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Step-by-Step Guide to Self-Directing Your Retirement Account

Episode 060

John Larson and the Real Estate Cowboys talk passive income real estate investing.

Hear new episodes every Sunday morning at 8 a.m. The Cowboys talk about the steps to self-directing your retirement account and the benefits of being ready to pull the trigger on an investment deal right away.

Keep the #CowboyCoffee hot while listening to John, and the Cowboys talk about how to #BeACowboy and earn passive income in real estate.

Episode Transcript

Keith Weinhold: Hey, this is Keith Weinhold from the Get Rich Education podcast. You are listening to my friend John Larson and the Real Estate Cowboys. Don’t quit your daydream.

Robert Helms: Hey everybody, it’s Robert Helms, host of the Real Estate Guys radio show, and you are listening to the Real Estate Cowboys.

Announcer: Have you thought about becoming financially free through real estate investing, but don’t have the time or knowledge to get started? Welcome to the Real Estate Cowboys podcast. Each week we discuss passive income investment opportunities in the red hot Texas market. John Larson and the Real Estate Cowboys will show you how to leverage their team to build wealth in real estate through passive investment opportunities. And now here’s John.

John Larson: Hello everybody and welcome back to another episode of the Real Estate Cowboys podcast. This is your host, John Larson. This week we are discussing something that I’m really passionate about and that’s self-directing your retirement accounts, taking your money out of Wall Street and bringing it Main Street. I talk about this just about every week on the show, but today I want to discuss basically a step-by-step guide to self-directing your retirement account. I just don’t think that there’s enough information out there, which is why I really hammer this home because I’m very, very passionate about it. I really believe in, like I said, taking your money out of Wall Street and bringing it Main Street and maybe not all of it, but some of it you should definitely self direct some of your money, put it into alternative investments like real estate. We all know real estate never goes to zero, but the stock market can, okay?

So I just want to delve into it a little bit deeper and just kind of talk about how the whole process works, uh, with getting the account set up. And so I mean by now you’ve probably heard about the benefits associated with self-directed retirement accounts. We talk a lot about it on the show. You know, those who, those who are self-directing the retirement accounts, they open up a whole new world of investment opportunities beyond stocks and bonds. Okay. When you self direct your retirement account, you can invest in real estate, property tax liens, certificates, Bitcoin, other digital currency, structured settlements, precious metals like gold, which is becoming very, very popular again, um, or you can do lending through the account and, and many, many more things. You know, we focus primarily on our private lending model, uh, through self-directed retirement accounts because those interest payments are obviously coming back to you tax-free or tax-deferred depending on the account that you have set up.

So lending money from the retirement account is a very, very passive way to earn double-digit returns in many cases on your money. Okay? So it’s a really, really, really great way to grow your retirement account without having to do any heavy lifting. All right? And really it also is kind of a good way to minimize risks because, with private lending opportunities, you hold a lien on the property whether it’s personal property or whatever it is, equipment. You can file a UCC-1 and hold lien to that property. Uh, if it’s a real estate deal, you’re obviously going to hold a first lien position through a deed of trust. That’s how the, uh, the, the project is basically collateralized. That’s how the money is collateralized. It’s through that deed of trust. So you know, if you’ve ever wanted to invest in something more interesting than stocks or if you wanted to take control over your investments and even checkbook control of your IRA or 401k so you don’t even have to really work through the custodian at that point.

If you get checkbook control, you can just write a check on any investment that you want to participate in, send it to that group. If it’s a private lending deal, send it to the account, sent it in escrow, deal closes, you start earning interest on your money. You know, that’s a really, really great way where you really take full control of your retirement account. So or if you’ve been wanting to invest in real estate, self-directing retirement account is definitely a great option for you. But how exactly do you go about self-directed retirement account? A lot of people have questions about this, you know, is there a ton of paperwork? Is it going to take a ton of time? And you have to understand you’re not going to get a lot of help from your stockbroker because they only make commissions when you buy or sell stocks or other traditional investments, right.

Which they want to keep you in those so they can keep making their commissions. Uh, they may even give you erroneous information about self-directing retirement accounts, you know, because they want, they don’t want you to really self-direct. They want to keep your money with them in whatever brokerage it’s at. Your banker is an expert in CDs, but probably won’t be able to tell you anything about self-directing your retirement accounts. Some banks can set them up. Some people at banks are very knowledgeable with this and can set up a self-directed account for you, but your employer or your HR department won’t really be able to help aside from sending you back to your retirement account representative. So that’s not really the best, best way to kind of learn how to get this started. But if you’re ready to start self-directing, here’s a step by step guide on how to make that happen. Okay? And number one is always to do your research, do your due diligence before you actually file paperwork to self direct a retirement account. Prepare yourself, do some research into what kind of investments are available for self-directed accounts. I already named a few, uh, but you want to understand that when you’re self-directing you’ll be the decision maker. So you should be ready with some investment decisions right away, right? You’re self-directing. This is now, you are the broker, you are the advisor, you take control of your money, okay? And so you won’t want your money to be sitting idle while you’re doing your research. You want to do your research first in many cases, right? ‘Cause if you self direct, you’re pulling your money out of the traditional investments. Now that money is not doing anything for you until you get it into an actual opportunity.

Buying gold, investing in real estate, doing a private lending, uh, you know, they’re just lending money out to somebody, whatever it may be. You want to kind of make sure that you have pegged some opportunities or peg some groups that have access to opportunities. So when you are self-directed, you are ready to move forward. Investors take action.

Okay, so one way to invest with your self-directed retirement funds is to invest in a private money lending opportunity that we offer here at American Real Estate Investments and the Real Estate Cowboys. This is a really straightforward investment opportunity that you can take advantage of. Okay. Many deals require you to be an accredited investor, but some do not. It depends on the structure of the deal. It depends on how many investors are coming in on a deal. You know, if you’re just doing, uh loaning money to a fix and flip outfit and you’re just one lender, you don’t have to be accredited for that.

But if you’re going to participate in a debt syndication, in many cases at that point you’re going to have to be an accredited investor. Okay. While the money is invested, typically these terms can be as low as three months. You know, some of these fix and flip guys, will do a three or four-month term with you. Um, many of the deals that we’re doing are going to be a year term, 18 months, maybe as high as 24 months. And so you can spend that time while the money’s working for you to research your next investment opportunity, which is great. Or if you find a team like ours, we are constantly out here finding deals. The problem is we gotta find good deals and good deals are very hard to come by, especially in the Dallas-Fort Worth market or in Texas. But if you find a team like that, what I’m trying to say is, you can continue to work with that team.

So when the investment pays back, in many cases we have another deal lined up ready to go. Or you can just roll that original principal investment into another deal and keep the money working for you. You know, making you double-digit returns back to the retirement account tax-free or tax-deferred. Okay.

The second thing you’re going to want to do is you’ve got to pick out a custodian, okay? And there’s many out there; Provident Trust, Equity Trust. There’s, there’s many, many custodians. Just type in on Google, you know, self-directed retirement custodians and you’ll see a bunch that pop up. So one of the regulations governing self-directed retirement accounts is that the money and transactions are always handled in accordance with the law. You need an approved custodian who will make sure that you comply with all the IRS rules about self-directed retirement accounts and can manage your distributions, keep tax records and assist with the paperwork involved in buying, selling managing investment vehicles.

Okay. That’s what your custodian’s going to do for you. And there are several, several self-directed custodians available through an online search like I said, but be sure to choose a custodian that is properly licensed, that does not impose restrictions on your investments beyond the IRS restrictions and that has reasonable fees. Some of them charge a lot in fees, you know, find somebody that’s a little bit more affordable and our team has, you know, some good recommendations for you. If you just inquire through one of our websites, you know, or you can speak with a member of our team and we can give you some recommendations. Okay?

Next what you’re gonna want to do is you’re gonna want to notify your broker, right? If you’ve been working with a private broker or retirement fund representative, you should notify them of your intent to self direct your retirement fund from here on out. Your custodian will be sending them paperwork, but it will be helpful if you let your broker know what to expect. I want you to be forewarned that they aren’t going to be happy with the news. Uh, your broker makes money, they make commissions on your money staying with them so they won’t make any money on your self directed funds. Okay. That you take control over and, and now they’re not making as much money off of you so they’re not going to be super thrilled that you want to self-direct. They might, they may even try and dissuade you or say that you aren’t permitted to self direct your account, but you are legally entitled to self-direct IRAs and 401ks in accordance with the IRS tax code. But it’s not common knowledge. So your broker may genuinely not realize that that is even an option.

Some of the old school guys, uh, may not even know that that’s an available option to you. And just remember that your notification is just a courtesy. You don’t need your broker’s permission to self-direct, okay? But obviously, of course, give them te common courtesy to let them know what you’re doing. Okay.

The next step after that is going to be to move your money. And this is one that your custodian will assist with to move your money into an investment. And so for example, say you decided to go with a private money lending opportunity. After reviewing the private placement memorandum or PPM, you decide to invest $50,000 into the deal. The private money lending sponsor, which if you’re working with us, would be us, sends over paperwork, which can also be forwarded to your custodian. You sign the approval and the money is then moved into the investment.

It’s basically what’s called direction of investment form. Okay. And all this can happen in a matter of hours. Once you’ve done your due diligence on the investment, it can happen pretty quickly. Then your money starts working for you in accordance to the terms of the deal, right? So if the deal that’s supposed to pay you 10 and a half percent, 12% over a year term, once that money is, like in our case, once your money’s moving into escrow for a deal, it instantly starts accruing interest for you. And then once the deal closes, you get that accrued interest. Plus, you start receiving your monthly dividends and it’s very passive. It goes right back into the account. Okay, I’m not going to call you and tell you that a tenant moved out or broke something or a roof needs to be replaced. With a private lending deal you know what you’re going to make each month to the penny, which is great.

And if you’re investing with good teams and good markets, good reliable markets, you know, nearly recession-proof markets, which I like in Texas, then there should also be a very high likelihood that your sponsor is going to deliver and either sell that project or refinance that project to get your money back. Okay? And the goal of us is to keep the money moving, delivering on deals, building rapport, and a good reputation with our clients so we can continue to keep that money working in deals like hot markets like DFW. Okay.

Next what you’re going to be doing is accepting distributions. Once the investment starts paying out, those distributions go right back into your retirement account. As I said, um, just like they did before you self directed. And all the regular retirement account benefits remain in place. You earn tax-free or tax-deferred interest on your self directed retirement account just as before. Okay. That does not change. You don’t need to be involved in making sure the distributions get back into the account. It’s automatic and overseen by your self directed retirement account custodian.

And then from there I would just say keep researching. Depending on how far off you are from retirement, you’re looking at many more years of self-directing your retirement account, right? Continue researching investment opportunities so you always have a profitable place to put your money when the current investment term comes due. Right. So you kind of, the only really, you know, especially if you do private lending, I mean there are only really work you’re going to have to be doing is just kind of researching, looking at deals. And I love looking at deals. That’s fun for me. Right? That’s not even work for me. But you always want to stay one step ahead so you can strike fast when a deal becomes available. Because like I said, investors, successful investors are ready to take action on a good deal. Unsuccessful investors, as I would say, miss out on deals a lot of time because they get caught up in too much of the intricacies of the deal. It’s like, and that’s why I believe in looking over at deals over and over and over again because then you start to make a judgment quicker. You’ve looked at enough deals to where you’re like, hey, that’s a great deal. I need to move forward on that, you know? But there’s many cases where some of our investors have dragged their feet or took too long to get their self-directed account up and running and a deal becomes fully funded. And so you miss out on that opportunity and it’s like, hey, I liked it. It was a great deal and now I just missed out. Now I’ve got to wait for the next one. You know? Then now your money is sitting idle a little bit longer when you want to put it to work for you. Right. And we want to get our money working for us.

Like I said, stay ahead so you can strike fast when deals become available. Okay. In the case of private money lending, there may be a second opportunity where the current one ends, you know, but your private lending sponsor, will let you know as the due date approaches, right? So for example, we have a refi coming up on one of our projects, so we’re going to be looking to pay our investors back. We’re actively looking for a deal right now where we can then just roll those funds into another deal and keep the investors’ money working for them, getting them double-digit returns. Right? That’s, that’s our job. Our job is to find the good deals and see them through and get our investors paid back.

I’m going to end with this, you know, know that you don’t have to self-direct all of your retirement funds, okay? You can diversify if you want. You can keep some of it and add it to your traditional brokerage account and take a portion out and self-direct. Test the waters, right? There are pros and cons of this approach, of course with pros and cons with everything. But it’s an option to consider. And so you know, if you’d like more information on how to self-direct to your retirement account or how to uh, basically, um, take, take full advantage or full control of your retirement account with checkbook control as well, you know, just sign up, get on our mailing list.

Uh, I have a great book that we offer every week that we send out to our investor list and it’s by a gentleman that I know personally, Damion Lupo, and the title of book has Total Control Financial Guide to the QRP, which is a qualified retirement plan. And this tells you how to get checkbook control of your 401k. It’s basically a solo 401k but you get checkbook control of that. So this book will basically tell you how to roll over an IRA or 401k into your own checking account, how to buy any type of real estate, even with debt, how to avoid any UBIT tax, right? Which is an unidentified business income tax? So if you’re taking advantage of debt, obviously the IRS is then going to look at like, well, if you borrowed 50% to purchase a property, that money is not technically retirement account money.

So that money is open to tax. We can teach you how to avoid that, that you’ve been taxed, okay. Um, in this book we’ll also tell you about how to get checkbook control of your retirement money now. Why the EQRP is IRS approved. You know, how to get an instant 50k credit line. You could borrow up to $50,000 from your account and pay it back at a very low-interest rate and then how to buy gold, silver, precious metals, uh, with your retirement money and legally take physical possession of it. So there’s a lot of good info in his book and we send this out to it’s, it’s in our email blast every week and we feel like every week we send it out, we get about five purchases of the book. So you know, if you want to purchase the book, I think you can find it on Amazon as well.

It’s Total Control Financial Guide to the QRP and it’s by Damion Lupo. Uh, great, great read. And then if you’d like to learn more about other passive income opportunities, buying rentals, private lending, vacation rentals, Airbnb, things of that nature, go ahead and check out my book. It’s a quick read, Passive Income Guide by John Larson. What’s Your Return on Life? You could go and get that on Amazon as well. The Ebook’s, fairly, very, very inexpensive. It’s only about a 50-page book, but it gives you a really good basics on all the passive income options out there that are available to you. Um, and also you can go back to the website, all of our past episodes are housed there, we have a ton of great information on real estate investing and passive income. Um, so I definitely recommend checking that out if you’re still looking to learn before you’re ready to kind of move forward and take action.

Um, so that’s a great place. And then American Real Estate Investments website. We have a ton of information on there as well. Market reports, you know, um, private lending, how to get involved with private lending, how it works. We have more information on there. So, you can go on the sites and put in your information. A member of our team will reach out and you can just have a consultation call and we can tell you what we have going on. What deals we have available right now and you know, between you and our representative, you can make an educated decision on what investment option is best for you. Okay. So in the meantime, that’s all we have for this week. Thank you for tuning into the Real Estate Cowboys podcast. This is your host, John Larson. We’ll see you again next week and always remember, what’s your return on life? Have a great week everybody.

Announcer: All opinions expressed by the host of the show are the opinions of American Real Estate Investments LLC and do not reflect the opinions of guests or sponsors. No personal or professional advice on this program should be considered an endorsement to follow a real estate financing or investment strategy. Before acting on any information, seek advice from your financial tax, mortgage or real estate advisor, as the information is not guaranteed and investment strategies have the potential for profit or loss.