Financial Independence
A Better Perspective

EPISODE 12 Self-Directing Your Retirement Options

Presented by Lance Edwards and Randy Luebke

In this episode of “Financial Independence – A Better Perspective”, Lance and Randy discuss retirement accounts and the ability to self-direct by choosing your own investments and managing yourself. There are benefits of being able to self-direct, but there are 3 important exceptions to take note of. 

Additionally, Lance and Randy discuss the value of having a third-party custodian and the advantages of setting up an LLC to direct investments.  

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What you’ll learn in this episode:

  • Self-directing to typical stockbrokers at large firms like Merrill Lynch or Raymond James, they will generally try to sell you their products versus you being able to tell them what you want to invest in.
  • In Randy’s view, a retirement account is like a shoebox. Whether it’s a 401(k), SEP or IRA, it has a set of rules dictated by the IRS. But inside that box, you can put almost anything you want, including stocks, bonds, mutual funds, Bitcoin and notes. He mentions three exceptions to this. In general, true self-direction means choosing and managing your own investments.
  • Lance says that his broker at a major house told him he could not use his self-directed IRA to invest in real estate – when he knew he could. The problem was this broker had no real estate to sell him. Randy says most likely if you ask your stockbroker about real estate investing, they’ll suggest a REIT: a Real Estate Investment Trust.
  • Randy refers to Tony Robbins’ book Unshakeable and mentions the fact that out of some 300,000 licensed investment advisors in the U.S., only one percent of those are independent Investment Advisor Representatives (IAR). The others can only sell you products their licenses and firms allow them to. They work inside a system that precludes them from giving the “kind of advice these folks are really looking for.”
  • Randy mentions the three limitations on the “shoebox” investments. You cannot own collectibles inside a retirement plan, or shares of an S corporation or life insurance. You can own shares of a C corporation, partnerships and LLCs, but not S corps. Some broker dealers will use these and say “things are complicated” to dissuade clients from self-directing.
  • Lance and Randy discuss the concept of self-dealing, using the example of a rental property to illustrate. If your IRA or retirement plan owns the property, you can’t use it yourself. But if your IRA buys a rental property and you hire a management company to manage it, that’s an allowable transaction. Adding potential value to it by managing it yourself could get you in trouble. Prohibited self-dealing transactions are any that give you direct benefit or usage.
  • Because banks can only sell you the financial products they have for sale, Randy suggests getting the shoebox out of the bank and move it to a third-party custodian that allows for self-directed investments. The custodian’s role is “holding your shoebox.” You’re still making all the decisions as to what that money will be used for.
  • Once you find the custodian and pay an upfront fee, you transfer your money from your old bank to the new bank and you can start seeking investments – real estate, gold, silver, etc. If you don’t start using the money to invest, you may have accomplished little while increasing your fees. Randy suggests buying interest in a Delaware Statutory Trust or TIC, because it’s basically a piece of real estate with tenants that is already being managed.
  • Lance agrees on the importance of finding “something simple and just put the money to work rather than pay fees to the custodial company and making zero percent.” Once you get your investment set up, you should open a self-directed account immediately.
  • Randy discusses the options that exist with an LLC. If you use your IRA for the down payment, closing costs, signing the purchase agreement and distributing the money to the escrow company, the custodian is going to charge you a fee. If you have a lot of activity, the fees add up, including every time you pay your property taxes and insurance. A better option is, instead of having your IRA buy that rental property, buy it with your LLC and your IRA will own your LLC. Randy calls that “checkbook control.”
  • The LLC you form has no value at first, but after you have your IRA purchase your LLC, it has all that capital. You don’t own the LLC, your IRA does. Then your LLC is going to buy the property and do the transactions. Everything comes and goes through your LLC checking account (rent deposits in, property taxes out). There’s no third party paying its expenses. It takes a little money to set up the LLC but it’s worth it for the freedom and overall savings it provides. Lance points out that you cannot write yourself a check out of that “checkbook LLC.” That is a prohibited transaction.
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