difference there is a traditional account. And our language kind of gets confused because you're talking about non-traditional investments and that stuff. But there's a thing called a traditional IRA, which, the contributions to that IRA are pre-tax dollars. In other words, depending on your income and those kinds of things, the money you put in, is before tax, and that grows within the IRA, for however long until you reach 70 and a half, if you let it go that long. And then, when you take it out, it's taxed at your current tax rate at that time. That's a traditional IRA.

The government also created this thing, I think, in the 80s, '84 or something, maybe, a Roth IRA. And the Roth IRA, the money you put in is after tax. So, you've already paid tax on the money, you put it in your Roth account. But then, it grows tax free, from that point on. There're two rules that you have to meet, you have to have had a Roth for five years, and you have to be over 59 and a half when you take the money out. So, if you meet those two rules, then, the income that's made on that, during the period of time you had it, is tax free, which is a huge advantage.

Beverly Edwards: There're, I think, two other ways where people can get hung up on the taxes, and one is following the rules relating to transfer and rollovers. You need to do those within certain time frames, and have a custodian to custodian transfer, so, it never leaves the protection, if you will, of the retirement account. You can also do a rollover, where you actually take the money away from one custodian, and then, within 60 days, deposit it at a different custodian. You need to follow the guidelines and rules related to that. The second is in the area of divorce. As, you need to follow the rules too, and make sure that the IRAs are included as part of the divorce decree. If they are not, and if the parties in an amicable divorce decide to split up a retirement account after the fact, the owner of the account might, that might be considered a distribution, if it hasn't been handled appropriately.

So, that's where the investment professional really needs to come in and advise their clients on the appropriate way to do things.

Remy Blaire: And, Bev, before we move away from you, can you tell me about the advantages, as well as some of the built in tax breaks?

Beverly Edwards: As Terry just mentioned, I think the key is that you can put money in an account, it can stay there for many, many years and grow tax free. And then, when you start taking the money out, through the required minimum distributions, once you hit that age, it's coming out potentially at a lower tax bracket. And if you don't have to take the money out, if your beneficiaries actually inherit it, it's stretched out even further and pushing that tax burden down the road.

Terry White: I think that's a great point too. It's amazing to me, I've been in this business 20 years. And it's amazing to me, how many people don't want to take the money out of their IRA. So, that's a nice thing to do, is you can leave that to your kids or your grandkids, and then, it can actually grow longer and benefit another generation. So, it's a great estate planning tool, in addition to a tax planning tool.

Remy Blaire: I think that's a key point that will be important for some of our viewers. And Terry, the IRS has never published a list of investments that can be bought within IRA, and you touched upon this earlier as well. But, does it list the items that can't be bought?

Terry White: It just lists the two, life insurance and collectibles. But I think it's important, I was sitting here thinking, as we were talking, we've not really talked about what are called prohibited transactions, and disqualified parties. So, even though you can invest in all of these things that we talked about, you still have to be careful and not invest with a disqualified party. And it's interesting, the IRS defines disqualified parties as yourself. So, we get calls a lot, somebody saying, "Well, I've got this something that I want to put in my IRA." Well, the only thing you can put in your IRA is cash, in the form of a contribution. And your IRA can't buy something from you, because you're a disqualified party.

They also, your IRA cannot do business with your family, they cannot do business with people that are providing services to your IRA. The interesting thing there, is that, the IRS defines family as ascendants and descendants. So, it's interesting to me that it doesn't, my brother does not qualify there as my family, as far as the IRS is concerned. So, you could potentially do business with a brother, a sister, uncle, aunt, that kind of thing. But, not parents or children or grandchildren or grandparents.

Beverly Edwards: I think this comes up a lot, and you probably get the calls too, that, people want to buy a vacation home, and use it until they retire inside their IRA, and that is a prohibited transaction. It's basically, using the assets inside your IRA, your retirement plan assets, for your own or your family's benefit. It's a simple rule, but the devil is in the details.

Terry White: Absolutely. And we talked before we were on air about telling people, they need to Google, there's a huge amount of information, as we all know, on the internet. But, be careful when you do that. And make sure you check a few different sources, because there are sources out there that will tell you things, that, again, the devil being in the details. Generally, they might say this, but then, when you get into the details, it won't work the way people say it will. So, I would just encourage people to be careful. Again, it all gets back to having a good CPA that you can trust and depend on, and a good investment advisor that you can trust and depend on.

Beverly Edwards: Absolutely, yeah.

Remy Blaire: And I'm glad that you both hit on prohibited transactions, as well as disqualified persons. Because, some of that is not very obvious to the average person. So, I think it's very important to highlight those points. And now, moving beyond these tax considerations that we just discussed, Terry, do you think there're any disadvantages, when it comes to these types of self-directed IRAs?

Terry White: I do. I think, again, and I've said it before, but I think, people need to be educated. And there's nothing wrong with someone who is not interested in investing, who doesn't pay much attention to it. I was raised in the real estate business, my dad was a builder and stuff, so, I understand that. I was controller for a title company for a time, and so, I understand real estate. But, those that don't, maybe they shouldn't have a self-directed IRA, maybe they should invest their money in mutual fund and let a professional manage that. I think that's just such an important thing. The other thing that I would strongly recommend, and I think Bev would agree with me, is that, if you get a phone call from somebody who's trying to talk you into an investment, and trying to talk you into doing something with your self-directed IRA, don't do it.

If you hear the word, guaranteed, that, there is no such thing as a guaranteed investment. And so, those kinds of things, I worry about people that just go with what somebody told them, or their good buddy knows somebody that did something. So, just be very careful about that, do your research. I think it's important that you make sure you understand the investment and you understand how the investment is going to pay you a return. If I invested in something, I guess, I should confess, I actually have some money invested in bitcoins, not in my IRA, but, frankly, I don't understand how those are going to give me a return. So, maybe that wouldn't be the best thing. I invested in amount of money that I can afford to lose, if it goes bad.

But your retirement is not something you want to take a chance of losing. So, I think it'd be very important for you to understand what you're investing, and make sure you understand how that return is going to be generated, and that it makes sense to you.

Beverly Edwards: And this is where the investment professional comes into play perfectly with the account holder. Somebody that the account holder can bounce ideas off, in that assets. Because, the custodians don't do that, we offer no investment advice whatsoever. We do determine whether it's feasible for us to hold an asset, do we have the accounting mechanisms and the ability to hold an asset? But, beyond that, we're not approving an asset. So, that's what we expect the investment advisor to vet those assets.

Terry White: Yeah, I think, just to go back and reiterate the whole idea of not administratively feasible for a custodian. Something that may be administratively feasible for your company, might not be for mine, and vice versa. Example is bitcoin. I'm sure there are other custodians out there that have no problem holding it and have a good way to hold it. And they do that. So, again, it's important to know what you want to invest in. And before you open an account with a particular custodian, know if they'll allow that to be held there.

Remy Blaire: And you mentioned the word education. So, if you're not relying on an investment professional, do you have any pointers for education, when it comes to looking into certain assets?

Terry White: Well, again, there is a wealth of information on the internet. I would recommend... You guys remember RITA? So, we're a member of an industry organization called RITA, the Retirement Industry Trust Association. Their website is R-I-T-A-U-S.org. There’re tons of information there. There's a lot of information about fraud alerts, how to discover fraud, those kinds of things. But then, just about every major custodian has a website, that will give you a lot of information. I know we have a YouTube channel, Sunwest IRA, where I have over 200 videos, that just, five, seven minute videos, that talk about specific things. So, people can go there. And there are books out there. There's a huge amount of information more now than there was maybe 10, 15 years ago, because it's gotten more following than it had before.

Beverly Edwards: Yeah, many of the custodians, both of these companies included, have websites. That are wealth of information, FAQs, that account holders can go to. So, the information is not about any asset in particular, but, rather, how this works, how to open an account, what can you invest in and not invest in? The mechanics of self-directed IRAs. As opposed to, is this asset a good one or a bad one for me to hold? That research is best done with a professional. And googling it, as always.

Remy Blaire: And I think that's very important to note, especially given some of the misinformation that is out there, it's important to make sure that you are going to the right websites and going to a trusted provider of information. And, Bev, I know that you did touch on this earlier, this is regarding prohibited transactions. But, could you elaborate on this, and tell me whether or not these types of transactions can lead to higher fees?

Beverly Edwards: Well, penalties for sure. I always like to say that, the benefits of investing in a self-directed IRA are huge, and you don't want to negate that by engaging in a prohibited transaction. If you do so, the possibility is that the IRS will take you back to when you opened your account, it could have been years ago, and take all of that benefit from you, through all of those years. It's just not worth doing, trying to hide that you're investing in your own company or your child's company, you really need to stay away from the prohibited transactions.

Terry White: There are so many good investments out there that, we see people all the time, trying to skirt that fine line of a prohibited transaction.

Beverly Edwards: Yeah, it's not worth it.

Terry White: It's not worth it, there's too many good investments out there, for them to do, without dealing with that. So, I think that's important to note.

Beverly Edwards: And it's not the custodian who is going to stop you from doing that. If your intent on, you can hide that from a custodian potentially. The penalty all comes back on the account holder, who may make a legitimate investment, and then, after it's in the account, make it a different direction that makes it prohibited. So, we hope that people are not trying to skirt those rules, because the benefits outweigh the possible detriment of going the wrong way.

Terry White: Another point along those lines, and I don't know if you guys have had this happen, we had it happen just recently is, whether the IRS finds that you did a prohibited transaction or not, may not matter, if you're in a divorce or some situation. IRA is, in most states, I think it's maybe a state thing or a federal thing, are protected from bankruptcy and those kinds of things. But we have seen lawyers who look for prohibited transactions in an IRA account. And then, their argument is, you did this prohibited transaction, the IRS didn't catch you. But, if they had, your IRA would have been disallowed. Therefore, it goes into the bankruptcy. And so, we had heard about this years ago.

And we just recently had a case in our company where that happened. Where, the gentleman did a prohibited transaction, and it got pulled back into bankruptcy, and it got distributed among-

Beverly Edwards: That's a good point.

Terry White: Excuse me, among the creditors. Yeah.

Remy Blaire: And before we move away from some of these points that you discussed, Terry, do you think there are some limitations that we need to consider, when talking about self-directed IRAs?

Terry White: I do. I think there are some limitations on the size of your IRA. Just generally, self-directed investments take a little more money. So, it may not be viable for someone who just starts an IRA, to do a self-directed IRA. Because, the only exception to that might now be bitcoin, because you can get into bitcoin for a small amount of money. But the thing I would be careful about, not only do you need to do your due diligence with the custodians to find out if they'll handle your investment but do your due diligence to find out what their fees are. Because, even if you can get into an investment for a small amount of money, you need to consider the fees, and how much return you need to make on that investment, simply to pay the fees.

So, you may have an investment that will make you 20%, but if it's a small number, a $5,000 investment, and you have a $500 a year fee, just to make the math simple, you've got to make 10%, just to pay your fees. So, that 20% return you think you're getting is really only 10, after you pay the fees. So, do the due diligence. And every custodian charges differently. And I think, every custodian, the difference in their fees may lend itself better to a particular investment, than in another kind of investment. So, just keep that in mind, that's the important thing. Whereas, your brokerage houses and banks don't charge fees upfront, but they make commissions on the sale of the product. Where, we make no commission on the sale of a product, we simply charge a fee for our service.

Beverly Edwards: And I think there's a couple of things on the fees you need to know, whether your custodian is charging a market-based fee. We do not, it's a set annual fee. But the other element is, is there a special asset fee? Is the type of asset you're wanting to invest in, complex or enough, or have enough bells and whistles, that there's a special asset fee, on top of the annual fee? So, I guess, you need to know all of the fees involved.

Terry White: Yeah. And I would... maybe I don't know if I should say this or not. But, if you go to a custodian's website, and it's not easy to find their fees, you might want to look somewhere else, because there's a reason why. I think their fee should be easy to find, because you need to know what you're going have to pay upfront. And so, if you go somewhere, and you've got to really dig to find the fees, or you have to open the account before you find out what the fees are, you might want to do a little more searching.

Remy Blaire: And as we head into the second half of this year, we know we'll be keeping an eye on what happens in terms of the SECURE Act. The House of Representatives passed this act in May of this year. And there are implications when it comes to retirement savings, as well as planning. So, Bev, can you tell me about the implications of this act for self-directed IRAs?

Beverly Edwards: Of course, we don't know what's going to happen. It looks like it may pass the senate, and I don't know if there are going to be changes. But there are two things, I think, that this industry is watching. One is that, there's a recognition that Americans are living longer and longer. And the mortality tables, the ones that determine that 70 and a half is a good age for you have to start taking RMDs. The 70 and a half age is going to be raised. If this passes, it's currently formulated to 72. And that's a good thing. You can leave that money protected within your retirement account for another year and a half, to recognize that Americans are living longer, and still working, in many cases, 70 and a half.

So, we would like to see that stay a part of the bill that passes the Senate. So, that's the good news. The bad news is that, if it's passed, it will certainly put a dent in what's known as stretch IRAs. And that's what we talked about earlier. Where, as an estate planning vehicle, you can have your children or your grandchildren even, be a beneficiary of your IRA. Under the current rule, then those required minimum distributions are stretched out again over the life of the beneficiaries. So, that's just a good way to push that tax bill into the future. Under the new rule, if it passes, that stretch is limited to 10 years, regardless of the age of the beneficiary. So, it's really putting a dent in the ability to use the inherited IRA as a generation skipping tool, if you will.

Remy Blaire: And indeed, it is a good thing that Americans are living longer. But, of course, it does have implications for funding retirement.

Beverly Edwards: Absolutely.

Remy Blaire: And, Terry, I do want to get your take on whether you believe Americans should be making accommodation of whether or not the SECURE Act has passed.

Terry White: Well, my personal belief is that, people should be putting away for their retirement. We've said it for years, that, social security might not be there when we are ready to use it. And even if it is, my parents just passed away last year, and I think they got 1,600 dollars a month in social security. So, that's an impossible amount to really live on. So, you need to start putting something away. And the real value in an IRA is, we talked about the tax advantage. But, just starting young and putting... even if you don't use a self-directed IRA, any kind of retirement account, put a few dollars in that every year, and it will amaze you, after a few years, how much money builds up there. And it's just a great way to put something aside that you don't think about.

It's not readily accessible, and in some cases, not accessible at all, without the penalties and stuff. So, it's just a great idea for people to do that. So, regardless of whether they do a self-directed IRA or not, people should start, everyone should have a self-directed IRA, or have individual IRA on their own.

Remy Blaire: Well, Terry, my condolences for the passing of your parents. Bev, what are some of the challenges of making RMDs with illiquid assets?

Beverly Edwards: Well, the required minimum distribution is a cash need. And many of the assets inside self-directed IRAs are illiquid. So, we talked on it earlier, that, if you get to the point where you need to take required minimum distribution, either, your self-directed IRA or one of your other retirement vehicles needs to have the cash, to be able to make that withdrawal. So, you don't want to be in a situation where you're completely illiquid, and are forced to make a sale of an asset in opportune time. So, I think the important part there is balance, that you have enough cash liquidity to meet those RMD requirements, without being forced to make a sale that you're not ready to make.

Remy Blaire: And when it comes to self-directed IRA, how does one know what's right for a client? Is there upfront learning that you suggest, Bev?

Beverly Edwards: Definitely. We talked earlier about the need to know the prohibited transaction, rules, in particular. The required minimum distribution rules, and the types of assets that, even though they're few and far between, that cannot be held in an IRA. And that, per law, there still may be some assets that your particular custodian can't or won't hold. And so, that's part of the education as well.

Remy Blaire: And I know that we touched on education, earlier in the segment. But, in order to stay current, what do you think people should be doing?

Terry White: Well, when Bev was talking about the SAFE Act that's coming up, there have been relatively few changes to IRAs over the years. I was trying to think what maybe they are, other than the contribution limits change. They don't change every year, but they change regularly. But we've been fortunate in that the IRS hasn't come up with a lot of new rules. One that I want to point out, that we talked about rollovers, the rule used to be that you could do one rollover per account, every 12 month period of time. Recently, that changed, you can only do one rollover per 12 months, regardless of how many accounts you have. So, that's something for people to keep in mind. Because, in most cases, it's easy to do a transfer, you don't have to do a rollover.

So, if you do a rollover, then, you can't do that for another 12 months. So, people need to keep that in mind. The other thing about liquidity that I wanted to mention, that I thought of while you were talking is, not only do you need the liquidity for the RMDs, but keep in mind the investment that you're making, that that investment could require future contributions, if you will. If I invest in the limited liability company that my friend has started, it may need more cash, and they may ask me if I have a capital call, for me to come up with more money or dilute my interest in it. Well, you always want to have some liquidity somewhere. Maybe not in your self-directed IRA account, but in an account that you have somewhere else, so that you can come up with that money.

One of the things that come to mind is real estate. Anybody's own real estate, there's always things that happen that are unexpected. The water heater goes out or whatever. And if you've invested all of your IRA money in a piece of real estate, and then you've got to replace a water heater, that could create a problem, because you don't have the cash to do that. So, always keep in mind that you need a cushion, if you will, to take care of those kinds of unexpected things.

Beverly Edwards: To follow in on that, you make an important point that people may not know. That, if you have an asset inside your IRA, for example, a real estate, and it needs a new water heater, that you have to pay for that inside the IRA. You can't go to your checking account and write a check for that IRA. So, it all has to stay, everything related to the asset needs to stay inside that account.

Remy Blaire: And because both of you have a unique perspective, what questions do you think investors should ask their custodians or administrators?

Beverly Edwards: Fees, for sure. We talked about that earlier, what the fees-

Terry White: And how they charge the fees. I think, both of us, I didn't realize you said you guys charge just on a flat fee, which is what we do also. But other companies charge a graduated fee, based on the asset value. That's one way to do it, depending on what kind of asset you have. Other companies charge a fee based on the number of transactions you do, or the type of investments you do. So, just look at all those. And again, not to say one is better than the other, but one might work better for the type of investment you're making, than another one would.

Beverly Edwards: And this might be an important point too, regarding the asset. The rules require that the custodian ensure that the assets inside of an IRA are priced annually. That doesn't mean the custodian is going to be doing the pricing. So, the custodian is going to look to the account holder to provide the price, that's one way it could happen. Or, the account holder can name a pricing source, and the custodian looks to the pricing source to value the asset. Or, maybe the custodian will go to a public source, like the county records for real estate. So, you need to know how your asset gets priced, and how your custodian is going to get that price.

Remy Blaire: And that leads to my next question, which is about maintenance. When it comes to account maintenance, as well as investment maintenance, could you tell me what's involved?

Beverly Edwards: That probably varies per custodian. You certainly, just like with all of your accounts, you need to regularly review your beneficiary designations. There should be a form. You need to regularly review who has access to your account, whether it's maybe a family member or your investment professional. Make sure that that stays current. I know that, with Mainstar, we put investment professionals on an account by name, not by company. So, if your investment account advisor moves from company to company, the investment advisor is still named, is that what you want? Or, did you mean to name the company? In which case, that designation needs to be changed.

And then, the other thing that we just talked about is pricing. You do need to keep the value of the assets in your account, to keep it current, as time goes on. It becomes really important during RMD age, to have those assets valued. And some of them are pretty tricky. You can't go to the web and pull out a price on a privately owned company maybe, that doesn't have the type of financial information that public assets do.

Remy Blaire: And Terry, you've also been in the space for a while. So, do you have any other insights regarding maintenance?

Terry White: Yeah. I think what Bev said was important. I think, the thing to keep in mind is, even if you buy an investment that doesn't require a lot of maintenance, as far as the investment is concerned, it's extremely important to check your account, I would say maybe even quarterly or something. I would think, most custodians have some kind of online access, call them, just make sure that what you think is there is still there. And also, what we require is, and I think everyone does, it's just they do it in a little different way, is, we require that the account holder give us the value of the asset in their investment. And we do that, I think, we require it by March of the year. They have to give us what the value was on December 31st of the previous year. And that's for two reasons.

Number one is, just to keep the account updated. But, the number two is, if they turn 70 and a half during that year, then that's the number that you use to determine the RMDs. So, those are really important. And I think, a lot of people forget. We send forms, and we do the best we can do, to try to get them to give us that information. But we can't force them. I mean, but, at some point in time, they need to do that. Because, if the value is overinflated, for some reason, and the account gets distributed, or something happens, they're going to have to fight with the IRS, to prove that that value was lower. So, it's important just to keep that value accurate, on a year to year basis.

Other than that, there's not a lot of maintenance in IRA. One of the things, and I'm sure Bev has the same situation, where, people think it's very complicated, but it's not that complicated. There are a few rules that we've talked about, and as long as you follow those rules, and stay in contact with your custodian, I think, everything can be handled by communication. And if, as long as you stay in contact with your custodian, and with your team of professionals, it'll run as smoothly as any other kind of IRA.

Beverly Edwards: I just thought of another thing while you were talking, that, if your account holder moves, that's one of the people they need to notify of the new address. Or, if there's a divorce situation, it's very important that these assets are considered in the divorce, so it can be part of the decree. Sometimes, I think people forget that they have an IRA, as hard as that is for us to believe. Because, you can open them when you're very young, and you're not expecting to get anything out of them, until you're at a retirement age. So, it's just one of those accounts that you need to keep on the radar screen, when life events happen.

Terry White: Along those lines about forgetting is, it's very important, I think, for IRA account holders to notify their beneficiaries, so that their beneficiaries know they have an account and they know where it is. Because, a lot of times, accounts get lost. Because, someone passes away, and they forgot to tell anybody, or they didn't write it down somewhere. And so, years later, I had a lady call just the other day, wanting to know if an account was still active, and it wasn't. But this was like 10 years after the person that left her the IRA passed away. So, I think it's very important to keep your beneficiaries informed that, "Hey, you are a beneficiary of this account. And you're to get 25%, and these people are to get what's left."

So that, that avoids any conflict or problem... Well, maybe not avoid conflict, but, at least, everyone knows where it is, and what it is. A lot of times, we run into things where people get, they're the beneficiary to an IRA, but they don't even know what the asset is, or how to get rid of it, or how to do anything with it. So, I think, it's all really important to keep those people informed also, the beneficiary.

Remy Blaire: Well, Bev, Terry, as we wrap up today's discussion on self-directed IRAs, are there any final takeaways for the viewing audience? And, are there any additional myths or misconceptions you'd like to address?

Terry White: Ladies first.

Beverly Edwards: I don't have one.

Terry White: Well, I think, going back, and again, this is like going over and over and over again, but I think it's so important for people to educate themselves. To me, it would be better for someone to think they want a self-directed IRA and get into it and educate themselves and decide it's not for them, than to jump in and find out that it's not what they wanted to do, and potentially lose their retirement account. Or, create a problem, where, me as custodian become a bad guy, when we didn't do anything. So, education, to me, is the key.

Beverly Edwards: I will echo that point.

Terry White: Good.

Remy Blaire: Well, it's been a very informative discussion on self-directed IRA. So, thank you so much for joining me today and thanks for all of your insight.

Terry White: Thank you.

Beverly Edwards: Thank you.

Remy Blaire: And thank you for watching. I was joined by Beverly Edwards, Senior Vice President and Counsel at Mainstar Trust. And Terry white, CEO at Sunwest Trust. From our studio, in New York City, I'm Remy Blaire, for Asset TV.



Mainstar Trust is an innovative leader in custodial services that diversify and maximize long-term objectives for IRA account holders and financial advisors.

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Sunwest Trust is an IRA custodian that allows account holders to invest in Non-Traditional assets.

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