You’ve heard the term “self-direct” when it comes to 401ks and IRAs. What that means, however, and how you take advantage of it, isn’t something that’s usually defined.

Zach Lemaster and Adam Schroeder talk with the IRA Club’s Ramez Fakhoury to discuss how you can actually convert your retirement accounts into controllable assets and what investing with them actually looks like.

Learn more about Ramez and IRA Club HERE
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Transcript:

Adam
Hey, Rent To Retires, it’s Adam Schroeder here with another episode and I am joined once again by Zach Lemaster, the founder and CEO of Rent To Retirement, and we are joined today by a member of the IRA Club. Ramez, thank you so much for joining us today.

Ramez
Not bad. Adam. I listen, we were just talking about rolling Rs, you hit that nail on the head pretty well. Good for you, buddy.

Adam
Well, I appreciate it. So you work with the IRA Club. But we’re talking about a slightly different form of IRA than most people probably have, you know, a lot of people have probably gone to, you know, fidelity or Schwab and set up an IRA account. And that’s about it. I mean, that’s what I have. That’s we did years and years ago, because you need an IRA. But tell us a little bit about kind of how you can go around what the differences between a regular IRA and a self directed IRA, like you help a lot of investors set up.

Ramez
You know, as we go through this podcast, and Adam, so sorry, and Zach, it was a pleasure having talking to you, buddy, it’s been it’s been a minute, actually, it’s been about a year. So before we kind of jump into that I kind of you said the word Ira versus self directed IRA. Throughout this podcast, you’re gonna hear me say this quite often. self direction is a marketing term that we use within our industry, right self direction. And my personal opinion means one thing and one thing only control, right? Taking control away from the classical brokerage firms, the traditional aspects of investing, you know, things that we learned from our parents up, go get a job, open up a 401k, take the employer match, that isn’t the norm anymore, right? We got to get that mindset out of our head, the whole, you know, set it and forget it the hurting method that we’re always used to hearing, we got to get that out of our mindset, because it isn’t working. Now more than ever, we know why the markets extremely volatile. So when we talk about self direction, that’s what Ira Club offers, right? When you think of Ira club, I really want you to think of fidelity Vanguard, Schwab, TD Ameritrade, and you’re always going to have me refer to those four, because are the four horsemen in our industry because they control pretty much 70% of all retirement accounts of the 30 Plus trillion. So what I’m trying to get at is, they’re only allowed you going to, they’re going to only allow you to invest within stocks, bonds, mutual funds, ETFs, what we’re used to hearing, Ira club allows you to do that and invest outside of the norm, right outside of stocks, bonds, mutual funds, and ETFs. You can do real estate land, syndications promissory notes, basically, anything that your heart desires, okay, except for three things that you can invest within your IRA, a life insurance policy, meaning your own personal life insurance policy to an S corp, or three. Forgive me, we’d like to call it self dealing. So you know, like, like, for example, an antique rug or antique car, so you can’t invest in antiques. But in a nutshell, control, control control. That’s what we’re educating you on. That’s the reason why I love Zach’s podcasts, he really, you know, tries to create and open up doors and opportunities for people to think, again, outside of the norm.

Zach
So I love it. And I really like you going through the control aspect. People have heard about this term, self directed IRA, no one’s really broke it down like you just did Rama. So I appreciate that. When we talk about investing in real estate, I mean, that’s that’s really what we’re talking about, right? I mean, there’s all sorts of different ways you can invest, but specifically with real estate, this is a way that people can basically take control to your point of their retirement vehicle and choose what they’re investing in, in, potentially, in this case, real estate. So what what are the steps to go through that process? I mean, that we get the question all the time from people that like, Hey, I have this IRA, and I’ve been putting this much money in because I have I mean, there’s these tax advantages I need I need to take advantage of and everyone knows that aspect of it, but it’s like how common question How do I invest in real estate through my IRA? What are the steps I need to follow?

Ramez
Honestly, the process is quite simple. It is truly open fund invest, right? The only the only thing that I should have stated prior to to what the IRA Club does is that’s the that’s the actually the only thing that we don’t do is choose the investment for the investor. Regarding the process the reasons why for example, you rent to retirement love, I should say and I’m not sure if you love us or not love us but I’m cracking a joke. But the reason why you do work with us true true story is it’s a true system of checks and balances here, right? When you call the IRA club, we’re not a call center, you call you get the receptionist, you ask to speak to your IRA club representative, right? So if you’re not sure you don’t know what to do, right, you would call and ask to speak, we have 30 plus employees that work here. But that is the beauty of Ira clubs. So step number one, we talked about opening the account, you could simply go to Ira club.org, you could click click on open an account, you would choose the type of retirement account that you would like to establish the two most common that we all know is Traditional and Roth. Now the only differences that I want you to understand when it comes to retirement accounts, they’re all governed by the same set of rules and regulations when it comes to investing. It’s really two things that separate us the contribution limits, and what are you going to pay the taxes, that’s really it. So with a traditional tax deferred, you pay the taxes later on in life, right, you could contribute up to $6,000, or $7,000. If you’re over the age of 50, if you are self employed, you could open up a SEP IRA, which is simply a Simplified Employee Pension up to 58,000. We could also do solo 401 K’s, again, we could talk about those maybe another day, Zach, because the truth is, most Americans don’t qualify for a separate solo 401k. In fact, it’s just a little under 11%. But most Americans, you know, when we’re talking about the average American 97% of them, I’m sorry, sorry, 90% plus of Americans qualify for the individual retirement account, unless they have an employee Plan A 401 K. Roth IRA, you pay the taxes up front, and taxes moving forward for the rest of your life is tax free. So the capital gains, and that also goes to your air like your spouse, and your kids also up to 10 years, by the way, they just changed that rule recently. So it’s up to 10 years for your air. But if you make sure that you educate your kids on on what a true self directed Roth IRA can do for you let them utilize those funds to the best of their ability, not something I was ever taught. And then once the account is opened, literally takes four to five minutes, Ira club will work on the transfer of funds on behalf of the investor. So we will get the funds over to you. Now depending on the custodian. There are over 10,000 brokerage firms trust companies across the country. And each one works at their own pace. And there’s a reason why they work at their own pace. They’re trying to capitalize it one last time before they send the funds off to the IRA club. So traditionally, it takes anywhere between seven to 14 business days. But once the funds are available at the IRA club, literally 24 to 48 hours, as long as you have the investment docs provided to the IRA club, you get that off to us, our investments team will cross all the t’s dot all the i’s as the full administrator, we make sure everything’s IRS compliant. And we send the funds right off to, to example, one house on 123. Green Street at Rent To Retirement.

Zach
Is this what is referred to is like transferring or converting or rolling over. I mean is that I mean, there’s a lot of confusion about oh, I want to I want to roll over change to a self directed IRA. I mean, what is the technical process? Is it setting up just an account that allows for this? Or can you talk more about on that?

Ramez
it’s as simple as literally establishing the IRA account itself here at the IRA club, us being the Trust Company. But this is to your point, I love that you said that. Most people number one don’t even realize that they could utilize these funds right first. So let’s backtrack one split second, let’s just say you have an the majority of what we see here at the IRA club are traditionally IRA, the IRA transfers, those could move as many times as you want back and forth to any trust company or custodian where people do get confused is the 401 K plan because the majority of Americans have a an employer’s 401 K plan. And unfortunately, you cannot touch that you could only touch an old employers plan a 401 K 403 B 457. A tsp by the way, a thrift savings plan which is traditionally means you work for the government or you were a you know, you weren’t your you know, an active duty, you know, within you know, the military so those you cannot touch if you’re with your current employer, unless you’ve been furloughed, unless you quit or you change your job, this is the opportunity for you to roll those funds over. So let me make sure that you understand that do not say the word I would like to take a distribution you do not say that word the correct term is a rollover to a self directed IRA trust company such as Ira club. And by the way, you’re allowed one rollover per year. Ira to Ira transfers can be done as many times as you want without us.

Zach
That’s taking the 401k rolling over into the IRA to then have control to invest in other assets? Correct?

Ramez
Correct.

Adam
If someone had a 401k with an old job, they rolled it over into their current jobs. 401k are those now commingled and you can’t split them up? Or could you take like your old 100 grand? And now you just say, hey, I want that back.

Ramez
I love that you said that, because I literally had two clients back to back. So I was at an event literally last week. And truth be told, it depends on the employer plan is the is the best way to say this to you. So let’s just say hypothetical, you had an old employers 401k, I had $100,000 in there, and you roll that over into your current 401k. With your new employer, can you touch those funds, just traditionally a time limit? And when you can touch those funds, right? Sometimes it’s within the first 12 months. So if you roll over, let’s say $100,000, to your new employer, and you found out about a self directed IRA account, and you would like to use a portion of those retirement funds, you could go to your current employer and ask that question. You know what, I just rolled it over about three months ago, four months ago? Can I go ahead and roll those funds off somewhere else? They’re gonna tell you, Yes, eight times, or nine times out of 10? Yes, after the one year, the one fiscal year that might change a little bit. And because the rules and regulations have changed for 401k employer plans, because they figured it out, more and more people are getting wind of self directing. And they would like to utilize a portion of their retirement funds. Now more than ever, as we all know, the markets been unbelievably volatile. Inflation is working against you and flat. In fact, I think everything’s working against your retirement. Right now. Taxes are on the rise, the IRS has been deployed 87,000 new, you know, IRS agents $80 billion to back them up. Every single government program you could think of from Social Security is broken Medicare, Medicaid. In fact, last year, we dished out $2.2 trillion as part of the stimulus package. So these are things that we could sustain as a country. So with that being said, we need to start looking at contributing more often to employer plans, and more importantly, diversifying outside of the norm, right what we’re used to, because that’s not going to work for the next five to 10 years, in my personal opinion. So that’s just me speaking out loud.

Zach
No, I love it, we will prop that soapbox up for you. Because our mindset is right there, you need to take control of your, again, this term control of your retirement planning. And look at asset classes where you know, you’re you don’t have all these things working against uses a simple factor be inflation, where it can be a tool like investment properties, just with a for someone that’s kind of new to this Ramas with a for like a defining terms, what is a custodian? What is a Trust Company? And how do they come into play in this are they required?

Ramez
So there’s traditionally three places where you can leave your retirement fund, a custodian, number one, a fiduciary or broker a registered investment advisor number two, and three, a Trust Company. That is because the American government does not trust the American people with their funds. So that is a reason why that you leave your retirement funds within these three places. So a custodian is, for example, somebody who is in charge of your retirement funds, such as a fidelity Vanguard Schwab, a Trust Company, is a bank that you could house your retirement funds, and we as the IRA club, or the full administrator. So again, we just keep it IRS compliant for you, you’re the only one that could choose the investment. This is the reason why that we do this. Here at the IRA club. Most Americans do not understand the process of self directing. They’re not educated on it. And that’s been our challenge here at the IRA club. And as of recently, Zach is more and more people are getting wind of self directing the other challenges become, they cannot identify the investment opportunity. So that has been also a challenge at the IRA club. So it’s not just about educating or the process itself, find the investment opportunity. Otherwise, why would you ever roll funds over here to Ira club, right? Why would you ever take that up? You know, it just it’s just, I mean, it’s very respectfully when I say this, most Americans are not savvy investors, so they need some sort of direction. And although I can’t choose the investment, there are some ways that we can help you out to some degree right, if that makes sense. So And lastly, a fiduciary that supposed to work for your best interest and and a registered investment advisor I have nothing against fiduciaries or registered investment advisors when they’re working in your best interest exec you know what I’m talking about when I say that because number one is, you know, some registered investment advisors or producers do not understand a self directed IRA or some Have them will say such terms like, don’t do that. It’s extremely volatile, it’s too risky. But what you’ve been doing for me the last six months. So every investments got risk, it doesn’t matter whether it’s the stock market, a house on 123, Green Street, but it’s taken educated calculated risks, right? At the end of the day, you have to take some sort of risk at some point in your life. And that also includes your retirement funds. But people Americans tend to be more attached to the retirement funds. In fact, they would rather lose $100,000 in their Chase account, versus losing $100,000 Here at the IRA club, right. So because they think of it as their nest egg, but most savvy investors, traditionally, people in the 32% tax bracket or higher, are very, they understand this concept better than most, you can’t just use your utilize your own personal funds, you have to use your retirement funds. And the same aspect.

Zach
I love it 100%. And this is a this is a key point where we talked with a lot of our investors. And they hit this block where it’s like, okay, they’re buying so many properties, and they’ve got this great cash flow and portfolio built. But then we all run out of capital at some point. So we need to be looking at additional resources to continue our investing. This could be a HELOC, it could be taking one of these retirement vehicles. So let’s talk about investing specifically, in real estate. Since we’re a real estate community, there’s a few key things that we need to be aware of. So basically, once the account is established, and the funds are transferred, they can choose what they want to invest in, let’s say they find this house 123, Green Street ROM is great investment property, what are the steps that they follow now that the account is set up, I mean, there’s certain rules and regulations. I mean, let’s talk about the acquisition, and then also the operation and where the funds need to come back into the account.

Ramez
Okay, perfect. So just remember, your IRA is a separate identity from who you are. So it’s not you buying the house on 123. Green Street is your IRA that’s buying the house on 123 Grand Street, which means your IRA must pay for everything within the the the hard tangible assets, let’s say the the actual purchase of the house. Property taxes, insurance, everything must come out of the IRA. That’s rule number one. So when it comes to when you just mentioned purchasing the house, think of it like you are purchasing it with your own funds, right, you’re going to title it in your name, or in the name of the LLC, if that’s what you choose to do. So instead, it’s not going to be in your name, it’s going to be in the name of the IRA account. So when you title it, you’re going to title it, Ira, club, FBO and your name and then your IRA account number and everything else will follow suit the same way you would provide those documents to the IRA club, our team, our investments team will go ahead and review the documents, again, cross all the t’s dot all the i’s make sure you don’t cause any prohibited transactions. And then we release the funds the very next day.

Zach
Is this through an LLC?

Ramez
No, this is done through your IRA. So there’s a little bit of confusion a little bit, you know, a lot of people hear a little bit about checkbook IRAs versus a regular IRA. And I just don’t want to get into the you know, I don’t want to get too much into because I don’t want to confuse people. But we offer both here at the IRA club, right? We are a full administrator, your IRA is a trust REIT. So you do not need to establish an LLC, if you’re looking to buy a piece of real estate with your IRA. Now, if you’re looking to have more a little bit more control, which we’re okay with, but we don’t recommend it because truth be told 75% of people that have more control, do something stupid with their IRA. And I mean that again, very respectfully. But with you know, just my team knows within just talking to you within the first five minutes, if you understand the rules and regulations, so we’ll always advise you, if you’re a savvy investor, and you do this quite often. And when I say do this quite often, there’s really three reasons why you should be opening up a checkbook LLC, is if you’re at a house buying if you’re at an auction, sorry, buying houses, if you’re doing tax liens, and if you’re doing fix and flips where you need access to the funds. Otherwise, I personally think just let Ira club do its job for you. Again, we offer both. I just think it’s smarter if you let us do the work for you. Because the truth is, the IRS could go back the day the account was established or the day that you did sorry, the day that the the prohibited transaction happened is the day that the IRA account because nullified which means you’re stuck paying taxes on the asset and the the funds within the IRA. So if that makes sense. And again, you know, I leave that up to the investor. At the end of the day, it’s up to you. My job is to do what you tell me to do. But let us do our job at the end of the day. That’s what we’re here to do.

Zach
Yeah, that’s why you’re hiring professionals to assist with this. Okay, so they have They count established. And they can basically coordinate the transaction with your assistance. They own the property in the trust or, you know, potentially in the LLC, if it’s a checkbook, but assuming it’s just a trust buying it in that LLC, you’re involved in the transaction, right communication, you want to be because you want to make sure that funds are being transferred appropriately. And that’s important to have you right there, you know, going through the transaction. Now on the financing piece, that’s that’s one area where we get a lot of confusion, and most people don’t realize this, if they haven’t explored this is that you cannot go out and get a conventional Fannie Mae, Freddie Mac loan 20% Down with an IRA, you need to use non recourse debt. Is that pretty much the case? Ramas. And, you know, what, why is that? And what do people what else do people need to be aware of.

Ramez
again, 99% of Americans. So sorry, let me backtrack, again, 99% of banks across the country do not like to lend against an IRA. Because the IRA is a trust, that’s a separate identity from who you are. So guaranteed. Correct. So in this case, you would have to establish a non recourse loan, for the first thing you should need to do is find a bank that will allow for it because again, only maybe 1% of banks across the country, allow for it or find a lender that will will allow for it. In fact, I know, Zach, that you guys deal with a great company, you guys could, you know, have one of your investors that is interested in utilizing a portion of the retirement funds, then you guys have those great connections. But finding a non recourse loan is number one from any bank that allows for it. Number two, most banks that do allow for at 150 60, sometimes even 70%, down against the IRA, because again, as a non recourse loan, they cannot touch the funds within your IRA. That’s the reason why they ask for such a bigger or a much bigger or higher down payment. So that’s number two. And number three, within an IRA, you want to be weary of ubit or UEFI. Okay, you unrelated business income tax. Now, if you have you qualify for a solo 401 K, again, less than 10% of Americans do qualify for a solo 401k. I would always always put you inside a solo 401 k versus an IRA. But you don’t have that tax, right? Because you don’t have to worry about ubit. So can you explain ubit.

Zach
Can you explain ubit for us?

Ramez
So, ubit, for example, you bet is triggered when there’s heavy leverage, or heavy debt against the retirement account. So for example, and I don’t want you to trigger it. That’s why, and I don’t like, again, I’m not sure how detailed you want me to get, because we could talk about this subject all day long. But in just layman’s terms, let’s keep it real simple. Like, let’s just say example, you borrow $100,000. Left, sorry, sorry, there’s a house for $100,000, your IRA only has 50,000 to purchase the house and you decide that you leverage the rest, you find a bank that allows for a non recourse, you leverage the rest of 50%. So think of the percentage in percentage concept, let’s just say simple rule of 1% of $1,000 goes back to you. Okay, now, it’s split between your IRA and 500 goes back to you. But that’s not the half of it. Right? So why am I saying this to you is because $500 is tax deferred or tax free. But this is where you get ubit triggers off where you are a noob, it’s a very hefty price. It lies into whatever tax bracket you fall into, or up to, I believe, 25%, I got to look at the rules and regulations behind it. So I’m just telling you that it’s a heavier tax. If you borrow against the retirement account, which we don’t care for within an IRA, it’s always better to treat your IRA, like a retirement account, don’t treat it like a business. There are other strategies that you know, these such as partnering. So for example, same set of rules and regulations. If you had $100,000 property in your IRA had 50,000, your spouse’s Ira had 50,000, they could collectively partner together to buy the house on 123 Green Street, same rules apply percentage and percentage of that sale, you know, you’ve and you’ve it has not triggered in that aspect. So I always highly recommend that you partner with a spouse retirement accounts. But I should also talk about this concept of partnering with yourself. Most people don’t know that you can actually partner with yourself. So like, for example, if you have $50,000 in your IRA, and you had $50,000 in your personal Chase bank account, those who can partner together, most people don’t realize that they could do that also. And in fact, the ultra wealthy that is I see this on a day in day out basis here at the IRA club, that they always partner their retirement funds with yourself.

Zach
And avoid then you still get the tax benefits of having the IRA and the you don’t trigger the ubit scenario. Assuming you’re buying that house all cash with no leverage involved in this scenario.

Ramez
And assuming you don’t qualify for a solo 401K.

Zach
Got it. We are getting a little bit into the weeds here. The main point is obviously reach out to the professionals, we can guide you on the investments, you know, that match what your goal is, on the retirement side, we can look at, you know, price points. And if you do want to use leverage, because we have people that do both, we have people that buy cash, and we have people that do use non recourse debt, which is pretty low. I mean, in the grand scheme of things, it’s a low risk loan, I mean, it’s non recourse, again, they can’t come after you or the IRA, if you were to default on that. And so that’s why they require more more money down typically standard would be, you know, 50% of a lot of the non recourse lenders that we see 50% down, they also have limitations on where they’re going to finance. Depending on the lender, they have minimum amounts where like $70,000 is a minimum loan amount, meaning you need to buy $140,000 house. So certain things like this, we’ll walk you through that aspect. But that’s just why it’s important to work with the right people to set things up appropriately and go through this process. Ron, is we have to your earlier comment, yes, we do love working with you guys. We’re not financially incentivized in any capacity to work with you guys. We’re just trying to help offer resources for people that we believe are doing the best job at assisting clients and, you know, in their financial space and accomplishing their goals. So I know that you said you have some benefits to the rent retirement community that you’re offering. Can we talk about that?

Ramez
Yeah, absolutely. You know, one thing we should talk about just real quickly, is fee structures. People we need to be very, very weary of their fee structure, whether it’s with fidelity Vanguard, Schwab, or TD Ameritrade or another self directed IRA company. Truth be told, most people never stare at their statements, they don’t understand the hidden fee structures behind these classical brokerage firms, they traditionally tack up to be somewhere between two to 3%. So think about that, for every $100,000 that you have. They’re taking two to 3000 from you. All right, and you’re taking all of the risk. So the only time that you get paid is if the stock market’s up. All right, if the market is flat or down, are they still taking their money? Yes, they are. And it and we’ve noticed this within our own self directed IRA, community, a lot of custodians are switching over to the percentage based model, we’re totally against that we preach against that, because we’re actually trying to help you keep more money within your retirement account. We have a flat fee model here, we don’t care if you have 10,000 100,000, or 10 million, it’s $175 per year, we make our money on per investment. So if it’s a hard tangible asset, like a house on 123, Green Street, it’s $175. And then $175. Again, for the IRA account, if it’s outside of real estate, it’s 135 bucks, so the only time you get paid the ones 3175. If it’s a house on 123, Green Street, everything else is 135. But again, you’re talking about $300 versus $3,000. For every $100,000 that you invest, you should be you’re thinking utilizing those funds for another investment, let’s say with rent to retirement or whatever it is that you’re looking to get into. Now, he said that there’s an incentive to working with each other. We also want to practice what we preach here. I want you to get started, I want you to educate yourself, go check out Ira club.org. And I will give you your free IRA account your first year right? There’s a promo code write this down our to our it’s the number two by the way, people get that confused. It’s our number two are all in caps. Okay. If you mentioned this ever during a podcast, if you ever say You know, I bumped into Zach Adam, or any one of the team members at the rental retirement group, just say we work together and we’ll take it from there. All right, your job, go find the investment our job, let’s get the money over to the IRA clubs so we can get tax for your tax deferred funds and let’s let’s diversify our portfolio at the end of the day control control control. That’s the name of the game.

Adam
I think we sold that house on 123. Green about 10 times today. So..

Ramez
I think I bought it

[all laugh]

Adam
It’s a hot commodity out there. And that’s for sure. So thank you so much for joining us today. We really appreciate it. love to have you on in less than a year’s time to dive a little bit deeper into this. Again, the website is Ira club.org That’s Ira club.org and enter the promo code are the number two our that’s our to our if you want to check out the investments that you can utilize in your IRA, you can go to rent to retirement.com That’s renttoretirement.com That’s the actual letters T-O for rent TO retirement and you can see our inventory you can schedule a call with us if you need To get in touch with Ramez and his team, we will direct you to them. Greatly appreciate you if you have any questions, email them to podcasts@renttoretirement.com. Podcasts@renttoretirement.com. Don’t forget to leave us a review on whatever podcast platform you utilize. We greatly appreciate everyone who’s reached out to us and left us reviews, and we’ll talk to you on the next episode.