Investor Insights Blog|Part 2: Common Mistakes Investors Make with a Self-Directed IRA on the Rich Dad Radio Show
Self-Directed IRA Concepts
Part 2: Common Mistakes Investors Make with a Self-Directed IRA on the Rich Dad Radio Show
In part two, John Bowens, National Education Specialist, and Jeff Desich, Executive Vice Chair, respectively, of Equity Trust Company, talk with Robert and Kim Kiyosaki of the Rich Dad Radio Show about common mistakes investors make with self-directed accounts, what investors should watch out for regarding scams and sales pitches, the importance of financial education, and how to contact an IRA counselor at Equity Trust. (Missed Part One? Read it now.)
Robert: All our programs are archived at richdadradio.com. We archived them because we believe in repetition. When you listen to this program a second and third time, you’ll learn even more. If you have friends or family members, have them watch this show and they might learn something because these are very interesting times. I mean, Kim will testify to this.
Twenty-five years ago, we started the Rich Dad Company because we knew it was going to get strange, but we never thought it would get this strange. Our guests today are John Bowens, Retail Sales Manager and National Educator of Equity Trust, and Jeff Desich, who is Executive Vice Chair of Equity Trust. We’re talking about self-directed IRAs.
We’re an educational company. We don’t endorse. I’m going to ask the gentlemen from Equity Trust to give us the stupid mistakes that people make.
Self-Directed IRA Mistakes to Avoid
John: Yeah, I’ll jump in first. And then Jeff, you can follow up on some of your observations over the past 20-plus years. The first mistake that I see investors make is when they entrust a third party. Someone that they’re investing in. That could be through a private loan, it could be through an equity interest in that individual’s privately held company, because as we know with a self-directed IRA, you can invest in privately held companies.
You can do promissory notes, mortgage notes, trusts, and more. It’s an individual not doing their due diligence. And so, a custodian isn’t going to do that due diligence, it’s up to the investor to make decisions and make sure that they’re investing with a reputable party and the underlying asset that that loan or that investment is secured by is safe and sound and is an asset that they feel comfortable with. So that would be the first mistake.
Robert: Wait, let me ask this question: when a person has a self-directed IRA, they’re kind of acting like their own personal Warren Buffet. Is that what you’re saying?
John: That’s correct. You could also say that they become their own financial advisor. They’re not at the mercy of a third party. They’re making all the decisions, calling all the shots.
Robert: That’s a very good point.
Kim: It is a good point. Are you saying that some IRA companies give advice and do due diligence?
John: Yeah. There are your traditional brokerage houses, wire houses, and your advisory firms that are absolutely going to give advice with respect to where to invest with an IRA, 401(k), and other retirement plan funds. In most cases, they’re only going to recommend traditional stock market-based assets.
The reason why customers come to a directed custodian is because they acknowledge that the directed custodian isn’t going give them financial advice, and because they’re not giving them financial advice, it opens the opportunity for customers to be able to self-direct into all these non-stock market-based alternative investment opportunities.
Robert: Right. So, they play Warren Buffet.
John: That’s correct.
Robert: Okay. I’d like to keep things simple here at Rich Dad because I’m a simple guy.
John: Yep, absolutely. The second mistake that I see folks make is they attempt to make investments that are considered prohibited transactions.
For example, if I personally own a property, I can’t take my IRA money and buy that property. If I have a mortgage on my primary residence, I can’t use my IRA money to bail myself out of that mortgage. Those are examples of what are called prohibited transactions. You want to be using your IRA funds for their intended purposes. Like I always like to say, IRAs and retirement plans have very powerful tax advantages. I like to say compounding interest in the absence of taxation.
If you’re utilizing these self-directed IRAs properly, there’s a tremendous amount of benefit in the long term because of the compounding interest without taxation. But with that, you must make sure you select investments and are self-directing your retirement funds into assets that you’re not personally a part of. That’s the best way to think of it. You want your IRAs and your retirement plan investments to be totally separate from your non-IRA investments.
Being able to eliminate taxes from the equation or at least reduce them dramatically is a major catalyst to finding financial freedom.
Jeff Desich, Executive Vice Chair, Equity Trust Company
Robert: Thank you. Very good point. Anything else?
Kim: Jeff, anything you have in terms of mistakes that people make with IRAs?
Jeff: Sure. One of the mistakes that we see is when an investor is looking at making investments in a traditional IRA where you have the tax deferral, and you’ll pay tax later in life. If you have the opportunity to take advantage of the Roth, it’ll put you in that position where you won’t have taxes, assuming you make your qualified distributions going forward.
And, Robert, I know you talk a lot about inflation. We talk a lot about the government printing money all over the place and someone must pay it back at some point. I’m going to go out on a limb and assume that as we go forward, taxes are only going to go up and we’ll be in an environment where you’re overtaxed and it’s eating into your profits and into your savings; being able to eliminate taxes from the equation or at least reduce them dramatically is a major catalyst to finding financial freedom. That’s what we’re talking about here.
Robert: Okay. You’re getting into a promotion. Any idiot knows you don’t want to pay tax and inflation is a tax. What mistakes do people who have no idea, clueless in wonderland, wandering around the woods of financial planners and advice and YouTube and all that other stuff, make?
Kim: That’s a good point because if it’s self-directed, I’m assuming they must have some level of education and some degree of sophistication when it comes to what they’re investing in. Is that correct? I’m only assuming.
John: Yeah. Some other mistakes that we commonly see here, — some we can prevent and some we can’t– is there’s a retirement account vehicle known as a Solo 401(k). And think of it like a 401(k) that you would have for a company you work for, but it’s for you as a self-employed individual.
If you’re a self-employed individual, you can take advantage of higher contribution limits to a retirement plan that go beyond just an IRA contribution, limit, more…
Robert: More tax reduction.
John: That’s correct. The challenge with that is not everybody qualifies for a self-directed Solo 401(k), and the IRS guidance is very specific that if you don’t have active earned income, you can’t contribute. You can’t even have a self-directed Solo 401(k).
A lot of investors that are looking at self-directed IRAs and 401(k)s will mistakenly open a self-directed Solo 401(k) when they don’t qualify. I’m seeing that more now than I ever have.
Robert: Yeah. That’s a good point. So why would somebody go there? Oh, I got a self-directed Solo 401(k). What’s the temptation?
John: I’ve found that a lot of investors will attend different seminars and conferences, and there might be a company there that’s promoting a self-directed Solo 401(k), and that’s the only type of account that they can offer. Investors kind of get sucked into a sales pitch that is a little bit misleading, but the issue is they will have retirement money, like an IRA or 401(k), and they’ll think, “oh, I can just move this over to a self-directed Solo 401(k) so that I can have check writing authority,” going back to that checkbook conversation that Tom mentioned before.
I think that was an important point for him to bring up. There are also people who will look at the self-directed Solo 401(k) as a good vehicle to go out and buy debt, leverage real estate, which Tom also alluded to earlier. The difference between owning real estate with debt and owning real estate without debt in a retirement plan.
There are some bells and whistles, if you will, to a Solo 401(k) that can make it attractive to a real estate investor, but you must make sure you’re going about it the right way and you’re structuring yourself properly. All of us agreed that we should have a tax advisor or CPA on the sidelines, working with us in concert to make sure we plan appropriately.
And that’s what it comes down to: self-directed IRA versus self-directed Solo 401(k). You must look at the pros and cons of both. And there are several organizations to look at along with your CPA tax advisor that can help you with that. And then you can make and evaluate and ensure that you’re making a good decision going forward.
Robert: What happens if somebody opens a checkbook IRA? What are some of the horror stories? Otherwise, it’s a sales pitch there.
John: My team and I take phone calls every day and work through the good, the bad and the ugly with self-directed Solo 401(k)s and self-directed IRAs. Recently, I talked to a prospective client, and they were interested in unwinding their checkbook LLC IRA. They had been advised that there’s great concern with this type of program and they wanted to remove their assets and put it into a self-directed retirement account environment without the LLC.
Ultimately what happened is they ended up finding themselves in an audit. Their CPA advised them to hold put, and that they should not unwind the account because the IRS is going to audit that checkbook LLC IRA. I haven’t heard back from this individual in terms of what the outcome was.
Kim: Let me ask another question because there’s a lot of people selling IRAs. What are some of the scams or some of the sales pitches people will use that people need to be aware of?
Jeff: I think that’s a great question. We see the accounts themselves as a vehicle. You can’t hurt yourself with it, but the investments you make within it can. There’s an active role here. You must do your diligence with the investments that you’re going to put in it.
If it’s something like gold or silver or if somebody’s offering an investment in some startup company in Las Vegas, you need to have that skill level to be able to do the research and make sure that’s the right investment for you. I think those are the biggest mistakes that we see. The risk certainly is the investments that you choose to put inside the accounts.
Robert: Correct. I’m pitched on NFT, doge coin, stable coins, crypto, and more. That’s why the Rich Dad Company would make no recommendations and no endorsements. Kim and I own tons of gold and silver.
These are the strangest times in world history. I mean, would you guys agree with that?
John: Yes.
Jeff: Unprecedented.
Robert: Unprecedented. We have never had such global debt in the history of the world, and I mean global debt. Not only are you and I in debt, but the world is in debt. Going back to 1971, when Nixon took the dollar off the gold standard and screwed the whole world, and then the Fed and the Treasury helped it all out. Guys like Equity Trust are more important to at least go talk to. That’s really what I’m saying. How do you guys meet with your clients?
John: I could jump in here. We have a team of IRA counselors, and we spend time with each individual prospective client before they decide to open a self-directed IRA. That’s one of the things that I learned from Jeff 15 years ago when I came into the business. We must meet with each individual.
It’s in our mission statement to help people make tax-free profits through education, innovation, and the commitment to understanding their individual needs.
Jeff’s father pounded that into me from day one. Understanding an investor’s individual needs. We would meet with an individual one-on-one over the telephone. We do business in all 50 states, and we would talk through their individual situation. What types of IRAs or 401(k)s do they have now? How can they move those into the right type of account?
So, to your point, Robert, rather than promoting a specific concept, we put all the cards out on the table and then allow them to make the decision because we can’t give advice or recommendations. We give them the information, and they can make the decision. And we do have training in education.
As a matter of fact, we did put together a specific course just for Rich Dad listeners. And there’s four modules in that course. I’ll just briefly mention the first two modules. The first one is called, “Diversifying Beyond the Stock Market.” It’s a video course that talks all about the various client investment examples and how investors are identifying alternative investments, how they’re executing on those transactions, and how they’re making them in a tax-free or tax-deferred environment.
The second module that that we’re giving to folks is what I call “Becoming the Bank”. I mentioned before my experiences and my wife’s experiences with private lending. These are loans secured by real estate. We just made a loan. As a matter of fact, two weeks ago, a $100,000 loan to a real estate flipper at six and a half percent interest. Whether the stock market’s going up or going down, we have confidence that this asset is going to produce. I talk all about how I find borrowers, how I vet the transactions, and the sample documents. We’re putting that all in that module for the listeners. It’s free of charge, by the way.
Robert: Thank you. And again, we don’t endorse it, but we do support education, even bad education, because I’ve gone to seminars, and I’ve stood on stages with a whole bunch of other speakers. The first thing I did after I got off those stages was take a shower.
Jeff: I couldn’t agree with you more and you know, coming up in two more years, we’ll hit 50 years. To be in business that long, you must do right by your customers. I think you’re saying exactly what listeners need to do: educate themselves.
Robert: Yeah. Be aware because I don’t think you can educate yourself. You must know who you can talk to right now and be aware that there’s many pitfalls out there. Again, as my dad said, there’s a million ways to financial heaven and billions of ways to financial hell, and I’m afraid billions are going to go to a financial hell in a few more years. That’s why I thank you guys for what you do. Again, Rich Dad is an educational company and makes no recommendations. How do they get in touch with Equity Trust one more time?
John: Folks can go to https://www.goequitytrust.com/richdad. They can call us directly, and they can pick up the free education training that we’re offering.
Robert: Thank you for offering that. Good luck to you.
According to the IRS, a prohibited transaction is improper use of an IRA account or annuity by the IRA owner, his or her beneficiary or any disqualified person. Examples of prohibited transactions with an IRA are borrowing money from it, selling property to it, using it as security for a loan and buying property for personal use (present or future) with IRA funds.
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Can I roll over a 401(k) account into a self-directed IRA?
Yes. A self-directed IRA gives you the ability to diversify your portfolio with additional investments that are permitted by the IRS, in a tax-free or tax-deferred environment.
the Rich Dad Podcast and owners of named publications are not affiliated with Equity Trust Company. Opinions or ideas expressed are not necessarily those of Equity Trust Company nor do they reflect their views or endorsement. These materials are for educational and informational purposes only. Equity Trust Company, and its affiliates, representatives and officers do not provide legal or tax advice. Investing involves risk, including possible loss of principal. Whenever making an investment decision, please consult with your tax attorney or financial professional.
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