ABANDON Your Self-Directed IRA Right Now! | Episode 140 - a podcast by Bryan Ellis - SelfDirected.org

Self Directed IRA’s are powerful.  Self-directed IRA’s are flexible.  Self-Directed IRA’s can help to make you very, very rich.  And today, I’ll give you the sobering reason to consider abandoning your self-directed IRA, and to never, ever use it again.  I’m Bryan Ellis.  I’ll give you the reasons, and the solution, RIGHT NOW in episode #140.

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Hello, SDI Nation!  Welcome to the podcast of record for savvy self-directed investors like you.

My friends… I’m going to do it again today… I’ll bang the drum on the risk of prohibited transactions, and why those of you who are doing real estate transactions – or investing in nearly any non-exchange-traded assets – are taking a huge, unnecessary risk by sticking blindly to the use of your self-directed IRA.

But first… HOLY COW, people!  Clearly, a whole lot of you are interested in owning some cash-flowing rentals!  Registrations for this week’s webinar about that topic have absolutely blown up.  Here’s the deal:  I’ve found one of those gold-mind types of opportunities.  A very successful real estate investor owns a portfolio of over 50 properties, but he’s in a serious legal dispute with his business partner, and their mediation requires them to liquidate these properties quickly.  That’s created a huge, wonderful opportunity because, folks… these are some incredibly solid cash-flowing deals.  I’m talking about properties that can be bought in the mid-$50,000 range that are collecting rents of $750-$800… and for reasons I’ll explain to you on the webinar this week, tenants tend to stay in these properties for 3-5 years and never, ever miss payments.  It’s a beautiful situation.  Anyway, bottom line is that even after expenses and reserves, most of the 19 or so properties I picked out of that portfolio are still yielding 12% cash-on-cash… and sometimes, quite a bit more.  Several of those properties are ALREADY gone, as some other smart investors like you have already jumped on it, so we’re down to somewhere around 13 remaining as of now.  Bottom line:  You’ll need to act quickly if highly cash-flowing property, fully managed, with very long-term, low-maintenance tenancies is something that appeals to you.  The webinar where I’ll tell all of you about it as a group is THIS week, and you can get the FREE registration link by texting the word TOPPICKS to 33444 right now.  I’ll give that to you again in just a minute, but also if you’re an existing client of mine and you’d like to chat with me personally about this BEFORE the webinar, you know I’m happy to talk with you, as existing clients get first shot at everything.  If that’s you, just go to SDIRadio.com/consultation and set up an appointment time, and I’ll be glad to talk with you.  And if you’re not an existing client, please be sure to join me on the webinar… register by texting the word TOPPICKS – spelled toppicks with no spaces – to 33444.  Text TOPPICKS to 33444.

So, my friends, the importance of prohibited transactions can’t be overstated, and since most IRA custodians won’t do you the good service of making it clear to you just how risky it is to use a Self-Directed IRA to buy any non-exchange-traded assets, clearly that responsibility falls to me, and I gladly bear it for you, my dear listeners.

Very quickly… a prohibited transaction is when you break a certain set of rules that the IRS has put in place that limits, to a small degree, what you can do with your account, and with whom you can do such things.  Bottom line:  If you break any one of those rules when using your IRA, your account is BLOWN UP, and the financial ramifications will be truly, deeply severe.  Ever seen those pictures of Nagasaki, Japan, when the atom bomb was dropped on it, forming a huge mushroom cloud?  It’s the financial equivalent of that… it’s a disaster if you commit one of these things within a self-directed IRA.  It’s entirely plausible to lose 50% or more… up to the whole thing… due to taxes, penalties and interest.  It’s an absolute disaster… and there’s simply no easy way to get any grace from the IRS to fix your mistake.  With few exceptions, once you’ve screwed up and Uncle Sam finds out about it, then it’s as if your house is already on fire and you can no longer buy insurance.  You’re screwed.

Here’s an example.

There’s a pending bankruptcy case involving a person named Donald Rogers.  Rogers filed for bankruptcy, and given that he had a self-directed retirement account, the bankruptcy trustee – the person who is trying to take away Roger’s assets for the benefit of creditors – promptly inspected the account for a prohibited transaction because if Rogers had committed one of them, then his account would no longer have any protection from creditors.  That’s one of the downsides of committing a prohibited transaction… suddenly, your IRA can be taken by creditors.

And, as it turned out, Rogers really, really appears to have committed prohibited transactions.  Some really, really, really obvious ones.  Things like… he lived in property owned by his account… he bought a boat using the funds in the account, and used the boat himself… he did business with relatives, took loans, and basically did absolutely everything wrong that he possibly could have.  Looks like an open and shut case.  No question about it.

That’s why the Bankruptcy Trustee asked the judge to rule that Roger’s account had been involved in a prohibited transaction… it was obvious.  Slam dunk.

And folks… the ramifications are huge.  Rogers’ 401k is worth about $300,000, and frankly, he’s going to be ruined by this.  When you factor in his creditors along with the taxes, penalties and interest he’s going to owe as a result of this, his retirement account will end up being a huge liability rather than an asset.  It’s amazing… he could lose the whole thing, and then some.  We don’t know for sure yet, because the part of the case I’m telling you about was a request by the Trustee for summary judgment concerning prohibited transactions and not the conclusion of the full case.

Oh, but wait a minute.  There’s an important detail I got wrong in my description to you.  Hmmm….

It turns out that Rogers has a self-directed 401k, not a self-directed IRA.  And largely because of and related to that, the judge REFUSED the request of the trustee to grant summary judgment, which would have cleared the way for the trustee to take away Roger’s 401k.  But the judge didn’t do that… the Trustee just couldn’t yet show that the 401k was disqualified.

And here’s the rest of the story… this particular case is still pending, so we don’t know what will happen.  But if Roger’s attorney knows anything about this stuff – which is, frankly, doubtful – he’ll reach out to the Department of Labor – the government entity that regulates 401ks – and will take a few simple steps to adjust the plan and bring it back into full compliance.  It will likely cost very, very little to do that, and what will be the result?

At the end of the day, if Rogers’ attorney knows what he’s doing, Rogers will be able to keep his 401k… the bankruptcy trustee won’t get his hands on that money… it just won’t happen.  All for one simple reason:  The rules for 401k’s are FAR MORE forgiving than for IRA’s where prohibited transactions are concerned… the difference isn’t even close.

In this case… the difference is worth $300,000.  For Rogers, it’s worth literally everything he owns… because his 401k may well end up being the only thing he has left after bankruptcy.

And remember:  You don’t have to file bankruptcy for this to be relevant.  Just by committing a prohibited transaction in your IRA, you’ll be subject to the same taxes, penalties and interest… and the financial pain that can cause is absolutely, positively brutal.

And don’t kid yourself, my friends.  Don’t just tell yourself that you’re smarter and more careful than Rogers.  Honestly, it’s hard for me to imagine a circumstance in which a person does any substantive real estate investing through a self-directed retirement account WITHOUT committing a prohibited transaction.  It’s just very, very easy to do.

Want to get a self-directed 401k set up the RIGHT WAY?  I’ve got a great recommendation for you.  Go over to SDIRadio.com/best401k for my suggestion.

So the moral of the story?  My friends, if you qualify, you absolutely should use a self-directed 401k rather than a self-directed IRA.  There’s just no counter argument.  And if you don’t qualify to use a self-directed 401k, you should make some changes so that you DO qualify.

And THAT will be the topic of tomorrow’s show… Do YOU qualify for a self-directed 401k… and if not, HOW CAN you qualify?  It’s so important, my friends…. So important.  So be sure you’re subscribed to this show on iTunes or Stitcher so that you don’t miss it.  This is a huge, huge deal.

That’s all for now.  One final reminder – text TOPPICKS to 33444 for the registration link for this week’s webinar on acquiring high cash-flowing rental properties.

And remember:  Invest wisely today, and live well forever!

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