BiggerPockets Money Podcast - How to FIRE Faster with a Self-Directed IRA

Episode Date: January 31, 2025

How can you use your retirement accounts to reach FIRE faster? We’ve talked a lot about the “middle-class trap”—having too much of your net worth trapped in your retirement accounts and home equity—and we may have the secret weapon to help you escape it. Not only that, this strategy allows you to keep more of what you earn, take control of your investments, and build a (relatively) passive real estate portfolio while you get closer and closer to FIRE. Of course, we’re talking about self-directed IRAs and Kaaren Hall’s new book, Self-Directed IRA Investing: A BiggerPockets Guide (use code “SDIRA10” for 10% off)!  Never heard of them? Self-directed IRAs (SDIRAs) are retirement accounts that give you more control over what you invest in. So, instead of just stocks and bonds, you can use your retirement funds to buy rental properties, become a passive private money lender, and invest in real estate syndications. These investments can often get higher returns than stock market averages, helping you reach your retirement goals faster! So, how do you use it to escape the middle-class trap? Today, Kaaren shares some of the often overlooked strategies to withdraw early from your self-directed IRA so you can FIRE in your forties or fifties instead of waiting until your sixties! In This Episode We Cover Self-directed IRAs explained, plus why they’re a “secret weapon” for retirement Self-directed IRAs vs. traditional IRAs and what you can invest in with each Escaping the “middle-class trap” with early withdrawal strategies for retirement accounts Completely passive real estate investments you can put inside your self-directed IRA How to turn your old employer-sponsored retirement account into a self-directed IRA And So Much More! Links from the Show Mindy on BiggerPockets Scott on BiggerPockets Listen to All Your Favorite BiggerPockets Podcasts in One Place Join BiggerPockets for FREE Email Mindy: [e-mail] Email Scott: [e-mail] BiggerPockets Money Facebook Group uDirect IRA Get fast, affordable landlord insurance with Steadily BiggerPockets Money Listeners Get 10% Off the Book with Code “SDIRA10” Property Manager Finder Finance Friday: How the “Middle-Class Trap” Stops Your Early Retirement Connect with Kaaren (00:00) Intro (01:23) Self-Directed IRAs Explained (05:49) Buy Real Estate with Retirement Accounts! (10:37) Opening a Self-Directed IRA (13:55) Escaping the Middle-Class Trap (17:41) Real Estate IRA Rules (20:52) Best Alternative Investments (23:56) 401(k) vs. IRA and Minimum Distributions (27:57) Withdraw from Your IRA for FIRE! (34:49) Self-Directed HSAs! (Timestamp) (36:59) When to Use a Self-Directed IRA (41:48) 403(b)s and TSPs (43:20) BIG Changes! (48:20) Grab the Book! Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/money-603 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail] Learn more about your ad choices. Visit megaphone.fm/adchoices

Are you ready to take charge of your financial future and avoid the middle class trap? Today, we're going to discuss the secret weapon for real estate investors, the self-directed IRA. If you are looking to keep more of what you earn, build a real estate portfolio, and surpass your retirement goals, self-directed IRAs could be your key to success. Hello, hello, hello, and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen, and with me as always is my self-directed co-host, Scott Trench. That was a 401 okay intro, indeed. It didn't quite work that. We'll try it again next time. CagerPockets is a goal of creating one million millionaires. You're in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you're starting, or how much of your wealth is trapped in your retirement accounts in that classic middle class trap.

We are so excited to be joined by Karen Hall today. She is the new author of self-directed IRA investing. I'm not sure. exactly what that book will be about. And we are really looking forward to getting into this. Karin, thank you so much for joining us. Thank you so much. I've been looking forward to this. I am going to just ooze excitement when we're talking about IRAs. Woo!

But wait, this is a really, really, really fun episode. I promise you because we are talking about ways that you can make more money and who doesn't want that, right? So, Karin, let's jump off the deep end and start with what is a self-directed IRA and how does it differ from a regular IRA? Right. That's such a good question. A lot of people just get confused about that, but IRAs were created in 1975.

So you figure 50 years, okay, of the IRA. And when it was created, there wasn't a difference between a self-directed IRA and a typical IRA. It's one thing. It's always been one thing in a way. Like all the rules are the same. When you go to the IRS's website, IRS.gov, you look at some, you look traditional IRA. It's the same thing.

The difference between a typical IRA and a self-directed IRA is the asset class that you can put into that account. So the typical IRA is in the stock market, right? Like mutual funds and stocks and all that and all that fun stuff. But the self-directed IRA is alternative assets, which Bigger Pockets is all about, you know, notes, real estate, syndications, all these beautiful things. So, you know, passive income. And so an IRA is an IRA is the answer. What makes it self-directed IRA is the asset you put in it. But not every custodian will allow alternative assets.

Like you go to Charles Schwab and you say, hey, I want to take my Charles Schwab IRA and I want to invest in a property. Can you help me? And they might even tell you, oh, you can't do that. But we know you can. I know, right? We know that you can. It's just that you need a different kind of custodian. You need a self-directed custodian.

You just used a key phrase that I want to highlight. You said passive income. So when I'm putting assets into my self-directed IRA, I can't have anything to do with them, right? Like, I can't manage them. I can't be involved. You can't a little bit, but what you can't do is what's called offer services to the plan. But let's talk about that. So your IRA buys a property.

You got a house. We got a little SFR right here, a single family house going on. So your IRA just invested in this. Now, what can you do? What you can do is you can screen tenants, right? You can pick up and collect the rent check, made payable to the IRA, and then send it into your account to be deposited.

So you can go to your tenant and pick that up if you want. And you can hire third-party vendors to do the work. So in a way, you can kind of property manage. But what you really can't do is take a fee as a property manager. That's called a prohibited transaction. And we could go deep on that later if you want. But you stay away from action. offering services to the plan, but you can do those three things, like screen tenants,

pick up the rent check, you know, and hire third-party vendors. Okay, as long as I'm not taking money for any of that action. No personal acceptance of money. Right, exactly, yeah. So many people may have a balanced portfolio, some wealth in their home, some after-tax cash, and something in a 401 get. In that situation, I would not be encouraging that person to use their 401k wealth, their IRA wealth, take it out of Schwab, which does not mechanically allow them an easy route to purchase a property and to buy a rental property with it. Because I'd use my aftertax portfolio for that. There are great tax advantages for that.

And if I want to balance portfolio with stocks and real estate, I might get the growth in the stock market inside of my IRA and my real estate outside of the IRA. However, if I was thinking about buying a private note, for example, I would do that in my IRA all day, and I'd put the wealth outside of the IRA into the stock market, for example, because I'm going to get a clear tax advantage. I'm not going to pay tax on what will be simple interest. Similarly, if I think about syndications and I want to be in a preferred equity trunch, or I'm going to be an income fund or something like that, that's where I want to use the IRA instead of the after-tax brokerage conditions. We use the real estate example to illustrate one of the shortcomings of traditional IRA custodians like a Schwab, for example. By the way, I love Schwab. I use Schwab. But I have that account with that. I have nothing against. It's just the mechanics of facilitating an investment in a note or a rental property are not readily available through my Schwab account. How am I doing in articulating the problem here in some use cases at the strategy to strategic level? Do you agree with those? I do. I mean, you're straight up right 100%. And I'm going to add something to that too. everything you said is 100% correct.

But there's another thing to think about, like just like take a step out and say, okay, you've got, maybe you just left this job and you've got maybe 100K that you've saved in your employer's retirement account. Now you get to move that money. So your question is, what am I going to do with that money? It's not, you know, maybe you don't have 100,000 personal to invest in real estate, but you have 100,000 from this old retirement account. So what are you going to do with that money?

So you could take that money, put it in a self-directed eye, and invest in real estate in some form or invest in an asset class that you know best. I think that's when real estate makes a lot of sense. You're right. Real estate has just awesome tax benefits. I mean, just ask our friend Amanda Hahn, right? She should go on for days. I love her.

And that's the best thing, you know, about real estate is the tax benefits. But if the question is, hey, I just found this awesome deal, this piece of property I really want to take down. I've got this old retirement plan and I don't have the cash. how am I going to do this? Well, maybe you can take your IRA. Maybe in that case, it makes a lot of sense. Okay, going off of this $100,000 myth, mythical $100,000 we just discussed.

I had it in my 401k. I separated from my company. And now I've rolled it over into an IRA, a self-directed IRA. But in my area of the world, houses don't cost $100,000. How do I cover, let's say it's a $500,000 house. Where can I get that other $400,000? Can I get a loan? with my $100,000 down payment?

Yeah, excellent question. You can get a loan. And I think one of the biggest misunderstandings about what you just asked is people think that they can go to their bank and get a home loan, just like when they bought their primary residence. It's different.

You can get a loan, but your IRA isn't a down payment on a Freddie, Fannie FHA, VA kind of loan. Your IRA would have to take on a non-recourse loan, is a special kind of a loan. So your IRA can do that. And then when your IRA does that, I mean, so here's what happens. Say your IRA has, it's a $100,000 property, okay? So your IRA has 70 grand and your IRA borrows 30 grand of non-recourse debt, okay? So beautiful. So you know, you're 30% leverage 70% IRA. So here comes your first rent check for $1,000, right? It comes back

to your IRA, well, you know, 70% you earned because of savings, 30% you earn because of leverage, and then that 30% is subject to this wacky tax, which you may have heard of, called UDFI, unrelated debt, financed income tax. Okay, so yes, your IRA can borrow money. We all know the power of leverage. It's awesome. But in a self-directed IRA, even a Roth, it can be subject to this special tax. It's not an income tax, right?

it's a special tax. What is this tax rate that we're talking about, this UDFI, approximately? Yeah, it's nuts. It's like 37%. It's the same rate usually as a trust rate. Yeah, it's nuts. But it's not on 100% of the proceeds. Like in this case, it would be on 30% of the proceeds,

would be subject to that tax. Now, it blows your mind, I get it. I see your mouth, you're agape here, but you can take deduction. So your tax professional is going to complete a document called a $990, Like when you and I, when we do our taxes, it's a $940, when your IRA does its taxes, it's a $990T because an IRA is tax exempt. So say, for example, there were expenses. Your IRA can, you know, deduct those expenses from the amount of tax out. And your tax professional will dig into the weeds on that one because I don't really offer tax advice.

But that's, you know, so you can take deductions. And another time that this UDFI comes into play is when you invest in private equity syndication. Say it's a big multifamily building. And that asset sponsor has got a capital stack and some of it includes leverage, right? borrowed money, obviously. Well, same thing. Your IRA is going to owe the UDFI tax on the syndication investment too. But say that syndicator did a cost segregation.

That can pass through to your IRA on the 990T. All right. It's time for a break. As you know, Karin's new book, Self-Directed IRA investing is a brand new book to the Bigger Pockets bookstore and we're offering BP. money listeners 10% off, go to biggerpockets.com slash sDIRA and use the code SDIRA 10 to score your copy today. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're

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first audiobook free when you sign up for a free 30-day trial at audible.com slash BP money. Welcome back to the show with Karen Hall. Let's say that I'll use a specific example here. This is not something I'm investing in, but we had a contributor, Matt Faircloth, do a little pitch for his income fund, a debt fund that he did at BPCon. It was a pretty fun little segment. They actually had three different funds presented. And let's say I wanted to put 50 grand into that fund through my IRA. but I have an IRA of $114,000 or whatever it is from my previous employer. Can I do this with a specific amount for a single purpose like that and create an IRA,

a self-directed IRA for each one of these investments? Do I have to fund it? Like, how are the mechanics of setting this up? Does it have to be a rollover from another one? Or can I just do this for a single investment at any time with any part of my IRA holdings? Like I have three different answers in my head for what you just said. One of them is if you want to have a different, IRA for every asset you can because the IRS does not limit how many IRAs you can have the only

limit the contribution amount that you can contribute. You could have a million IRAs, but you can only contribute X. Of course you have to pay the account fees, which with us aren't that bad, but there you go. So that's one thing. Number two is you've got 140,000 you want to invest in math's 50K investment. So you can move all the money over. You can do a rollover from a previous employer into self-directed IRA, do the 50K investment. Then you've got the Delta sitting there and you've got that going on. So an IRA can have also an unlimited number of assets inside of it. So your IRA could have, you know, just, yeah, there's no stop to how many assets can be in an IRA. We charge a flat fee regardless of the number of assets.

So it's not going to cost you extra to have extra assets in there. So the mechanics of it is you open the account, you fund it by contributing from your own pocket, and every account is different, you know. It has its own contribution limit. it has different little teeny variations of rules. You can do an IRA to IRA transfer or you can roll over a previous employer account. So those are three ways of getting the money in. And that's how that's done.

Awesome. So the mechanics are much easier that I think most people imagine than to be in this world of real estate investing. And again, I'm using the case of an income fund, a debt fund, because that is exactly of the type of thing that I would be thinking about using an IRA for first, right? I mean, if all of my wealth is in an IRA and I only know, I want to be in real estate, okay, maybe I'm buying a rental property with it and thinking about these things. But to your, even in your example, you're like, oh, you're going to have to use a non-recourse load. Well, that sounds

great in theory, except for those are going to be much lower LTV. They're going to be much higher interest. They're going to have a balloon payment typically that are associated with them. They're just not as good as the 30-year fixed-rate mortgages you can buy as a regular, you know, what we're used to calling a real estate investor and single family. These other assets, I would say even specifically syndications are what I would imagine are a primary use case for a lot of IRA investors. And you don't have to roll over your entire fund, your entire stock portfolio. You can do it in chunks here.

And that is going to be what I think a big chunk of the capital that has invests in syndications will be coming from is these IRAs out there, maybe as much as 40 to 50 percent of that capital. Yeah. You know, syndications is the number one asset class for our industry. So let's talk about, we often talk about this concept called the middle class trap. And we define the middle class trap as, you know, this, let's create a family of a million five in net worth with 500K in their primary residence, 500K in three rental properties that are kind of break even cash flow and 500K in a 401k.

So they're producing essentially no cash flow from their portfolio. and they can't actually harvest any of that money. The playbook here has to be about their real estate and their home. We've talked about those at length on paper pockets money, but how can I use this tool, this notion of the self-directed IRA to give me some creative options that I might not be thinking about if I'm in this position? How can I use that to actually begin thinking about creative ways to generate income I can spend after tax today? Yeah, I think, well, first up, I love the term middle class trap because isn't that true?

You know, a trap is something that you don't know you walked into it until you're there. And it's like, oh, wait, it's a trap. You wouldn't have walked into it if you didn't already, you know, if you knew it was a trap. So if you find yourself there and you're following the rules, right? You're playing by the book. You know, you've got this nice little, sweet little portfolio going on and that's beautiful. But what you want is real wealth and you want to be truly wealthy. And so what do you do?

I think that's what you're asking. And I think with a self-directed IRA, it's not going to give you cash today. It isn't. An IRA, a retirement account, is all about later. Any retirement account is about saving for the future. And that's why the IRS gives us tax benefits. Because I think we know Social Security.

It's always iffy. My whole life I've heard, well, it may not be there when you reach that age. So, you know, like 75, they came up with IRA so that we could prepare for our own retirement so we could be responsible for ourselves and our own future. So as self-directed IRAs can do is help you prepare for that long-term eventuality of being retired and doing it in style. You don't want to be, you know, that old person at the grocery store buying a banana for 15 cents because it's all you can afford, you know. But that's kind of, I know, I've seen that. I know.

I literally saw that. This is something I don't want to be like a cautionary tale, right? So what we have to do is help ourselves by investing today in all different kinds of asset classes. that come with risk. But a self-directed IRA lets you choose different asset classes, not market-correlated assets. And a self-directed IRA

also helps you have more of what you've earned, like you get to keep more of it because when you invest, you know, we're not going to beat up on Charles Schwab. Let's beat up on TD Ameritrade for a second. I have an account with them. So with TD Ameritrade, I mean the same thing. They're going to take, like, whether I make money or not,

they're going to get a percentage of my assets under management, aren't they? whether I make a profit or not. And they're going to make a little fee on every trade and every deal. With a self-directed IRA, we're not doing that. When you make a deal, we might charge like a $35 transaction fee, but we're not taking a percentage. You know, we're not taking your earnings away, you know, to a great extent.

And by the way, if you want to go deep on this, there's a great, you know, John Oliver, the comedian, he has a great segment. So look up John Oliver and teacup pegs, and he breaks it, down how market correlated, you know, advisors, how they're taking money off the back end and you put in all this money, you know, again, the middle class trap, you're following the rules, you're putting money in your 401K, but John Oliver brilliantly lays out how, that it's a trap, how much are they taking and how much are you keeping? Well, within self-directed IRA, you're keeping more of it. So I'd say that's the advantage to self-directed.

Okay, Scott just shared a scenario where real estate investments might not actually be so great for your self-directed IRA with the non-recourse loads, the higher interest, the balloon payments and all of that. Are there any other investments that aren't so suited for self-directed IRA investing? I don't think there's any asset class that offers as many personal tax benefits as real estate. So I would say no. I would say real estate is the one. I think I want to push back a little bit on that because aren't there a lot of big rules with related to IRA investing and your direct ability to make changes to the business. So, for example, in real estate, I don't think you can manage the property directly if you buy a property inside of your IRA, right? Like that, you have to

hire an outsource management. You can not be a self, you know, it certainly can't be an owner-occupied. And you probably, I don't believe, also can be the property manager. Well, you can be, though, if I could, you know, jump in there. Like I mentioned, you can pick up and collect the rent checks. You can hire third party vendors and you can, you know, just, you know, hire third party vendors to do the work. So everything that you would do as a property manager, you can do with the self-directed IRA. What you can't do is do the work yourself. Got it. Yeah.

I think the more of the broader umbrella here is that the investments inside of your self-directed IRA can't benefit you. Like you can't be your home. It can't be a second home. You can't manage the property and charge your IRA. a fee for that. There has to be a distance that's, the intent is to create a distance between you, your wealth today, and the benefit of the investment is broadly how I'm interpreting that. And that's where I'm going with this is those rules can be constraining or you will have to

educate yourself on those because there are deep intricacies that you have to follow if you're going to invest with your IRA. So for example, you buy any business that you are hoping to generate income from and spend in any way or benefit you in any way, credit card points, right? Those would all be problems to have your IRA, your self-directed IRA participating in. Is that a better way to phrase it? You got it straight up right. Yeah.

Yeah. And that's a big piece of this that I think folks need to consider is like, hey, this is not a way to, this is not something you can, you know, you mess your life and your business and all this stuff with. This has to be a separate set of investments. And that's another pain point with rent with real estate. Yeah, with an IRA keep at arm's length. I always say that, you know, when I do a presentation, I say, that's the number one rule, keep at arm's length. Now, there are these tiny, they're not really exceptions, but it's insight into how you can manage a property, but you still keep at arm's length.

Like, what if your tenant doesn't pay their rent? Then you have a third party go in and do the loan servicing part of it, you know, whatever it may be. And on the flip side of that, Karin, you mentioned that syndications are the most common investment in IRAs. So what are some other investment vehicles that are great within the IRA? Yeah, I think one thing that may be overlooked is performing a non-performing debt. When you can buy, you know, debt pennies on the dollar and turn a non-performing loan, for example, into a performing loan. And this may take some, you know, like a loan service or you may have to keep an arm's length and all this. But there are companies that do this and you can invest with them. But your IRA can also be at the bank and lend money to people.

And I've seen a lot of people do this in real estate investment groups. They'll say, somebody will come up and say, hey, I've got this rehab I'm doing. I'm looking for somebody with a self-directed IRA. I need another, you know, 20K to finish the kitchen. Your IRA can come in and be that lender with, you know, points and fees and all this. And then, say, for example, they sell the property and at closing, here comes your money back. Or hopefully with monthly payments in the interim. Or it could be interest only.

You can set the terms as long as they're legal. Yeah, I do that. We have to take our final break, but more with Karin after this. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going, and more importantly, where your tax refund can make the biggest impact. Because the goal isn't just to look backward, it's to actually make progress.

Simplify your finances with Monarch. Monarch is the all-in-one personal finance tool designed to make your life easier. It brings your entire financial life, including budgeting, accounts and investments, net worth, and future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch subscription with the code Pock. What I personally like is that Monarch keeps you focused on achieving, not just tracking. You can see your budgets, debt payoff, savings goals, and net worth all in one place. So every decision actually moves the needle. Achieve your financial goals for good with Monarch, the all-in-one tool that makes money management simple.

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Thanks for sticking with us. Back to Garn. I love the idea of hard money lending within the 401K, right? That's a great option for somebody. I think that's maybe getting closer to retirement age and wants to have, you know, keep that practice of generating that income there. I mean, you know that that's going to be fairly safe and you're going to foreclose an asset that if in the worst case, that's your bread and butter and real estate around there.

I, I've done a few hard money loans outside of the 401k. And the issue is, it's all simple interest. So it's just, there's no tax advantage whatsoever. But inside the IRA, that problem goes away. And it becomes a really powerful wealth. You can compound wealth at somewhere close to 10 to 12 to 14 percent, depending on what you're charging for these loans. That's really interesting and a way to use that real estate skill set in there.

And that's before we even talk about performing versus non. performing. That's just a straight vanilla hard money loan that is used every day by flippers around the country. If you start talking about getting non-performing loads performing, I mean, you can make serious money inside this thing in a way that's really tax efficient. To that point, I have to say I know somebody here in Southern California real estate investment community. I was talking with them. He built up a million dollar Roth portfolio. Of course, he worked his buns off by making these microloans to people for mobile homes. And he just, you know, kept going and churning and shurning this money over and over and built up a million

dollar Roth, long story short. So what you said is, I mean, I see examples of that all the time. Yeah, that's how I use some of my IRA money is to make, to make microloans, to make hard money loans to flippers that I know very well and I know are going to pay me back. I think that's really important to note that you want to be paid back. So don't just randomly make these loans, but you can make a really, really great return if you do it right. Scott, you just said 401K and IRA. You were kind of flipping back and forth. I am under the impression that the rules are essentially the same with regards to a 401k and an IRA.

Karin, can you clarify? You could do all of these things in your 401. Well, I'm talking about a self-directed 401K. Yeah, so a 401k, if it's with your current employer, no, because then it's going to be tied to the market, market correlated assets. But you can absolutely have a self-directed 401K. And I think that's what Scott's talking about, you know, like a solo 401K. I'm incorrectly, incorrectly using the term 401K to describe the vehicle. Well, no, I mean, that's what it's called.

It is a 401k, it's just for an individual. But, I mean, yeah, there's a delineation there, but absolutely, you guys got it right. I mean, you're on the right pinch. There's a lot of phrases that we're throwing out here. I want to throw another one out there called RMDs, required minimum distributions. And for somebody like Scott, that's not really so close to his horizon,

but for somebody like me, it's a little closer or a lot closer. I think Scott's 50 years away from RMDs, whereas I am only 25 years away from RMDs. How do I, is there anything I could do to reduce my RMDs, or like now that I can do that will help reduce my RMDs down the road. I mean, RMDs are a great problem to have.

Don't get me wrong. But I'd rather not pay it if I don't have to. Right. Right. Because, well, a required minimum distribution, right? This is an RMD. One piece of good news is that right now the age is 73. Your RMD age is 73.

It used to be 70 and a half, now it's 73. It's going to shoot up in the year 233 to 75. So one way you can do it is just live longer. know, and, you know, so you won't even have to start taking it until you're, you know, until your 75 in the future. So that's cool. But the purpose of the R&D, it's kind of like the IRS is making a little deal with you. Hey, take this money, contribute it to your IRA and assuming your income isn't too high,

like you're not a super high net worth, you know, wage earner. We'll give you a tax break. All right. So we'll give you this now while you're young and you're building your retirement. But later on, it's a pre-tax account, like a traditional or maybe a SEP or something, or a 401K, like with your employer. But later on, when you're older, you're going to be required to take the money out. So we're not going to hit you up for the tax now.

We're going to hit you up for the tax later. And that's what an RMD is about. So they really want to tax you. So getting away from an R&D, that's not the way it's set up. The game isn't set up to be played that way. But it doesn't mean that there's nothing you can do, you know. And the R&D does not apply to the Ross. IRA, right? So this is only for the 401K, another vote in favor of the Roth for all those listening.

If you're unsure, if it's close, you know, there's certain these scenarios where it's 401k all day. We've discussed at length in the future, on previous episodes. But the goal, I think that the goal here is I have a bunch of money in a 401K. I move it into an IRA. At 73, I'm going to be forced to withdraw to some degree. And a strategy, that we should be thinking about whether we're talking about a self-directed or a traditional 401k is how do I move that money into the Roth way in advance of that point. That's a 50-year problem. One of those years, you're going to have a loss as an entrepreneur, right?

And that $500,000 loss year is the year you roll it all over into the IRAs in there. Yeah, and then one offsets the other. Like, yeah, right, because a Roth, when you do a Roth conversion, it's taxable to you. You're going to get a 1099. But like you said, if you have a loss one year and then you've got this extra gain of a Roth conversion, they may equal each other out. This is when you work with your competent tax professional to kind of time that for you. So my question is like, let's say I'm not willing to ever bet on a loss. I'm going to be super, super rich the whole way, never have a loss, never have a bad year of income, whatever, never have a chance to roll this over because my career is so stable and so high income earning around there.

we've talked in the past about a number of strategies to withdraw early from a 401k to fund early retirement, which include things like substantially equal periodic payments or a Roth conversion ladder. Are those concepts all still applicable, at least in theory, to the self-directed IRA world? The first one you describe, we call it as a 72T. and just know that once you commit to a 72T, you're committed to the 72T, you have to see it through. So that's the equal periodic payments where you get to take them out. That's absolutely true. Another thing you can do is I will make a qualified charitable distribution, a QCD.

So if you are in your RMD phase and you don't want to pay tax but you have to take a distribution, what you can do is take that money from the pre-tax account, contributed to a charity, and it's a charitable contribution that you don't ever pay tax on. It just goes straight from your IRA to the charity, and you don't pay the income tax on that. I mean, you didn't get the personal benefit of it either, but you did get to make a charitable contribution. We have some use cases that pop up here that I haven't explored. We would love if you're listening and you have explored one of these for you to come on and share these stories. But in theory, for example, we could play out the debt fund concept, right, or hard money.

like let's say you go see i'm going to take this i'm going to take some few hundred thousand dollars out of my 401k and i'm going to start substantially equal periodic payments this is using the 72t right and i'm going to take out you know 20 grand a year uh and i have to commit to that forever right in perpetuity essentially but i want to make sure that that that pool of assets is going to clear way more than that so i put it into a debt fund that's conservative and it's generating an 8% perhaps or something like that. And hopefully that'll go well, or several that will give me that on average, or whatever it is.

That would be one way to use the money in a 401K to provide current income. And then the rest could be, the rest would stay in the IRA and continue to get reinvested and compound or invest in. But those are things that are more, that are accessible to someone with a self-directed IRA that might make them feel more comfortable harvesting a portion of their 401k millionaire wealth, middle class trap wealth, to fund early retirement. How am I doing? Are these the types types of options that begin to present themselves when we start going down the deep rabbit hole of SDI IRA? No, you're right. Yes, it is. And another thing to know is that with an IRA, you can't

take a loan from it. You can have it personally for 60 days, but then it has to go back in another retirement account. So you can have personal use of it for 60 days. I did that one time when I was buying a primary residence. I was waiting for some money to cut like a commission to come in. And so I used, I took my IRA and I took it out. I withdrew it, used it to for the down payment on the house, but then here comes a commission and I took the same exact amount, put it back into a retirement account and it was not taxable. So I did that a long ago.

Hold on. Is there a cap on this 60 day usage? I could take the 100% of my IRA and borrow it for 60 days. Do I have to pay interest back? Do I have to? It's not alone. You just have to return the entire amount to a retirement account within 60 days. And mind you, you can only do that once in a 12-month period for all your IRAs combined.

Once in a 12-month period, that's a cap. But you can have that money for 60 days. I could take 100 percent, let's say back to this $100,000, I have $100,000 in my IRA. I can for two months borrow that, pay it back, and that's not a taxable event. That's correct. I'd leave a couple bucks in the account so you don't close the other account if you want to move it back, you know, just saying. But yes, what you said is correct. You can move it out, have it for 60 days as long as it gets back into the account within the 60th day. You're fine. Mindy, what possible application, you know, besides like a one-off short, like, I need a 30-day bridge in terms of getting bridging a commission with this. I need a short-term loan. I've got an IRA. My husband has an IRA since they're two separate accounts for two separate people. I could take. take my money out, put it back in, then he could take his money out and put it back in.

This is just, it's Scott, it's just another idea. Remember when we were talking about talking to Tony Robinson and he said, oh yeah, I took a loan against my stocks and I was like, wait, what? Essentially, he takes out a helock, but it's against his stocks and he can use that for things. I bought a whole house with that, Scott. I'd never even heard of that. It is great.

There's probably an application for this. Now, you have to take the money out of the account. So if you have, if you've put this into a, you know, Vanguard fund or whatever, you will sell the ETF, put it into cash, pull it out of the account and give it to somebody. Whereas in a 40, is that same mechanic happen actually at a 401k loan or my barring against the value? Yeah, if you're going to take cash out, you have to liquidate. Sorry to interrupt. But yeah, yes, the answer is yes. You have to liquidate to take the cash out, correct.

So yeah, I don't have any cash sitting in my 401K. I don't know if I would in a self-directed IRA, except for it as various private loans or funds liquidated. So yeah, but yes, I think there's an application there. That would be interesting. There's an application there. I think it's interesting just to have more information. There was at one point, Scott. I don't know if you remember this. Carl and I borrowed against our stock portfolio and we had a margin. And then, you know, it was really. reduced a little bit because we borrowed the money. And then we watched it get smaller and smaller and smaller. And we're like, oh, no, what are we going to do? So we actually took out a helock against our primary residence and threw that into there and grew a little bit of margin. It actually, if we wouldn't have done that, we would have been called out of some of our stocks. And we would prefer to sell them on our terms, not have somebody else choose which stocks they're going to sell for us. And because the margin was going down because the stock market. was going down. I think this was the end of 2022 when the market was down a whole lot. So just having

another option, now all of a sudden, I have a whole lot more money at my disposal to throw into a short-term solution if I need to. So I just like having lots of options, Scott, and knowing about the options. Karin, how does this work with a health savings account? Is there a self-directed health savings account option? Yeah, I mean, if you play the game correctly, you can really win the prize here. Okay. So in HSA, you've either got individual contributions or family contributions, and we've got all the contribution limits on our website, so you can go look them on. So you make the contribution, and that is like, well, that's like that's, you get a tax deduction

for making that contribution, okay? So that's pre-tax. Then you invest that money. It grows tax-free, and it comes out tax-free. free as long as you're using the money for medical expenses, qualified medical expenses, which are on the IRS's website. There's a giant list. It even includes things like band-aids. You just have to have the, it might even include if your doctor says you have to have a jacuzzi, you know, for your health, you know, if you get a prescription. But it has to be

health-related expenses. Okay. So then you save your receipts because you're going to probably get audited. So you save your receipts, you can tell the IRS, I took all this money out, here are the receipts to substantiate the money I took out. That happens. But what are you going to invest your HSA in? And then that's when we get to things like loans. And usually smaller things because with the HSA, it's got a smaller contribution with it. You can make loans in your HSA account?

Yes. What's it called? Is it called a self-directed HSA? Is that? Right up. Yep. Okay. How do I get this account?

Well, there is a caveat. You have to, when, okay, if you work somewhere and you've got, you know, health insurance, you have to have the high deductible health plan, the HDHP, high deductible health plan. That's the first barrier to entry. So if you have the HDHP, then you can have the, you know, this special kind of HSA savings account for medical. Is this fair to say that, you know, if I'm 23 in listening to this podcast, I have probably next to nothing in my HSA, my 401K, or Roth IRA. I'm just getting started on all that front. And those are probably offered through my employer.

And most of this discussion doesn't really apply, except in this kind of abstract sense, that 20 years down the road, there will be some options available to me. But if I'm 45 and have a million, I'm a 401k millionaire in this middle class trap thing, that all of these options apply, but really they begin to apply the moment I leave my job, right? And I can begin making other moves at these. And that's when I got to think about moving the IRA. the HSA and or a Roth, whatever is provided by that employer, into these new categories.

And that can be at the change of my current employment, or if I started a new business or have several of these accounts. But am I really kind of locked into my employers one until that event takes place? You can always have an individual retirement account at the same time that you have an employer account. So you can still like have a Roth account, say, if your income doesn't exceed the cap, which is like around on about 140K as an individual, something around there. So, yeah, you can contribute to these retired, the individual retirement accounts and contribute and contribute. And I recommend that if you want to get out of the middle class trap, that's what you

have to do. You have to be disciplined. You have to save and score all this money away in every tax-advantaged way that you can. But yeah, so you can, at the same time, you're building a 401k at your company, you can be building an individual retirement account simultaneously. And does this, but, but for the, but for the most, but the most of the most, but the material portion of the retirement wealth will likely in this hypothetical scenario be in the employer balance, which for all practical intents and purposes can't be rolled over and begin exploring

these things until that job is terminated. Yes, you have to leave the service of the employer before you can roll over a plan typically. Now, there's an exception to that. Say you're working for company A and company B buys them. So company B just bought company A. But you want to take the 401k money you used to have in her company A, you can move that into an IRA. All right. So that money you can roll over. But you want to call your plan administrator from company B and say, hey, this is what I want to do and make sure that their plan document allows it. Okay.

So when I'm preparing to fire, right, which is what most people are listening to Bigger Pockets money are trying to do in some form. I got a million bucks across the sprawling set of 401Ks. Two of them are from my employer I had for two years. They swelled to like 70K. But really, I got 800 grand in this 401k from this employer I've been with for a while. That and I got 100K or 50K in the HSA because I've been listening to Mindy for five years on that front. At that moment that I fire, that's when I call up someone like you and I say, okay, let's think about these options because I have a material balance here. I have options.

I can self-directed in the HSA. I can self-directed in the 401 and or the Roth, and I should be really thinking about what I want to do there. I can leave whatever I want to keep investing the stock market in Schwab or whatever my brokerage of choices I want to roll over to. But the other stuff is where I really begin to have these options, and that's the trigger point. And so the planning and knowledge used to be developed now,

but the action can really only be taken once we have a job change unless your company is purchased or some other kind of weirdo event happened. Yeah, that's exactly. right. I think that you bring up the point that you really do need to plan in advance these things because you don't just, okay, well, guess what? I'm leaving my company today. Now I'm going to start thinking about it. You really have to, you have to start planning now because with self-directed IRA assets, you don't just pull the trigger on these. You do your due diligence. And that's, we're opening and you open fund invest to self-direct. That's easy. But the challenge is the due diligence. Learning about the

asset class and what are the underlying rules and exceptions. Like one of the things that that I've done in my that gave me such a leg up is getting a real estate license, you know, and working in the real estate field, getting a life and health license, learning about those options. And so studying the skeleton of the creature, you know, and so you want to, as you're young and you're building your wealth and you want to be wealthy, get as much education as you can. So when you're ready to pull the trigger, you've done your due diligence, you've done your homework, you get it. You know the ins and ounce of the asset you're getting into. Because that money is very precious. You You can't just replace it.

You know, when an IRA loses money, it just, it's lost. You don't get to deduct that on your income tax. So you really want to make sure you're making a smart deal going in. Karnar, are there any gotchas for 403B or thrift savings plan, military, like for, you know, government employees, military, anything like that that we should be thinking about? Not that I'm aware of. I mean, the same thing, you've got to leave the service of the plan to move it over. But you can just do a self-directed IRA with those funds as well.

Sure. You can roll them right over, yeah. Is that something that's recommended? Like if I am separating from service from the military, do I want to keep it in the TSP? Or do I want to roll it over? Well, you're going to have to make that decision independently. I mean, again, it's what's your risk tolerance? Are you ready to invest in alternative assets?

And that's a whole, that's a whole, you know, separate question. But you can. I think that the point is that you have the freedom to do that if that's what you want to do. I don't know about the military, but most employers have fairly high fee funds. inside of the typical corporate 401K. So, you know, first thing I did when I left my Fortune 500 company job is I rolled it over to a Fidelity account with much lower fees around there, right? And then I would definitely, I would encourage most people when they leave their job

if they have a 401k balance to just like look at the fees. And if you're a believer in index funds, go with a low cost index. Like that 1% a year adds up huge over the next 30 years inside of retirement. account. But then after that, if you want to put it into alternatives, you have to use the SD IRA option. I was just making sure there wasn't any other, like, kind of weirdo rules associated with the military stuff in there. Yeah, no, it's treated basically the same as a 401k when it comes to rolling it over. All right, Carl, we've covered a number of different things here related to self-directed IRAs. Tell us what's going on, what's new. What else should we know

before we adjourn here? Yeah, for most of my 17 years in the industry, there's been, well, it's not much new, but this year there's a lot. And just hitting on a couple of highlights. One is, and this doesn't apply to everybody, but if you happen to be between the ages of 60 and 63, not everybody, but you get this wacky new, giant catch-up contribution. So in other words, it's not just being able to contribute to an account,

but you get to contribute even more, $10,000 more starting January 1, 2025. So that's one thing. But another thing that's really exciting applies to everyone across the board, is, thanks to Secure Act 2.0, which, by the way, went into effect December 31st, 2022. It's taken the IRS away, you know, a long time to actually implement this. But you can make a Roth contribution to a separate simple IRA. Well, what does that mean? Like, this means you don't have to do a backdoor Roth.

So if you are self-employed and you have a simple IRA that stands for savings incentive match plan for employers, okay, so you have to be an employer. or a simplified employee pension, a SEP account, those two, so you're self-employed, either one of those accounts, you can contribute the lesser of 25% of your income up to, say, $70K, and it can be a Roth contribution for a SEP. You know, simple, the contribution isn't as much. So that is a tremendous big door opening to tax-free savings.

And so, yay, for us, you know, we can have more tax-free dollars, more tax-free gain from our IRA saving. So those are two of the biggest highlights, I think, in this space. Yeah, so here's what you do if you're the 401k millionaire using this nugget. You retire at 45 or whatever it is, and it's all in the 401K. You go get your real estate license. You become an agent. You make, what is that, $280,000 in commissions, go you.

You put $70,000 of that into the Roth. you buy two rental properties outside of your 401k and cost sagam you have a loss you're able to put a nice big loss overall because you're depreciating four 500,000 you roll over 200,000 dollars from your 401k now you put 270,000 dollars into your Roth and it can be in a debt fund or a hard money note or whatever it is that's related to what you're you're doing there and now you have an income stream where you can start taking your substantially April periodic payments and that's the holy grail of retirement planning right there, I think, right? Mindy, how we doing? My attorneys make me say the contents of this podcast are informational in nature and are not legal or tax advice. And if you'd like to follow Scott's

plan, you should really, really, really speak with an actual tax planner to make sure that what he said is true. However, it sounds really good. I just want to make sure that people are like, Scott said. Then that combines everything. That's rep status. And that's the, yeah, we got the whole, we got the whole jargoning out there. Yeah, that's not, that's not feasible for maybe anyone, probably most on there. But these are the theories that you begin to think about when you start putting together all of these things about real estate and then the retirement accounts and the self-employment and the advantages you get across all of these things in the different asset classes. Like there's lots of fun ways to do this and there's the tools are out there and they're

starting to get a little bit more accessible with each passing year. Yes. And the money that you're paying your tax planner to confirm that this is actually correct or to correct anything that Scott, who is not a tax planner, has said perhaps mistakenly, is well above or well below what you're going to save in taxes. I mean, even if Scott is slightly off, that's the difference between what you're paying and you still have this giant amount of tax-free cash. And what kind of cash do we like best? Tax-free cash. That's the best kind. There's tax deferred and there's tax-free and there's a whole bunch in what I just kind throughout there, but options that should be floating out there for folks to begin thinking about

that are really interesting and really cool. Karen, I am so excited about this episode and all the stuff that I just learned. I like to think that I'm fairly knowledgeable about this whole money thing, but you just threw a bunch of stuff out at me that I am going to now have to go and dive deep. Like you said, do your due diligence. I need to get a lot more information about this, but I'm really excited because there's a lot opportunity that I wasn't aware of. So the whole point of having you on this show is to plant some seeds so people could be like,

oh, I didn't know about that. Let me go get some more information. I didn't know about that. Let me go get some more information. And I think you just gave people a lot of people a lot of homework. So thank you. Thank you. This was super awesome fun.

I really appreciate your time today. Where can people find you if they want to chat more? And where can people find, like, is there like a body of work? that digests all of this research, maybe one text that they can go and kind of study and look up. If they're looking to learn more, that would distill your knowledge into, I don't know, like 250 pages. That book, man, it only took me 10 years to write it, you know. But, you know, bigger pockets, I was talking to Katie at a conference back in, a few years ago in San Diego.

And it's like, hey, let's do this. Oh, yeah, let's do it. And we started working on it and it's had iterations. And since then we've had Secure Act 1.0 come out. Secure Act 2.0 come out, so then there have been rewrites until finally we have everything digested into a nice, you know, how to kind of a handbook, a self-directed IRA handbook about the rules and a lot of things that we covered on this podcast, the basics, you know, about self-directed investing.

Karen, what is that book called? It's called self-directed IRA investing, and it covers, wow, soup to nuts about what self-directed IRAs are, how they got started, how you use them. a lot of the things we've talked about today here on this podcast. So it's going to be a great read and a great resource to look back on like, oh, I forgot, how do you do that? You can pull it out and look it up. I cannot wait to get my copy.

I'm super excited about this book. Thank you so much for your time today. I really appreciate it. And we will talk to you soon.