WIN182. How to Use a Self-Directed IRA to Invest in Real Estate with Kaaren Hall

Intro speaker: Welcome to the Westside Investors Network. WIN, your community of investing knowledge for growth. This is the real estate professionals investing podcast for real estate professionals by real estate professionals. This show is focused on the next step in your career, investing. Thank you for listening.

AJ: And please, if you

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AJ: All right. Today, we've got Karin Hall with us. Karin, thanks so much for coming on the show. Why don't you start off by just telling us a little bit about yourself and kind of how you got to where you are now?

Kaaren: Yeah. I mean, you know, you don't you know, you don't wake up one day and say, wow, I want to self direct some IRAs. I think I'll open a company. You know, it's not like that. But but my background, you know, frank frankly, after spending seventeen years as a radio announcer, made the logical decision to go into real estate to make some money, you know?

So I while I was kind of doing both at the same time, and I got a real estate license, did that for, a year. You know, I was actually a realtor, but then got into property management. And just as I was going along through life, I got into mortgage loan servicing, loan origination that lasted a while. And then we had the Great Recession. Right?

And so I got of course, mortgages weren't going to work. So I got into self directed IRAs in 2007 with the company for a couple of years, broke away. And in 2009, opened UDirect IRA services. There you go. So we're we've got 1,200,000,000.0 under management and we're just helping a lot of people self direct and, you know, taking what they have and investing outside of Wall Street, which is so great because there's, you know, more power to choose.

So that is me.

AJ: It's awesome. And maybe just so our audience knows, like what the term self directed IRA, like how is that different than some of the other more common IRAs and 401ks? And maybe just kind of a little background on that for everyone. So we're all on the same diction.

Kaaren: Yeah. Yeah. I mean, it's a great question because a lot of people don't know that. So IRAs were created in 1974 and in 1975, Gerald Ford was president, you know, that when they when they went into effect. So it's created 1975, this IRA.

So it's like just over fifty years you've had an IRA. You could always self direct this IRA because at that time, they said, hey, look, the only thing you can invest in is life insurance contracts and collectibles. Everything else is just fine. So from day one of having IRAs, from the day they were created in 1975, your IRA could have bought a house, for example, like a rental property. And those renters could have paid your IRA the rent.

Your IRA that day could have made a loan secured or unsecured to someone. They would have paid those payments back to your IRA. Or, you know, of course, we don't have cryptocurrency fifty years ago. But precious metals, all this, you could, you know, all these alternative asset classes. You could use syndications for whatever state they were in fifty years ago.

But I mean, they've always had syndications of some sort because how old was Ponzi? I mean, that's going back to the like the '20s. That was a syndication. So you've always been able to use your IRA to do this, but people just didn't know for the longest time. I think, though, that like when people really started to know what these were is in the Great Recession when you couldn't get a loan.

Remember that? How you have like like, the cap was how many, bank loans you could get on mortgage. It was now it's like 10. You can have 10 loans on real estate. But then they narrowed it to six.

And I am an investor. How am I gonna get capital? And then investors started realizing, like, our space, I can go to self directed IRAs, get a loan from a self directed IRA holder, and use that for my deal. Or I can take my retirement money, and I can take down this deal without getting a bank loan. So that is that's it was about 2009 when I opened you direct Great Recession.

You know, I remember buying properties on tape where you're doing that. Like, you could get 50 properties sight unseen on a on a banks. They give you a tape and you just buy them.

AJ: Go deals.

Kaaren: You know, kind of scary, but you could do it. People made a lot of money that way in those days.

AJ: Yeah. So with a self directed IRA, there needs to be a trustee, right, essentially oversee or make sure that the compliance is met? Or can you

Kaaren: explain I call it a custodian. Yeah, yeah, there has to be. And that's that, you know, we provide that. And because, of course, you're not going to take personal possession of your asset because if you did, that would be a prohibited transaction.

AJ: Okay. Like, has it always been that way you were mentioning in 1975, you know,

AJ: that, you

AJ: know, you could buy a property and have your tenants pay your rent? Like to me, the way that that sounded, it sounded like it was a lot more simple. Like you could just open up a bank account and No. No. It's always

Kaaren: Always never like that. That was never like that. But an IRA has always had a custodian tied to it. The custodian would have to be willing to custody an alternative asset. But that existed.

And it was only really the uber rich at the time that understood that this even existed. People who had tax strategy attorneys, you know, helping them out and but then again, it's become more commonplace, as time goes forward. I

AJ: think a lot of people as they've swapped switch jobs to they had leftover four zero one ks's and they roll them over into an IRA or a self directed IRA and you know, kind of as Chris mentioned the like the number one no no is like you can't quote unquote actively manage the asset that is owned by the IRA. So

Kaaren: Yeah. You know, you're right. But I just just to give you some hope there, you know, a little ray of hope here. So there's some things that that you can do. You can choose the renter.

You know, if you select the property, you can choose the renter. A lot of people don't write checks anymore, but you pick up and collect the check. And as long as you never took personal possession, as long as it never went in your bank account, you could then just send that check-in to the custodian, you know, into your account and you can hire third party vendors. So you really can't kind of property manage an IRA owned house in this way as long as you don't take personal possession of the money. You can do that.

AJ: If you have like a property management accountant software that directly puts the money from the renter to the IRA account, you're saying you could just do the management for it?

Kaaren: You could. And so as long as it was arm's length, that's the thing about IRAs, everything you do has to be arm's length. So if you're managing your own property, you know, you're you're calling you're you're calling that plumber to come out and fix that toilet, you know, and and you couldn't do that with an IRA. You could never take a management fee, I have to add, because there's a whole court case about that. And the guy lost and had, you know, prohibited transactions.

Bad thing. That's that's a keep away from prohibited transactions, the whole self directed IRA game. But but, yeah, so you wouldn't even need special software because if you're just sending an ACH, it doesn't really matter where it goes. Just going to an account, it doesn't have to be special. So just send that money over to the custodian to be posted in your account.

AJ: I've always thought that you couldn't manage or work on a property that would be prohibited.

Kaaren: Yeah, I mean, managing it and working on it are different things.

AJ: Well, mean, like Yeah. We we take IRA investments into our syndications all the time. And I I believe that we've been advised that we can't use our own IRAs to invest in our syndications even That's though true. The the money never, you know, it it goes from essentially the tenants directly to the IRA.

Kaaren: I'll explain. And like like prohibited transactions, like for those of you who for those who are listening in, rule books, you can read about it in the internal revenue code. It's IRC forty nine seventy five. So I'll throw this in the chat. IRC

AJ: Great evening reading.

Kaaren: Yeah. And yeah. Right. I mean, it's super exciting. But what it says is different things can be prohibited.

So one is offering services to the plan. And if you're out there as the general partner and you've got limited partners, as a general partner, you're making decisions and you're offering services to the plan. So that makes you disallowed. So what's also a prohibited transaction is having personal benefit from your IRA assets. So as a GP, if you make a profit, you're actually receiving personal benefit from your IRA investment.

So it's like a double prohibited transaction because you're offering services to the plan and getting money.

AJ: But if it's if it's a partnership or if you're a minority partner of an entity.

Kaaren: Same. Yeah, you're the decision maker, so no.

AJ: Okay.

AJ: So IRA holds just a single family house would the custodian or the IRA hold title?

Kaaren: It's one in the same. The

AJ: custodian or the IRA can hold the title and then all the funds go directly to the custodian to deposit the IRA account.

Kaaren: Right. So the name of investor is the IRA account. It's not the person. So it's like, for example, it's like you guys for the benefit of the custodian. And that's who owns the asset.

So AJ, for the benefit of the custodian, and there you go. And that is a name. It's not your personal name that owns the asset. It's the IRA name that owns the asset that includes the name of the custodian.

AJ: Honestly, it's pretty much suitable to the management yourself. Like, if you had a plumber go work on the place, like, how would you get the plumber paid?

Kaaren: You oh, super well, right now, you know, things have changed over the years. Like, for us, we've gone digital. So you would log into the platform, submit the invoice for the plumber, and we would disperse from your account.

AJ: Oh, wow. Okay.

Kaaren: So that is easy.

AJ: That makes it a little bit easier. Usually, you know, it's the we pay them as a management company and then we get paid from the owner from properties and that sort of stuff, which, you know, if you're buying like a property out of state and you're using another you can use another manager, like, makes it very easy, I think. And then because then you're never as long as you're you're not like touching the funds, right? That's kind of the concept.

AJ: Yes. Or making decisions.

Kaaren: Yeah. Yeah. Right. So it's called offering services to the plan. So if if if you're the decision maker, in other words, like you're the you know, you're making all the decisions and you're getting paid for it and it's you own the entity and it's too closely held when it's when it's like that, when it's when you're so close to the deal, you become a disallowed person.

It's the it's a broad term, isn't it? It's offering services to the plan.

AJ: Oh, would like, well, it would like a value add single family home work where you did, you know, say you bought it for 200 ks and you put a 50 or 100 ks into it through like a general contractor, would that be? Because I mean, you're essentially telling the general contractor what to do.

Kaaren: Well, I think that as long as your IRA is paying the bills, can you can you can hire that third party GC and have them come in and do the work. Yeah, no problem is the IRA pays for all expenses of the assets that the IRA owns.

AJ: Okay. Yeah. Well, very interesting. You know, I know that you mentioned earlier, you wanted to chat about the big beautiful bill and all the wonderful things that it has brought. I don't know that I've heard much about this yet, so I am kind of excited.

Kaaren: Yeah. I mean, it's it's still on the foreground. You know, we we it's like distant thunder that we're hearing now. It's not right in our backyard yet. So but the big, beautiful bill, Trump passed it because, you know, Trump's a real estate investor, isn't he?

He is saying, let's put some alternative assets in four zero one ks's. Why can't four zero one ks's invest in alternatives? And by not just four zero one ks's, but I mean, technically, like a four fifty seven, four zero three b, these different kinds of plans that are employer plans. And so what I'm hearing today I sit on the board of directors for our industry. It's a group called RITA, the Retirement Industry Trust Association.

Okay? So we have lobbyists out on the street and on hill, and they're talking to the lawmakers. So they tell us what's going on. So basically, the thing about the big beautiful bill isn't that when you have a four zero one k, you're going to be able to use it like a self directed IRA. You're not going to be able to take your four zero one k with your employer and go buy a house.

It's not like that. But it would it would be different. It would be just like these accounts can invest right now in, mutual funds. With the four zero one k, what they're looking at, the big beautiful bill, is having these investors invest the way they're calling it a sleeve of assets. That's the term, a sleeve of assets, which is just like a mutual fund.

So it's a whole bunch of alternatives wrapped up into a package and you're investing in the whole, this whole package of assets. So you're a syndicator. Maybe you get one of these you know, institutional custodians to take on your asset and put it into one of these sleeves of assets. That that could be beneficial. But here's the thing.

So say you work like you're at Home Depot and you work at Home Depot and you may not be an accredited investor. Right? So if I want to invest in your syndication, I have to be an accredited investor. So how can my four zero one ks invest in alternative assets if I have to be accredited? So to get past that hurdle, they're saying that in this case, the institutional custodian is going to act as that accredited investor.

And so you'll be able to invest in the assets through them.

AJ: That's a big hurdle that can be removed and a lot of compliance. You know, we do 506B syndication, so, you know, we can take on non accredited investors, but for those guys doing 506C, you know, being able to just, you know, say, hey, get hooked up with this custodian and then you'll be able to invest, you know, like that's that's a lot of red tape.

Kaaren: Well, and the way it stands now, if you've got if you've got a four zero one ks, by the way, this thing hasn't come out yet. So all this isn't in cement yet. But so we'll see how it actually rolls because, you know, they have all these ideas. They mull them around and then they release something. But if you have a four zero one ks where you work now, when you leave that employer, then you can put it in a self directed IRA, then you can self direct.

So two different things with your employer outside the employer.

AJ: Oh, I mean, it kind of sounds like it's like a mini REIT of some sorts where you may have one syndicator that's got multiple different syndications or it's a fund that's got a portfolio of properties or it's, like, a bunch of different syndicators. And it's it's kind of interesting. Would there just be shares of that particular, like, quote unquote fund?

Kaaren: Right. Just like a mutual fund. That's what how they're looking to design it today.

AJ: Yeah. That's that is very interesting.

Kaaren: So we'll see. Yeah.

AJ: Well, super cool. Well, the the other thing that I did wanna talk about on here, which we kind of started talking about was the IRA to Roth conversion. This is something that's piqued my interest lately. It's just, you know, when it first was described to me, was like, wow. That could be an incredible savings.

So, I know enough to be dangerous, but not enough to feel good about describing it. So, Karin, can you kind of walk us through, like, what that process is and what what it accomplishes?

Kaaren: I mean, in the bottom line, it's a simple process, and it's not a lot of brain damage. But if you have pretax funds like a traditional IRA or maybe a SEP IRA or something, or you have an old four zero one k, you roll it over and they're pretax dollars, you want you want to turn that into Roth. What you have to do is, one, open a Roth account. So there's a place to put that those dollars. But also, you're going to get a valuation on the asset.

So if it's cash, we know the value. It doesn't have to be evaluated. If it's a noncash asset like a syndication, it to be valued. So what you do is you basically talk to your custodian. Hey, I have this, asset in my account.

It's like maybe a syndication. And I want to convert that to Roth. And they'll say, great. Well, give us a valuation. And so they say the valuator says that your $100,000 syndication is only worth 50.

It could be anything. We don't know. But in this case, we say now it's worth 50. So you would convert $50,000 of value from the traditional to the Roth, whatever the valuator says the value is at. And then what you would do is receive a $10.99 for that tax year at the amount of the value of the asset that was converted.

So it takes a value. It takes a valuation. You open a Roth account, takes a valuation, and you'll get a ten ninety nine, it'll be taxed.

AJ: So if somebody has a four zero one ks and then they leave that company, then they can the four, they can roll the four zero one ks to an IRA, but that'll be a traditional IRA. And then they can self direct those funds, place them into syndications, and convert it to a Roth with the hopes that the valuator values those syndications at less than what the

Kaaren: Yeah, you never know how you're rolling the dice on where the valuation is going to come in. And one thing that's really important, too, is there is a lot of we call Roth fraud of people undervaluing assets in a conversion. So I don't think the IRS has a lot of people doing audits these days, but that would be that would be a low hanging fruit for an auditor is to is to take a look at a Roth conversion and see if it was if if a if a asset was, like, undervalued significantly. So you just want to make sure if it's if it's a lot you mean. But that's why you get evaluation.

You get a third party to say, I've I looked at this asset. This is what it's worth. So it's a third party evaluator giving you that value. It's not a stated value.

AJ: Yeah. And the reason that the appraiser will give you less of a value is because once you've invested in the syndication, it's there's a length of term that that's gonna run. So there's the market has a lack of liquidity. Like, you can't just ask for your money back the next day. Like, if you invest in the stock market, you can get your money back within a couple days or something like that.

It's very liquid. And then there's a lack of marketability. Like, if you do wanna sell it, not only does it have to be, like, usually approved by the the general partnership, but then it also you have to find someone else that's interested in buying it and there's, you know, there's not a lot of, accredited investors that are out there looking to buy other people's syndications too.

AJ: That's either

Kaaren: Right now?

AJ: That's even if it's allowed by the syndication. True. The operator can say, Sorry, vetted you. We're not going to vet the person that you want to sell to.

AJ: Yeah, there's there's definite basis for having it be worth less until it performs. And so, you know, even though, like, in your scenario where you you purchase a $100,000 worth of shares, all of those shares move over into the Roth, but at a value that's less. So instead of paying a $100,000 in not not paying a 100,000, but having a $100,000 of taxes due, it's like $50,000 of revenue for taxes due, which, I mean, to me, seems like, you know, at that 100 k mark is probably $15.15 to $20,000 savings from moving it. And I think one of the other detriments too is that you have to have that extra cash in your personal account to pay those taxes. You can't remove that money from the syndication or from your traditional IRA to pay those extra taxes.

Like, that's gonna be an extra burden that you're gonna have to wear going forward in that year.

Kaaren: That's right. Yeah, exactly right. We see a lot of people doing Roth conversions though, year end, boy, we're just, you know, up to here with with Roth conversions, people trying to get it before year end for the tax year. And and but Roth dollars, I mean, that's the brass ring, isn't it? Having assets ultimately growing tax free for life.

That's pretty cool. So once you have a Roth IRA and you've had a Roth IRA for at least five years and as long as you reach like, so you've had a Roth for five years, you're 59 or older, then you can you can take those, you know, you can take that money out, those proceeds out tax free. So it's it's just huge, huge retirement boost.

AJ: Well, my understanding too with the Roth is that you you can actually take out the funds that you put in as that are already tax dollars. So, like, you know, if you move that 50 k over and then you have, say, a 150 k gain on it, you can pull that 50 back out into your personal account tax free from the Roth and leave just the gains in there. Like, somebody described it to me as it's like eating cake. It's like you you take out first your what you put in that's already taxed and then it's like the gains and then the gains upon the gains or something like that.

Kaaren: Well, yeah. So so so kind of break that down. It's it's the contributions you've already paid tax on. When you contribute to a Roth, It's after tax dollars. So you already paid the tax.

So it's so so those contributions can be pulled out tax free. You already it's not really tax free because you already paid tax on it. So that is something that you can do. But it's your contributions that come out that way.

AJ: I always thought that was kind of interesting, especially that, like couple that with the traditional to Roth conversion is like, that's a way to free. If you have, you know, a significant amount in that, you know, pretax dollar account, then that's a way to get access to some cash at a lesser value and then leave the proceeds in that Roth to, like, grow.

Kaaren: Not really. Yeah, not really. I mean, let's think about it. Did you already pay tax? It's not the if converted assets, they're not contributions.

It's just an asset. Does that make sense? Because you paid tax on the contribution.

AJ: So on the $50,000 valuation. So when that goes and sells, the syndication sells, say it makes 200 k after five years. So then you can take out that 50 k that sold because you paid taxes on it already.

AJ: It's only appraised amount that converted, you know.

Kaaren: I see I see where your train of logic is going.

AJ: That was my understanding.

Kaaren: This is where I have to say talk to a tax person.

AJ: All right, let's change subjects slightly. All right, so, you know, what about someone who, you know, let's say that they have a couple of young children and they want to start planning for their kids. What do you believe the best way to, I guess, you know, because AJ and I, we don't have this huge IRA or four zero one ks because we've been self employed our whole lives to direct. Whereas, I'd like to set that up for my kids, and I'm sure that other people would like to set that up for their children too. And so do you have a roadmap or a plan that might help someone doing a little planning for their kids?

Kaaren: Yeah, I did this with my kids. So what they would do I mean, when I opened UDirect, they're in middle school. And so what I had them help me with marketing, I would send out marketing postcards. They would be my marketing assistants, and they'd be stamping and labeling the postcards. So I could pay them to do that, say, like $5,000 a year to do this service for the company, this marketing service.

And so in order to contribute, you can only contribute from earned income. And so that was their earned income. And so that amount equaled a Roth contribution in their case. And so that's how we did it with the kids. It has to be like a bona fide job for the kids.

I know that there's one thing that people like to say, a modeling fee. And so that's also something you want to talk about with your tax adviser if that's really going to work. I've heard both sides of that argument. But in this case, the kids were doing real marketing. And they got paid.

And they took you know, their paycheck and they put it all in their Roth IRA. And now they're older and they they're, you know, they have jobs and they're adults. And, and so now they've got big Roths, which is really cool. So it's nice to kind of get them started with some assets, you know, as they head out into the world.

AJ: Oh, yeah.

Kaaren: Figured that out early.

AJ: There's a there's a max contribution to the Roth per year. Right?

Kaaren: Yeah.

AJ: And so Isn't that

AJ: gonna be increased?

Kaaren: It did. Every year. Yeah. Yeah. Every every year, it gets increased.

And so it just got, you know, just got increased from from seven let me find it right here because I wanna put I wanna put in a link in the chat so you can share it with all the listeners so they can see the contributions for really all these different kinds of assets. But so here we go. Here it is. In fact, let me just share my screen. I think that that would also work because we can just look at this whole table that I have created.

And so I just need to be able to share that share my screen if it's Okay. There we go. So here it is. So this is

AJ: This is Karen's website, udirectiri.com. Then I think there's a contribute to account page.

Kaaren: So you see how over the years, back in 2008, 5,000 was the cap that you could contribute as long as you had that much earned income. But something interesting happened this year, 2026, is that for people who are 50 and above, there's always been what we call a catch up contribution so that when you're a little older, maybe haven't saved so much, you can contribute a little bit more to help your retirement. Always been $1,000 and it just changed to $1,100 So if you're 50, you can contribute 7,500. But if you're 50, it's not, you know, it's $808,600 is the amount, including that $1,100, what we call catch up contribution.

AJ: Karin, with our previous example, is there any limit to the amount of conversion you can do from a traditional to an IRA? So that's unlimited.

Kaaren: So some things in IRAs are unlimited, like conversion. What's also unlimited is how many assets an IRA can hold. One IRA can hold an unlimited number of assets. There's also no limit to how much an asset in an IRA can grow. I mean, you'd ask Peter Thiel, right?

He had this multimillion dollar IRA. So there's no limit to those things. But what there is a limit on is how much you can contribute. There's a cap on that. But you can open an unlimited number of accounts too.

You could have 50 traditional IRAs, but your contribution limit is, for example, one $7,500 contribution spread over every IRA that you own. So I don't know if you'd want to own 50 IRAs, but you could because there's no limit on how many accounts you can have.

AJ: So what are some other opportunities to getting funds to self directed?

Kaaren: Right, I think really to get the money in the account, it's making a personal contribution based upon your account type and your age and your income.

AJ: Well, there's IRAs that so that's

AJ: what The we're talking

Kaaren: account types.

AJ: And there's different account types and different limits that can be contributed, you know, and if you're planning on, you know, if you have an old four zero one ks, that can be rolled over. If you have, you know, if you're self employed, there's other options.

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Kaaren: There are. So let's look at so here's here's the Roth and not just kinda I'll just throw that out there because if you make so if you're married filing jointly and you make more than about around 242,000, that is you won't be able to contribute to a Roth at all. So you could make too much money to even contribute to a Roth. Now there's the four zero one ks, which we have at work. And this is the employee contribution portion.

Just to say that this year, if you're under 50, it's $24,500 But if you're 50 plus, it's $32,500 Okay? So now there's the SEP IRA. Now the SEP IRA is a really great employer plan. It's a kind of an employer plan you can have yourself employed. It's incredibly inexpensive as opposed to having a full blown four zero one ks for your employees.

You could contribute for your own up to a max of 72,000. So it's a lesser of 25% of your income up to a cap of $72,000 a year. And you can also have separate IRAs for all your employees. And then as an employer, you would make contributions to their accounts based on the percentage of their income on the same kind of scale. But there's a simple IRA, which is we hardly have any of these anymore because the SEP just blew it out of the water.

I can't believe it still exists because we barely have any. It's a very unpopular account because the contribution limits aren't as high. It doesn't have as many bells and whistles, but it exists. Describe

AJ: a little bit more about the SEP? That's not something I've That's I've definitely heard of it, but I'm not super familiar with that vehicle. Can you describe a little bit more how it works?

Kaaren: Yeah, I'd love to. It's an acronym, obviously, like everything in the government. So it's a simplified employee pension. And so it's kind of like how an expedition is built on the chassis of a Ford F-one 150. Am I right?

So that's what I know about cars. It just said everything I know about cars right there. But the SEP IRA is built on the traditional IRA chassis, so to speak. So it's got the same platform but with more bells and whistles. And the bells and whistles mean that a pretax SEP IRA acts just like a traditional IRA in every way except with higher contributions.

And you also have the benefit of having this as an employer plan and offering it to your employees.

AJ: Is there any is there any hoops you have to jump through in order to like get the money in there or qualify for it? Or is it just it literally just like replace the simple IRA and there's no reason not to have it.

Kaaren: I would totally have. There's also there's also a solo four zero one k, which is a it's not this is this describes the employee portion of a solo four zero one k. That's another employer plan. But with the SEP IRA, no, you just you simply open the account and you you always work in tandem with your tax adviser because it's a circular calculation how they're going to figure out the taxes. So what they're going to do is say, Okay, how much do you make?

How much can you contribute to a SEP? They're going to determine that. And as they're filing your taxes, plug in that deduction and make sure that that's and make sure that you get the maximum benefit of a CEP contribution if you're trying to max out a CEP contribution. But there's there's the cap 72,000.

AJ: When you couldn't set up SEP and $4.00 1 ks, it's kind of one or the other, right?

Kaaren: It has a control group. You can have a solo K at the same time.

AJ: Yeah.

Kaaren: Now, there's an HSA too that you can self direct. So let's talk about that. It's a health savings plan, a health savings account. And it's pretty cool that it's self directable. And it is a health savings plan that you would have where you work.

So if you have what we call HDHP, high deductible health plan at work, You've got a like an account within that high deductible health plan, a savings account, and you can you can invest those dollars. And it's super cool because the money goes in pretax. So you don't pay tax on the money that goes in. The money that's in there as it's growing and it's being invested in Z investment is growing in value. That value, that increase in value is not being taxed.

And as long as you use those proceeds, those funds for a certain list of medical expenses that are preapproved, the money comes out tax free, too. And as you see, the amount you can put in per year is pretty small, but it really ticks all the boxes on tax savings.

AJ: When it comes to all of these accounts, I mean, are you able to let's say you've got you want an HSA and a traditional IRA, can you have both of those accounts? I guess I'm just wondering, I can contribute $7,500 to an IRA and my family, I can do $8,700 for an HSA. Can we then take that $17,000 and invest in a syndication?

Kaaren: Yes.

AJ: But it would be two different accounts, two separate checks?

Kaaren: Yes. But as long as you invest concurrently, you can do that.

AJ: Okay. That's interesting. Yeah. So there is a solo four zero one ks. I believe that SEF IRA is only for self employed income.

Is that correct?

Kaaren: It's Okay. There is always a company that's going to sponsor the plan. Let's start there. So to create a plan, foundation is somebody who's self employed. Okay?

But that self employed person can have employees. And so those employees don't have they participate in the SEP that the business owner created. Okay? So again, the foundation is a business owner with a business. Now, what the employee actually does and it's interesting is they create actually a traditional account.

Or they could actually here's another thing. This changed where now you can actually put Roth dollars into SEP. Okay, that'll blow your mind. I can go there. Separate topic.

But so your employee, you've you're the employee that you've created the SEP, the foundation, and you'll you're going to be making contributions to your employees accounts. Those can be regular traditional or Roth accounts.

AJ: Interesting. And so there's just so much nuance to

Kaaren: And

AJ: then it's like, okay, Like, from a real estate perspective, like, if your main income is, and your main job is being a real estate professional, like the amount of income is pretty well, like, reduced by the amount of depreciation that you get. And so, yeah, it's tough. I haven't spent that much time in it because there's just so many tax benefits from real estate that, you know, and AJ and I, we're not at the point in our careers where we are, like, where we've stopped buying assets to get depreciation. And so but once we do stop getting assets, then then this stuff starts getting really important.

AJ: We've always said if we stop buying, then we're gonna have to start paying taxes.

Kaaren: Just right.

AJ: Or figuring out these complicated vehicles.

Kaaren: Well, you know, mean, make such a good point because real estate is just like the best thing in the world for tax breaks, isn't it? Personally. But the thing of it is you've got personal money, you've got retirement money, and you want to invest both sets of dollars, the tax protected dollars and your personal dollars. And so I'm a real estate investor, and I invest both ways too. But it depends upon you look at the deal and you look at the numbers.

So does it make more sense to buy real estate with your personal not retirement dollars? Yeah, a lot of times it really does for what you said, you know, depreciation and so many different things. But when you but when you consider that you've got this pile, this this, of of of retirement dollars, how are you going to also invest those? And and what are you going to do? So is buying brick and mortar real estate, the actual building, the make does that make the most sense for those dollars?

Or is there a different asset class that makes more sense for you with your retirement that are tax protected where you don't get depreciation, you know, where you don't get to take advantage of those things? So, again, the the overarching thing here that we keep getting back to is how important it is to have a good CPA because what you would like anything, you guys wouldn't do a single thing if you didn't have a plan. Am I right? I mean, you start with a plan. So so you build the plan with your CPA.

I have these dollars. This is what I want to do. How do I max out what I have? So the self directed IRA lets you invest in alternative assets. It's a vehicle to let you do that.

What's best for you is a conversation between you and your and your advisers. Makes sense? Yeah. But it's cool. You don't have to just rely on the stock market.

And one of the things, too, that our account holders invest in is they by the way, syndications for our entire industry is the number one asset class. Like, the board, every self directed IRA company, syndications are the number one asset that our account holders invest in. But you can also now invest in other things. Well, now there's crypto, and that's going nuts. And, precious metals are through the roof, aren't they?

Maybe, you know, maybe you want to buy low and sell high. It's at an all time historical high right now. But you can invest in precious metals with a self directed IRA. And then in the middle of that, you can still talk about real estate and then you're thinking about, well, with my if I invest in real estate with my personal dollars, I get more tax benefits. But what about this with a self directed IRA?

Like my self directed IRA makes a loan to you guys so you can buy a property. And then you pay my IRA. You pay the loan back to my IRA. If I made a loan to you, I wouldn't get a tax break personally. But my IRA can loan you money.

You can pay my IRA back. And that's how that works. And those dollars come back to me in my IRA tax free in a Roth or tax deferred. So it's so real estate is still involved in that scenario without losing depreciation, that depreciation benefit, right?

AJ: I mean, from the debt side, even hard money loans, investing in a hard money loan syndication or a debt fund.

Kaaren: Yeah.

AJ: Those debt funds don't provide the same depreciation that a traditional asset would, and so that's very interesting.

Kaaren: So put your retirement dollars in there. You're not going to get depreciation anyway. And maybe put your retirement dollars there, if that makes sense for you.

AJ: Rand, one thing I do got to bring up or ask about is forget the acronym, but it's unrelated business taxes. The is the units or something?

Kaaren: UBIT and UDFI. Sure.

AJ: You know, I waited till the end. So if anyone's listening now, but this is give me I I never quite understood these. Can you give us a understanding of what they are?

Kaaren: Sure. I wanna put something in the chat. So irs.gov is is the IRS's website. Okay? And if you want to talk about UBIT and UDFI, this is where you find it, irs.gov publication five ninety eight.

So there's the rule book. Okay? So if you want to dig in deep later, that's where you find it. What these taxes are, unrelated business income tax is sort of an umbrella term. Basically, the taxes are the same amount.

But if your IRA, say, buys a house and borrows money to buy that house, the proceeds that the IRA earns because of leverage are subject to that UDFI tax. So I'll explain. Just to use some easy numbers, you find a house, it's $100,000 which we know you can't buy a tool shed at the Home Depot for that, right? But let's say you did. Dollars 100,000 for a house.

Your IRA has $70 in it. You borrow $30, and your IRA acquires this $100,000 property. And now you get a rent check. It's $1,000 Now, of that $1,000 of proceeds you just got from your IRA owned asset, 30% of those proceeds were earned because of debt. And so it's that 30% that was earned because of debt that's subject to that UDFI tax.

And that's how that works. And the tax, I mean, it's not small. Again, you want your tax person in on this, right? It could be somewhere between 1737%. It's based on the trust rate.

And that varies from time to time.

AJ: Interesting. Yeah. And so, you know, that's another reason that,

AJ: you know, IRAs do do very well at the debt is because when they're they're placed as debt, it's not, there's none of this like leverage or anything else. Like they are the leverage and that higher interest rate. You know, acts more like rent as opposed to like appreciation.

Kaaren: Yeah. You know, like like you and I, when we invest in real estate personally, I mean, debt is our friend, You know, we we it's great. But when we invest with our IRA, it it's it's going to lead to this tax when we make money. You know, we sold the property and made a profit. We'd be taxed UDFI, and the UDFI sticks around a year and a day after the property sells, you know, any proceeds that come in after that.

Or after the debts paid off, I mean to say. So so there you go. It's something to consider. It's it can be a deterrent to actually. I don't know.

I don't know. People will do that to to get the asset and to acquire the asset because they have some other play in mind, like a long term hold. And then UBIT, unrelated business income tax. That is if an IRA invests in an active business, then the unrelated business income tax comes in. So say, for example, you in well, I'll tell you like where it started, where they came up with this.

It's like the Catholic church where so many things start. Say the Catholic church has a bakery. And then Joe's got a bakery. And so the Catholic church, they're tax exempt. Like an IRA is tax exempt.

So they can sell their donuts for less because they're not paying tax. But Joe, he's got to pay tax, so he has to charge more for his donuts. That's not really fair. So it's a tax. I don't know if the church actually faces this tax, it's a bump up for these guys over here so that the price so now it's even competition with Joe.

You see That kind of a thing. So that's how it was explained to me in my initial and my early self directed. So

AJ: I think that when it comes to syndications, UBIT is the thing. I actually haven't heard of the UDFI, and I wasn't aware. Does the UDFI tax come into play on a syndication when it's a highly leveraged asset?

Kaaren: Yes. Yes, it does. So if you've got a syndication and part of the capital stack is leverage, that will and you've got an equity investor, an IRA equity investor in your deal, that IRA equity investor is going to get the pass through experience of a UDFI tax based on how much they earned. And so that's usually reported on the K-one.

AJ: Interesting. So, but that, it only really happens on the sale, correct? Or is that something that is supposed to be calculated every

Kaaren: It would be calculated every year.

AJ: Oh, Chris, it's like the information's on the K-one, but the personal tax accountant custodian has to apply it, right?

Kaaren: Apply it? I mean,

AJ: I mean, the tax situation different and, like, every, you know, account is different. Like, we provide k ones and give information to the owners. They go do their own taxes with it. So everyone's responsible for reporting those.

Kaaren: Yeah. And I should say, like, today, we've had this, like, this great conversation and a lot of it is is really out of my wheelhouse. And I I know I can tell you what I know, but when it comes to tax advice, you have to talk to a tax like you talk to a CPA. And my CPA is Amanda Han from Keystone CPA. She's brilliant.

She she knows all these things. So so don't start without talking to an actual actual tax professional when you're creating your overall your overarching investing plan. But yes, UDFI tax can pass through to an equity investor in a syndication.

AJ: Do you think Amanda would be able to handle a complex ten thirty one for our CPA just threw up his hands. We did a ten thirty one and he basically said, Oh no, I can't handle this.

Kaaren: Really?

AJ: Yeah. He's like, because we sold the syndication, half the people wanted to stay in and half wanted to leave. And so we had to chop up the entity.

AJ: We did we did a drop drop every investor out. They wanted their money and then we swapped over everyone.

Kaaren: Well, I I put Amanda's email in the chat. So ask her. I mean, she's she's been doing this a long time.

AJ: So we're getting to the end here. So I think it's a good stopping point to start our four questions. And I'm going to start you off with the first one, which is what's one piece of advice you would give to your 25 year old self?

Kaaren: Well, first, don't worry so much. You know, it all works out. You know, that that's the first thing. But I think that I mean, far as investing, I mean, it's it's it's start now and don't spend your savings, you know, really, really truly save them because just to the power or what Einstein say, you know, like one of the great wonders of the world is compound interest. And and you you you'd be surprised that you went to start saving at a young age.

You do such a benefit for yourself by letting that money just sit there and grow for you. So I would just have started investing sooner. And you don't have to be a big investor. Just keep, keep, you know, keep putting the money in. That's what I would have told myself.

AJ: Build the system. Yeah. Yeah. Okay. Next question.

What was your first entrepreneurial endeavor?

Kaaren: I started a company when I was in the mortgage industry called Carin for Mortgage, and I was a I like an independent mortgage broker and going out and making deals. And this is just before the crash. So it wasn't a long lived business because then nobody was making loans for a while. It was pretty self directed IRAs, but that was my first step into it. And I I didn't understand.

And the CPA that set up he set up a c corp for me. Like, why a C Corp that that that's wrong? And so many I didn't even know. But now I know what I what I didn't know then. I didn't last very long because of the market, but now.

Well, in 2009, I opened you direct IRA services, and that's been nothing but a learning experience.

AJ: Yeah, another start early. Make your mistakes early when it doesn't matter as much.

AJ: Doesn't cost as much either.

AJ: Inflation, yeah, for sure.

AJ: Well, yeah, that and yeah. All right. Next question. How has your formal and informal training shaped your journey?

Kaaren: I think my formal training in college, I was a radio TV and film major. All right. So that helped me as a broadcaster, but it didn't help me build my personal wealth. So it's everything that I learned after that, getting all the classes I took, getting real estate license, all the classes that I took in the self directed IRA space, getting some certifications. I got a couple of certifications.

There's something called the CISP, Certified IRA Services Professional from the American Bankers Association. And also, I've had a life and health license. So learning about finance through just the licensing process. But I think the the highest level of education I got probably was being a mortgage lender and working in in a mortgage loan originator and working with people who are getting loans and looking at their tax returns. Like, how are these people?

How are they building wealth? Like, what's in their portfolio? And you could see everything. And that was a real eye opening experience. Everybody on real estate.

I mean, that's how they were doing it. Wow.

AJ: Okay. And our final question, what was your biggest mistake and what did you learn?

Kaaren: Biggest, I, you know, I don't really focus my biggest mistake. I don't know. I don't I don't know at the, you know, at the top of my head, I just. I could talk about successes, you know, but I can't think of my. I don't know.

I don't know.

AJ: What about just, you know, one of your biggest learnings, like maybe a turning point for you?

Kaaren: Okay, a turning point or something like where I faced an adversity was, that was difficult was when, we had a bad actor invest who used self directed IRAs, some through UDRIC, some through other custodians, to invest in his deal. And that deal went belly up. And so the thing of it is is I knew these people. And everybody, you know, in this market where I am in Southern California, we all knew these people. And so we had 17 account holders.

And so they came to me once this whole thing blew up and said, hey, Karna, what do we do? You know, These people, they stole our money. So I maybe this is a mistake. So I I go I I had a RIDA conference in DC, and the head of enforcement for FINRA, this woman, that's her job. And FINRA is the enforcement arm for the Securities and Exchange Commission.

So her job is head of enforcement. And I say, hey, look, we've got this bad actor. How do these people report it? And she said, well, they file a complaint with the California Department of Business Oversight. So I tell all these people, hey, file a grievance with the California Department of Business Oversight.

So they did, And they filed that on everybody, including me. So and I, you know, I didn't do anything. Thanks. You know, so. Yeah, that's probably a mistake.

So but at the same time. But it was also great because if anybody had any questions about our ethical behavior at UDirect, it was completely we were completely exonerated because it started off with a with an investigation. And so we had approved to the Department of Business Oversight, you know, that we were not acting as a broker dealer or affecting transactions because, see, we don't sell assets. We're not financial advisers. We're not giving financial advice.

And we're not selling assets. So we're not telling you like, giving you financial advice like, hey. You should do you should invest in this thing. So we're exonerated. We don't do that.

They've proven great. And so that got wrapped up in a much neater bow than I expected. So then the next thing, as I go home and I get my mail and I oh, I'm being audited. You know, the business is being audited. All right.

So I haven't been through this before. So let's do this. Then I'm personally audited as well. But, you know, no problem. Clean books, Amanda helped me write through my audit.

And and the auditor told Amanda tell her she's getting an A plus on her audit. So that was cool. So was very stressful. It was ten years ago, very stressful. Like, how is it going to turn out?

I have no idea what they're thinking or but I just gave them what I had, all the books, and they said, you're fine.

AJ: I remember when our dad got audited.

Kaaren: Oh, man.

AJ: He lost some hair on

AJ: that one.

Kaaren: Oh, it's crazy, man. So then all that's over and everything's cool. Then the next thing is I'm at that time we were in an executive suite and the receptionist at the at the 1st Floor calls me and says, hey, Karen, the FBI is here and they have a subpoena for you. So they think This sounds

AJ: like a really good week.

Kaaren: Yeah. Right. So they think I'm going to get be arrested. It's like, no, it was a subpoena for records because they're trying to take down this very same bad actor and they needed proof. So it was just a subpoena for records.

But then I made friends with the FBI guy. We're still friends to ten years later. We're still friends today. And I always I hit him up every time we need a speaker for

AJ: our industry conferences. Oh, some good stories.

Kaaren: Yeah. So that is that is the biggest I you know, I mean, by by talking to that woman who's the head of enforcement for FINRA and telling her about this, it really put me through a world of stress. But it also, made it very clear and apparent to all these investors who thought I was in cahoots, you know, that no, I wasn't. And of course, I wasn't and completely, you know, cleared the air there. Turned out to be awesome.

AJ: And you were just trying to help them go after this guy.

Kaaren: Yeah. Oh, by the way, which we did and they landed in jail. Okay, they both served jail time.

AJ: Oh, wow.

AJ: Lauren, thank you so much for coming on. If our audience wants to get ahold of you or learn more about self directed IRAs, what's the best way for them to get in contact with you?

Kaaren: Well, here might you see my logo. So it's youdirectira.com. And that's the best way because that's I mean, obviously, the website just has everything. We have so many blog articles to go you know, where we've researched and gone deep on the kinds of questions that you're asking me today. There's so many different questions with self directed IRAs.

You'd be surprised on how many things come up. And also, like, what's new? And so you're gonna see that on our blog and everything like, our fees are super low and how we work and everything you need to know about you direct IRAs on our website.

AJ: Well, very much enjoyed the conversation. Thanks for being on the show.

Kaaren: Yeah. Thanks. It was a little Volleyball. I really it was fun.

AJ: Thank you. Thank you.

Intro speaker: Thank you for listening to this episode of the Real Estate Professionals Investing Podcast on WIN, your community of investing knowledge for growth. We hope that this episode has increased your knowledge and added value to your path to freedom. If you would, please take a second to rate us so that we can get more great investors to interview. If you or someone that you know wants to be on, please visit westsideinvestors.com and fill out our form to be on the show.

AJ: Thank you again, and enjoy your day.