Are You Breaking These Self-Directed IRA Rules? (Don't Find Out the Hard Way)

David Wiener: Right now, somewhere out there, you probably have an old 401K from a job you left five, ten, maybe fifteen years ago. It's sitting in a target date fund, quietly losing to inflation, and you've probably forgotten it even exists. Meanwhile, you're out here finding real estate deals and private lending opportunities, maybe even investing in a friend's business, using the cash out of your own pocket, when there's a completely legal way to use that old retirement money instead. tax deferred or even tax-free. Today we're talking about self-directed IRAs or SDIRAs, what they actually are, how people are using them to buy real estate and fund deals, and the handful of rules that if you break them, can blow up the whole tax advantage. This is the account most investors don't know they're allowed to have. So stick around for the whole conversation because by the end, you'll know exactly whether you're sitting on money that could be working a lot harder for you. Stay with me. Welcome back to the Tax Strategy Playbook, the show where real estate investors, business owners, and tax professionals come to turn complicated tax rules into practical strategies that protect cash flow and build wealth. I'm David Wiener, also known as Mr. Cash Flow, and on this show the goal is simple: help you find every legal advantage the tax code gives you before you leave money on the table. Today my guest is Daniel Terse. Daniel's a senior account executive and relationship manager at Directed IRA, where he works day to day as a self-directed IRA educator, helping investors open, fund, and actually use these accounts, real estate, private lending, precious metals, startups, and more. Daniel, welcome to the show.

Daniel Tercey: Hey, thanks, David. Thanks for having me. Really excited to be here.

David Wiener: So for somebody who's never heard the term self directed IRA before, tell me what it is just in plain English.

Daniel Tercey: Yeah, so this is a perfect question to start out with. Because for anybody who ends up thinking that they want to open one of these up and they call up directed IRA, one of the reps here will say, What kind of account would you like to open up? And a majority of you are probably gonna say a self-directed. self-direction is just a marketing term. So you can self-direct at Fidelity, Schwab, Goldman. You can also self-direct with an alternative asset custodian like directed IRA. And All that means is you go out, you find the deal, you tell the custodian what it is, you tell the custodian how much it is, and then the custodian goes out, sends your money out, and then custodies whatever that asset is. In the case of Fidelity and Schwab, it's probably gonna be stocks, bonds, and mutual funds, right?

David Wiener: do you see a misconception that most people have when they first call into you? 'Cause you talk to investors about this all the time, right?

Daniel Tercey: Yeah, I think it's because they don't understand that there's a traditional IRA and there's a Roth IRA. And so when they say self-directed, they think that they're saying not traditional. But really all traditional means is pre-tax dollars and Roth means post-tax dollars. So it's the beauty of bureaucracy and lawyer jargon that make you get confused when the word traditional means antiquated or old. And the word Roth is just weird. It's named after somebody. And then self-direction magically gets thrown in there when really it can be a self-directed traditional IRA, a self-directed Roth IRA, or maybe we get into self-directed HSA, self-directed ESA, self-directed solo 401ks, many different kinds of self-directed accounts, qualified retirement.

David Wiener: so how did you wind up specializing in this little corner of the retirement world?

Daniel Tercey: Yeah, so my friend and some people listening, or even you may know her, Lindsay Mersino. we were at Get Together, and I was coming out of the 2020, you know, all the salespeople were getting let go. I was in California, so it was a little bit worse over on that part of the world. And I was like, you know, I really want to get into cryptocurrency. Yeah, that's something I believe in, that's something I like. and by the way, for anybody wondering, If I was good at cryptocurrency, I wouldn't be here on the phone call with you right now. I would be on a beach

David Wiener: Yeah.

Daniel Tercey: drinking a Mai Thai or something. So that just goes to show you how well I do with cryptocurrency. But I spoke with her and she said, Well, I work for a self-directed IRA company that specializes in cryptocurrency. And I said, Well, I'd love to jump on board. And so she brought me on board back in like 2021. And then she left over to come to directed IRA, and I followed because directed IRA. also offers cryptocurrency as well as an alternative asset class. So yeah.

David Wiener: So let's start with the big picture because I think most of our audience has no idea this account even exists or or this type of IRA even exists. What's the difference between a regular IRA somebody has at a brokerage that they just kind of leave alone or a self directed IRA? is it a different type of account or is it the same account with different rules?

Daniel Tercey: Yeah, I let's go same account different rules. At the end of the day, it is the same account. The IRS is gonna look at it and go, How the heck are we gonna tax this? How is the what is this doing, right? And I'll even defer to you a little bit on that one on on what the IRS would look at it as. But for the sake of the conversation, it's it's just the same account, different rules in that self-directed, right? Like what I talked about earlier. Who who finds the deal? You do. Who decides how much they're gonna buy the deal for? You do. The only difference is the custodian still stays the same on the background, which is where the count kind of stays the same, as it custodies that asset, which keeps you tax-free. Because David Wiener is, he's a taxable entity. David Wiener Roth IRA, not a taxable entity. And the what makes that not a taxable entity is that custodian.

David Wiener: I see. Okay. So are are there boundaries to what kind of assets you can put in an S D I R A?

Daniel Tercey: Yeah, here are the boundaries. Anything except for collectibles and life insurance contracts. Those are your no laboo boos, no none of that. Okay. And then life insurance contracts. If you put a life insurance contract inside of really anything, but a tax deferred or tax free account, you're just going to be a true crime documentary waiting to happen. So that's how you can remember. Don't do those two things. Everything else, free and clear.

David Wiener: That makes you the subject for a d a completely different type of podcast, right?

Daniel Tercey: Yeah, it'll be yeah, you'll be yeah. True crime all the way.

David Wiener: why is it do you think that most financial advisors and and big custodians never really mention this as an option? is it that they can't or is it just not their business model?

Daniel Tercey: Okay, two things, two reasons. One, they've got trillions of dollars to lobby against it, right? That if I only want somebody to do one thing, I'm going to push them into that thing. Second thing is, what is the thing that they're pushing you into? Obviously, the business model, what I make money on. So I ran a business and I told everybody, this is the only way you can retire, this is the only way you can do anything. And that business model makes me money, I'm gonna spend all the money in the world to make sure people only do it that way. Now, and I think we're gonna get into this a little later, but there are pitfalls that come with it. Are they really that serious? I don't think so. But that's what a financial advisor or a wealth manager would say when they can't make money on your account. Because a of a Fidelity or Schwab account. 'Cause they need to be under that umbrella. If IRA, they can't make a percentage off of your portfolio. So then they get upset and they go, Well, you're gonna you're gonna disqualify your account if you're not working with me, of course. Yeah.

David Wiener: naturally. So there's a bunch of different account types, right? You could do traditional IRA, Roth IRA, SEP IRA, solo four one K.

Daniel Tercey: HSA, ESA.

David Wiener: Who who yeah. So who does each one of those make sense for, especially for our business owner listeners? specifically, how how do you choose which one? What what

Daniel Tercey: Okay.

David Wiener: makes sense for who?

Daniel Tercey: All of these accounts have their time and place. And again, I think it's something else we'll probably be getting into a little later is like what are the benefits of these? So I'll save that piece, but some people will look at this and they'll say, Well, I want the money now. I don't want to wait for retirement account. And to those people I say, Great, what are you gonna do when you retire? You don't have anything waiting for you at the end because you took everything now. You're just gonna be working for forever. But We at Directed IRA, I always tell people we we're the church of Latter-day Roth. That's all we preach. Okay, but that doesn't mean that you have to have a Roth IRA. Some people have big ol' 401ks, like you mentioned at the beginning. Some people have big old 401ks that have only been pre-taxed dollars, so traditional dollars. And they don't want to have to convert it over to a Roth. I'll talk about a conversion in a second. But they don't they want to convert it because they don't want to pay the taxes on it. And to those people, I always say, I would rather have a multi-million dollar traditional IRA than no retirement account at all. So you shouldn't be held up thinking you can't do anything because it's in a traditional. No, you should still invest it and grow it in the things you know best. But if you have a Roth, invest with the Roth. That's a great account that anybody and everybody should be using, including people that they say make too much money to have one for. It's not that's not a real thing. You can do what's called a backdoor Roth. And if we if you want to get into it, we can get into it. But you can always have a Roth account. Okay. And you can grow that post tax dollars, grow tax free, come out tax free. Grow that if you put five thousand dollars into a Roth and you grow it to five million, you only pay taxes on the four hundred four million nine hundred ninety five thousand dollars, or excuse me, on the five thousand. You don't pay taxes on four million

David Wiener: Right.

Daniel Tercey: nine hundred ninety five thousand. Excuse me.

David Wiener: I was gonna say that doesn't sound like a great deal to me.

Daniel Tercey: So that's a pretty sweet deal. Yeah, right. Well, that's a traditional IRA is what I was explaining. And that's why,

David Wiener: Exactly.

Daniel Tercey: yeah, you you have to you have to be concerned about that, but it's still not bad. Again, I'd rather pay a little bit of taxes on five million than no money at all when I retire. So if you can grow it, you should do it.

David Wiener: That makes sense. That makes sense. And and I'm of the age now where, you know, they never told us about Roths before. And now that I'm staring down required minimum deductions or dispositions, I I'm starting to do Roth conversions and paying a lot for that.

Daniel Tercey: Yeah, and and again for for David, for you, you know, you are having to look at required minimum distributions, but let's say somebody's 59 and a half. They don't have to worry about required minimum distributions until 72. Okay, but they have that traditional IRA. So while you will have to pay taxes later on and have those required minimum distributions, why not do a private money loan and pull out the the interest that you have? Sure, you're gonna have to pay a little bit of taxes, but if your private money loan makes you forty thousand dollars and you don't have to pay taxes on that immediate you know capital gain and or short-term gain and and taxes right then you profit all the forty thousand dollars right there take it out slowly take it out slowly don't take the full forty thousand out and it and it it'll it'll benefit you later on but RMDs suck I I will I will admit or for anybody who doesn't know when they're gonna die irs.gov it will tell you exactly when 'Cause that's when your RMDs expire.

David Wiener: They will tell you. I think this could be a whole series of of podcast episodes actually, but getting back to the S D I R A. So the account exists,

Daniel Tercey: Yeah.

David Wiener: it can hold real assets. I guess the next question everybody asks is, How do I actually get money into it? How do I actually use it? So if somebody has an old four one case sitting with a former employer Walk us through what a rollover into an S D I R A actually looks like. Is it as intimidating as it sounds?

Daniel Tercey: I want to say no, but it is a little bit in that the custodian you're working with can make it kind of annoying. As an example, I'm in this space. I went to Fidelity to take a distribution to help pay for a down payment on my home. Because you can do that. Up to $10,000, you can actually take out the money. If you have a traditional, you still have to pay taxes, but if it's Roth, it's tax-free, up to $10,000. But man. How where to click the buttons and stuff like that was so annoying. Like it was it was frustrating. But once I had it rolling, once I found the buttons and everything, it was very easy. It was very straightforward. But the custodian can make it difficult. So those of you that are coming from like a Fidelity or a Schwab, it's not really that difficult. Again, once you find the button, you could also call them sometimes and they'll help you out with it. They may try and keep you there. But at the end of the day, most of our accounts are rounding errors to a Fidelity or a Schwab. So they're not really worried about that account leaving, right? If you're with a smaller custodian, it can be a little cumbersome. And that's not on us. We'll do our best to actually help you out in that aspect. And that's where having a custodian that will maybe, if need be, jump on a call with you so that they can speak their foreign language, their foreign IRA language. And not not make you feel dumb, right? Which is what some of those custodians will do. and sometimes when you talk to me on the phone, you'll be like, why does Daniel keep making me do a different word? And it's because, well, when you say distribution or withdrawal, that is a taxable event. And I don't want to say those words because I want you to know you're investing, not distributing or withdrawing.

David Wiener: That makes sense. So I've heard the term IRA LLC. That's a that's a an LLC owned by the IRA, right? Why do so many real estate investors want what's called checkbook control?

Daniel Tercey: Yeah, so let's let's talk about the the 401k rolls over into an IRA. And depending on what account you had under that 401k, traditional or Roth, it will roll into that IRA. Okay. So I'm just kind of trying to walk people through a path. So once you have that rolled over, it's sitting in an IRA, and then you may decide to set up an IRA LLC. Okay, so you have some money sitting in an IRA, and then you go to A lawyer, we have a sister company, KKOS Lawyers, who sets those up. And they will set that up for you. But it's not your IRA, it's not David Wiener's LLC. It is David Wiener's IRA's LLC. And so that's who it will be set up in the name of. And once you have the IRA funded and set up, the IRA owning the IRA LLC, then you will find a bank, just like a regular LLC. To set up a checking account for that LLC. And then you'll transfer that money over to that bank account. And then you'll have what's called an IRA LLC account with a checking account attached, giving you checkbook control. It's an IRA LLC that has access to a checking account, which makes it checkbook control. And real estate investors love it because they need money yesterday, whether they have a deal or not. And the quickest way to get money invested from your IRA into your next investment is to have checkbook control. Because we move fast, 24 to 48 hours with good standing paperwork. We'll have your money sent out to whomever you need. But if you need money yesterday, Writing a check to that person is a lot easier than submitting a form hoping you got it right, which you will after your first couple of tries, but your first try, you make, I hope I got everything right. And then 24 to 48 hours later, you'll have that check.

David Wiener: Is it is it really as simple as just writing a check?

Daniel Tercey: Yes, it really is. Or debit card. I mean, come on, let's stop saying checks. debit card, right?

David Wiener: Yeah, who writes checks anymore?

Daniel Tercey: I can tell you right now, I'm 37. I remember the first time I had to write a check. It was to my school, and I didn't know how to write it. And they were looking at me like I was dumb, and I was like, why are you not taking debit? Why am I the one being ostracized?

David Wiener: what's the biggest funding mistake you see? Somebody who sets it up wrong or funds it in a way that caused a headache later?

Daniel Tercey: I haven't seen any of these, mainly because I don't work on the investment side. I have heard stories where they told me and I went, I don't stop telling me this. I hope you're not with us. where it's it's just the prohibited transaction part. So what we talked about earlier with the financial advisors, okay, so s Backtrack just a smidge. Setting this up is not, it's not complicated. It's just like setting up an IRA. It's it's no different. Okay. So I don't want anybody to be intimidated of that. We literally get audited by the IRS. You can't set it up wrong, otherwise, we get in trouble. So the setting up portion is gonna be easy. It's when you go into your investment, how you structure the investment, what that looks like. So I'll tell you an example of a client who set up with us. I'm not gonna name any names.

David Wiener: That's good.

Daniel Tercey: they actually they actually they rolled me under the bus, and I know that I wasn't wrong here. I had the conversation with them and I said, Here you're the disqualified parties. You cannot transact with yourself, your spouse, your grandparents, your parents, your children, your grandchildren, or their spouses. So just seven people. There's a lot of other people I didn't mention. Just those seven. You cannot transact with. And this person said, that's fine. I'm just working with a business partner. And then they submitted an investment for a loan that wasn't even backed by anything. It was an unsecured loan, which to us immediately kind of throws up a little bit of a red flag. We'll process it. It's not on us to decide whether you did something right. I always tell people we're the guardrails and speed bumps. We're not the police. So if you're doing something that looks weird to us, we're we're gonna look at it and we're gonna say, okay, what's weird about that? So in this guy's case, unsecured. We immediately were like, what the heck's going on? Then we saw that it had a similar last name, not similar, identical last name. So our investments team said, Hey, who is they called them and said, Who is this person to you? Why are you doing an unsecured note with somebody who has the same last name as you? And they it's my son. And we said, Okay, that's a prohibited transaction. We can't do it. And they said, Well, Daniel told me. I'm like, Daniel didn't tell you that.

David Wiener: Yeah.

Daniel Tercey: I went back and listened to the call, and all they referred to their children as was their business partners, and then started submitting unsecured notes. So

David Wiener: my.

Daniel Tercey: that's one example of how to poorly structure a deal, right? They did an unsecured note, which anybody listening, I'm not here to give advice. This is just to to help David educate you all. But unsecured is just not. You have an opportunity to have first lien on a on a home or on a business. To where if they default, now your IRA owns that. Right? And if you did your due diligence right, you maybe only lent 50,000 and you got 200,000 if they default on it, right? So that's a pretty sweet deal. So don't do unsecured notes.

David Wiener: That makes a whole lot more sense, doesn't it?

Daniel Tercey: Personal opinion, but

David Wiener: Yeah.

Daniel Tercey: but then they decided to work with their children. Prohibited transaction. wrong. It's just not listening.

David Wiener: I wanna get into the rules a little bit more about where good deals turn into expensive mistakes. So you talked about the disqualified persons. that's really anybody directly related to you, including your spouse, right? What what

Daniel Tercey: Yeah, yes, yep.

David Wiener: actually counts as a prohibited transaction other than other than those people? Anything?

Daniel Tercey: So that that's pretty much it, but let's go just a little bit more detailed. So what is transacting with yourself? Okay, of a that's that's kind of a weird one. Like, what am I doing? I'm selling something to myself? That's one way of transacting with yourself. I can't tell you how many people call me up and they're like, Daniel, I'm gonna move my home into my IRA. I'm like, yeah, you the IRS totally didn't think about that when they built these in the nineteen seventies. Go for it. They have no idea what you're trying to do. So that would be a transaction with yourself. You would have to be transacting, or I'm gonna buy my son's home from him. Or I'm gonna buy this is a perfect example. My son's going to college, and I'm gonna buy a rental in my IRA, and my son's going to live in it. Uh-uh. Your son is now transacting with your investment, your IRA's investment. So another way of transacting is lending a service. So let's say and I keep using real estate as the example, but it's just the easiest one to to kind of wrap people's brains around.

David Wiener: And that's where the majority of our audience lives. So that's that's great.

Daniel Tercey: Good. So so let's say you your IRA buys a a a home and and you have tenants in there and your tenant calls you up and says, Hey, I have a leaky faucet. And you go, no problem, I'll be over there to put that piece of duct tape on there. Prohibited transaction. You're now transacting with your property. And the first thing I hear is but no, I'm I'm helping the I'm helping the investment. I'm making it better. I always I always say, okay, you fix my faucet. For free. Haven't met a nice person yet. Nobody has said they'll do that for free. They'll do it for themselves, but they won't do it for me. Well, I'm not prohibited. I'm not a I'm not a disqualified party to that person, but they won't do it for free. There's the there's the disconnect. You cannot lend a free service. You are now giving free free labor to your IRA. Your IRA needs to call up a plumber and tell the plumber. I will pay, well, not your IRA. You need to call up on behalf of your IRA, cut the check, the plumber goes and fixes it.

David Wiener: Well that makes sense. Now, specifically for our real estate investors, you're not allowed to personally use it, manage it, or do sweat equity work on it. So if they buy let's say they buy a short term rental and I I do a lot of work in cost segregation with short term rental owners, and

Daniel Tercey: Yeah.

David Wiener: they say, Well, one week I'm gonna go stay there. They can't do that, can they?

Daniel Tercey: Nope. And Matt, the owner of our company, Matt Sorensen, he has an example of this on his podcast where one of his clients said, Hey, listen, my brother's gonna stay there. The kids and everybody are gonna be there. Your brother, your sister, your aunt, uncle, niece, nephew, cousin, friend, enemy, those are all you can work with them. Okay. So he said, I'm gonna I'm gonna rent out the Airbnb to my brother and his wife and my and my nieces and nephews. Is it a prohibited transaction if I go and visit them? In Matt's case, he says, listen, do I think the IRS is gonna tail you and hide in a bush and count the minutes that you take a nap on that couch? Probably not. Is it a prohibited transaction? Yeah, probably. But you're just going to visit your nieces and nephews and cousins. This is getting a little gray, you know, that like it's up to you whether you want to do that or not. But is it doable? Probably. Is it a prohibited transaction in the far detail of the rules? Yeah, it it is. Staying there yourself for sure is a prohibited transaction.

David Wiener: Now, as far as managing, you know, when I do a cost segregation study for somebody who owns a short term rental, it's for for taking advantage of that short term rental loophole. If they self manage, that's how they get to material participation so that they can use it. But that's a prohibited transaction as well, too. They can't manage that property.

Daniel Tercey: Exactly. And I always tell people just best to keep your hands clean. Hire a property management company just to do it for you. It's the easiest way to really make sure you're not gonna mess up. But you know, sometimes you have to find tenants. That's not a big deal. You know, go out, find some tenants. IRS isn't gonna come after you for that. It's just when you really start sweat equity, lending services, trying to just stay there for free. Like stop trying to do those things. You're not outsmarting the IRS. And they can audit you whenever they want. They have the full lifetime of that investment to audit you. So

David Wiener: Yeah, no statute of limitations on that. So let's talk about

Daniel Tercey: No.

David Wiener: two acronyms that the audience will hear a lot if they're if they're dealing with self directed IRAs. UBIT, which is unrelated business income tax, and UDFI, unrelated debt financed income. If an IRA uses a non recourse loan to buy real estate,

Daniel Tercey: Beautiful.

David Wiener: when does that trigger one of those tax filings and and is that a really a big deal?

Daniel Tercey: So it can and can't be. I'm gonna again refer to Matt, who thinks that people are crazy if they aren't using UDFI. UBit's a different story, we'll get to that in a second. It's a little bit more detailed, a little bit out of my depths, but I I can I can speak to it enough. I would even yield to you, David, a little bit on it, because you you're you're the you're the tax person here. but for UDFI, it's actually not that crazy. So that non-recourse loan is going to trigger UDFI, unrelated debt financed income. And before I even get into it, one way to just avoid this altogether, have a solo 401k. Solo 401ks are exempt from UDFI. So keep that in your back pocket as I go through all of this.

David Wiener: Okay, that's good to know. Yeah, absolutely.

Daniel Tercey: So if you are trying to buy a home in a traditional way, this is usually what people think immediately. Well, I'm gonna get a mortgage. You're not gonna get a mortgage with an IRA. When you go the traditional route of obtaining a loan, a a mortgage from a bank, what does the bank check? The bank checks the home, what's it worth, all that. loan to value, right? We want 20% down, we want 10% down. This is the interest rate, blah, blah, blah. And then they check you. They check credit. Because the bank is gonna say, if you mess up, I'm not only gonna take the home. But I'm gonna put you on the hook to pay me back. So I'm gonna make all of my money and possibly then some. An IRA doesn't have credit. So what the heck is the bank gonna come for? And that's where non-recourse loans come come into play. And there's many of them out there. We have a few on our website if you're interested in in speaking to people about these. You can go to our website and you can find some non-recourse lender. Doesn't mean that's all of them. But what they're gonna do, they're gonna be a bank too, and they're gonna say, okay. Because we can't come for you and your credit score, what we're gonna do is we're gonna do some due diligence with you. We're gonna find out the rental income and everything, the value of the home, what it's worth. And we're gonna ask for 25, 30% down. If you're really looking at a bad home, this is also good for the the investor. If they're asking for 45, 50% down, they probably don't have a lot of faith in this home. so it's a good sign for you on what you're getting.

David Wiener: Take a hint.

Daniel Tercey: So they're usually though around 25 to 35% is what I've seen. Okay, and now your IRA owns a loan and a home. Well, what is that? What what is the UDFI? What is that? So the UDFI is the unrelated debt that is financed. Okay, so that is $100,000. We're gonna say we put 30 down. So your IRA has $30,000 of IRA money in there. 70% of that. Is somebody else's money. That's a bank's money. That's a taxpayer's money. So that is where the UDFI comes into play. And then the income that you receive from it, 30% tax free. 70% will be taxable. What that tax is and what that's going to apply, you guys are gonna have to have a competent CPA or tax strategist to help you out with that. And that's where cost seg actually comes in and depreciation. So you can actually depreciate the asset and seventy percent of it will be applied in this UDFI case because there's money that can be depreciated, right? There's assets that can be depreciated on seventy percent of it. The thirty percent tax free. What what do you have to depreciate if you're not paying any taxes?

David Wiener: Exactly.

Daniel Tercey: Yeah. So that's the UDFI portion. Okay. That's not

David Wiener: Okay.

Daniel Tercey: scary. One, you get depreciation. Talk to David. He's going to help you out. He's going to teach you about all that stuff. I'm not here to talk about the depreciation and all that. Okay. He can help you with that so that when you are ready to sell, you probably aren't going to be paying too much in taxes at that point because you're only going to be paying taxes on 70% of the equity that's le of the equity that's left in the home. Okay. That's at the very end of when you're ready to sell. You've been using depreciation up until then. So, again, not going to get into taxes, but you should be doing pretty well on that portion. But the the UDFI, Matt always says, like, if you only have 60,000 in your IRA and you have two deals that are $100,000 and you can put 30% down on both of them, why are you not doing both of them? Do both. You can turn a $60,000 Roth IRA into 200,000 just by taking both of those, or excuse me, I guess it would be two you could make s good money on it, turn sixty thousand into like a hundred and twenty by doing a little bit of UDFI and again having a competent CPA, having a good tax strategist to walk you through that is what's gonna help you out with that. But if you're a real estate investor, you know this stuff better than I even do. I just am around it all the time. I'm not doing it right. I don't I do funds in my IRA. Yeah.

David Wiener: Theoretically. Theoretically.

Daniel Tercey: You should be doing this. You're doing this already. Do it in your IRA. Don't be afraid of a little bit of tax when David's here telling you how to depreciate it and kind of offset.

David Wiener: Then then what about UBIT?

Daniel Tercey: U Bit is going to be, I always give this example. So UBIT is unrelated business income taxes. So your IRA, for lack of a better word for this example, is a charity. It's tax-free. All right, right? Just like a church is going to be a tax-free entity. So if a church runs a cookie store, right, and they're making money selling cookies. They are going to trigger UBIT. Why is that? They're a tax-free entity. Well, because there's a cookie store right down the road that is a taxpaying entity that is now having to compete with the tax-free church down the road that can undercut them on everything because they don't pay taxes. Right?

David Wiener: Exactly.

Daniel Tercey: So the IRS sees that and goes, Well, that's not fair to the business down the road that is registered with us and doing everything right. And trying to run a good, legitimate cookie business, and you're just trying to sell some cookies for free on the side or for a couple bucks to make a little extra money. So we're going to charge you UBIT which UBIT falls under trust tax rates. And I actually pulled these up right before just to make sure I'm not spitting nonsense. The tax rates for trust go from zero to 3300. You start paying 10%. And the 3300 to 11,700, you're now in the 24 percentile. And the eleven thousand seven hundred to sixteen thousand that you make is in the 35 percentile. And then you get into the 16,000, which jumps you up to the 37 percentile. So it it jumps very, very quickly. And the reason why they do that is because. You're a tax-free entity. What the heck are you trying to do running a business? so that's the UBIT portion. And the only way you're gonna run into that, if a majority of your client base is real estate investors, you're only gonna run into that when you start doing more than about three deals a year. The IRS is gonna start looking at it and going, what exactly is going on here? Why are there so many deals coming out of this IRA, this tax-free account? You might have to start looking at UBIT. Now, for other investors, maybe a smaller percentage of your audience, they might want to run a business out of an IRA, which you can do. I'm not going to get into the logistics of that because it gets it gets very nitty-gritty. We could literally do an hour on running a business out of an IRA. But there are ways around both of those things. C Corp blockers are one. and that can that can lower that tax threshold. again, I'm not gonna get into that. That's more of a tax strategy thing, but U bit will only be triggered if you're doing a lot of deals out of your IRA. But if you're only doing one or two a year, you're totally fine.

David Wiener: Makes sense. If somebody's about to do their first deal inside their SDIRA, what's the one call or the one document that you wish they would review before they wired money?

Daniel Tercey: Yeah, make sure the contract looks good. Like that's make sure the contract looks good. And the reason for that, let's say it's a private money loan. If you're lending, if you're b if you're lending money to somebody and they're returning the payments, why are you not putting in the the the time frame that they should be paying you back? Is it monthly? Is it weekly? Is it quarterly? Also, if you're doing it at the end of the year. How are we as a custodian supposed to know this loan is in default? Right? And when a you have to be able to prove that to a judge in some cases. Well, if it's a two-year loan, you probably shouldn't be doing two-year loans, should be about a 12-month loan. it's a two-year loan and you know this person's a defaulted, how are you gonna go to a judge and say the loan's defaulted and you're only in month nine? There's no way of knowing. So Make sure your contract is is is in good standing because we're the custodian. All we can go off of again, guardrails and speed bumps. We can only go off of what you provide us. And we're not gonna be the police here. We're not gonna tell you if it's a good investment. We're passive.

David Wiener: And that's probably where they need to get an attorney involved, I would imagine, to review that contract.

Daniel Tercey: Or maybe you have a a good friend that is is that is in this space that knows it. As long as you trust them and you see that they've done good things, use theirs. You can always copy and paste. There's nothing wrong with copying.

David Wiener: Yeah, that's true. That's absolutely true. So so that's kind of the rule book. Let's get concrete for a second. What does this actually look like in the real world for the kinds of investors and business owners who are listening right now? Give us a real example of an investor using their SDIRA to buy rental property or fund a syndication. How did that actually play out?

Daniel Tercey: I'm gonna give a real estate one and then I'm gonna give a fun one.

David Wiener: Good.

Daniel Tercey: so the fun one has nothing to do with real estate, it's just crazy. The real one, real estate, or they're both real, but the real real estate one, wholesaler. My wholesalers love these freaking things, but they are prime candidates for UBIT. Because you can do quite a few wholesale deals a year, right? I mean, you're not

David Wiener: Sure.

Daniel Tercey: buying and selling a home or fixing flipping a home. So you can do a lot. So They have to make sure they stay three and under. and by the way, that's again just a guideline. That's not a you're not gonna be able to go to a an IRS attorney and be like, Well, they told me three deals. I only did three if they want to come

David Wiener: Yeah.

Daniel Tercey: for it. It's just a guideline. So fix and flippers, $500 down payment for a contract for 60 days, assignment fee, 20,000 bucks. They make some pretty good money on these things. So I have a client. Who I just got off the phone with him right before this, right before this. He is 56. And the reason why I say this is because he's opening up a solo 401k so that he can do a Roth without having to do the back door because he makes a lot of money. And most people would say you make too much money to do a Roth, but he doesn't want to do the back door, which is how you do it if you make too much money. He just wants to put money into a Roth account, into a solo 401k. And he will be doing. Wholesale loans two a year out of his solo 401k. Now he's 56. Normally at 59 and a half, he would be able to start taking out distributions. But the one extra rule that Roths have is: if you've never had a Roth before and you're just starting a brand new one, you have a five-year seasoning period. Five years. Okay? So at 61, he will be able to start taking out. Qualified distributions. He'll be able to start taking out his distributions. So he knows he's probably not gonna stop working at 61. He's probably gonna do a deal or two here or there. So he will still keep doing the wholesale contracts. Maybe he only does two a year. He's retired. But he can take out all of those profits every single time. Tax free. So if he makes $40,000 on two wholesale deals, he can just take that out tax free. He doesn't have to do it out of his business anymore. And pay taxes on it. He just takes it out tax-free.

David Wiener: Wow.

Daniel Tercey: So that's what he's doing. So he's gearing up right now for the first five years. He's going to try and grow it as much as he can. And then once he hits retirement age, he still has the business. His business partner's a guy about my age. So he's probably just going to sell it to him and be like, hey, let me do a couple of deals every now and then. and and I'm going to take the distributions as a retired person. And now he has $40,000 tax-free a year, whatever he makes from his wholesale deals. So that's how he does it. And he's starting it now. I also have a I have a guy who's 27 who's opening up an HSA and he's doing all his wholesale deals out of his HSA. He's like, by the time he goes, by the time I'm 30, I want to have a $200,000 HSA. And I was like, all right, do it. So he's setting up his health savings account for later on. So

David Wiener: Wow.

Daniel Tercey: The fun one that has nothing to do with real estate, and it's just quick. I have a pilot who set up a Roth IRA, and he bought a plane, is leasing it out to a pilot school. He will have to worry about UBIT, so he's working with our sister company, KKOS Lawyers, to kind of structure that. Because it is kind of a business. Okay. it's also there's some rules of it being property, not being Like a I forgot how they phrase it, but like a real estate asset. so it's it's considered a different class. Anyway, he's leasing it out, but they're paying for everything. And so when he hits retirement age, he's just gonna take it out as an in kind distribution. So he doesn't have to sell the plane. He just takes the plane out, gets a fair market valuation, takes the plane out, and now he has a free, he never paid any taxes or anything on his plane, and now he'll be able to fly it around wherever he wants, free and clear.

David Wiener: That is crazy. Wow.

Daniel Tercey: Yeah.

David Wiener: Let's let's look for a second at the private lending side. How are how are people using their IRA as the bank? You know, lending to other is real estate investors or small businesses?

Daniel Tercey: Okay, two two cases for this one too. So I call private money lending the gateway drug because it's the it's the lowest amount you need, and you start getting returns on it, and you're just like, wow, this is insane. I'm making like I'm making way more than what I was making in the stock market, and it's passive. So two ways I see it. One, join a local REIA Just find people, do your due diligence, figure out what they're doing, set your terms. I want This much in return. I want 10%. I want 2% up front or at closing. Right? So now you're at technically 12%. You just get the two points right up front, kind of like a down payment. And then maybe you do a balloon payment so that the investor can get it amortized over 30 years, but they only pay it for the 12 months. And then maybe you have an option at the 12th month to they can pay for another six more months. You know, maybe the wheels are falling off. Or something like that. You need to give them a little a little a way out or something, right? So how you set it up, structure it, right? You're a bank. Structure however the heck you want. Okay. You do have to make it reasonable. You can't charge some sucker 75%. The IRS is gonna come for you, right? That's ridiculous. And you also can't do like zero percent. What like that that seems unfair to the market. Okay, so you have to be fair, and then you structure it. You have them sign off, you send it over to the custodian, we cut the check, and then you just sit back and collect. That's the way to do it individually. The second way to do it is in that same real estate group. Maybe you're already, you're like, Daniel, I'm already in a real estate group. I'm doing deals. I don't care. Get five of you together and form your own bank. These four people fund this person's deal. Then when that person's deal is done, that person comes over to here, this person leaves, goes back over to here. Now these four people fund their deal. Right? I have a group doing that in Georgia right now. They do commercial real estate. They have huge retirement accounts. They just do commercial real estate deals. They're all in construction and stuff. So this guy's business buys the land, does everything, tears it down, gets a great rate of 7%, 8%, does everything, builds it, they make their money, he gets his money, they go to the next guy.

David Wiener: Amazing. So for our business owner listeners, and we've got significant number of business owner listeners as well, can somebody use a solo four one K or or the funds out of the S D I R A to help capitalize their own business? And where's the line that gets people into trouble?

Daniel Tercey: Yeah, so business owners are gonna open up their own solo four one K as long as self-employed, zero employees. Okay, that's the rule for solo four one Ks. Otherwise you have to start looking at SEPs so you can use it. Now this is when it gets a little gray. I tell people, I'm not I'm never gonna defend you in court. And like I said, this is you know, this is all education. When people try to use their IRA to invest in a business that they have their hands into, I stop talking to them at ten percent. If you're if you're involved in the business, ten percent interest, that's that's as far as I go. You talk to an attorney, they may say higher. I think they go up to twenty percent or something like that. I don't want to give any numbers so that people think that they can do this on their own and say, well, this really funny, handsome guy said this, so I'm gonna go do it that way. I and no, that would be you.

David Wiener: Would that be would that be Matt? me. Nobody's nobody's ever referred to me that way. So

Daniel Tercey: I I you have to be careful when you're investing in your own business. Now, I did mention disqualified parties that you cannot transact with any of them. You can invest alongside them though. So if you find a piece of real estate, a hundred thousand dollar piece of real estate, you invest, you and your son invest $50,000, so it's 50-50 right? You can do that. Right. So you can invest at the beginning of the deal together, but you have to maintain the same percentage ownership. It's called Pro Rata. It's Latin because lawyers are involved. and you have to maintain that same percentage ownership. If the property needs another $50,000 in repairs, each one of you has to pony up $25K. And I say 50-50 it could be 20-80 1% 99. I see that with people who

David Wiener: Whatever it is.

Daniel Tercey: are using children's IRAs to invest with them. So yes. But investing in your own business, you have to be careful. It's a gray area. I would definitely seek professional help on that one for sure. A good tax tradition.

David Wiener: And I know a lot of people who need professional help. we always like to close the podcast episodes with a playbook for them. So to give some specific things that they can do right away. If you had to break this down into like simple four steps for somebody who's looking at this and wants to open and fund their first self directed IRA, what would the steps be?

Daniel Tercey: Yeah, it's three and it's easy. Find a custodian, an alternative asset custodian. Don't call up Fidelity and Schwab and say I'd like to do a self-directed IRA. They're gonna tell you you can. And then they're gonna be Yeah, you can do real estate. REITs. You're like, I know I want to own physical property. Right? Like that's not what I want to do. So you're gonna call up an alternative asset custodian, preferably one again, tall, handsome, funny. Really good at educating people. logo. So you're gonna pick

David Wiener: Yeah.

Daniel Tercey: that custodian. All jokes aside, whoever you pick, make sure that they are speaking with you and finding out what you're trying to do. Any rep here will say, What are you trying to do? And you're gonna I wanna do real estate, I wanna do this. I have this, a traditional IRA, I have a 401k, and they're going to direct you into what you need to open up. Once you've had that, it's a 15-minute call. It doesn't take long, okay? Once you've had that phone call, you are then going to fund the account. Transfers and contributions, those take about five to seven business days. I've seen them go as short as three. I've seen them go as long as two weeks. Okay. So just make sure you fund it. Rollovers take about two to three weeks. Okay, so make sure, set up the account, fund the account, then find your deal. Okay? Do not do it out of order. Right? You're not saving any money because you waited a month before you found a deal. Okay. So you will be very happy if you do it in those orders. If you call me up and you say, Daniel, I found a deal. I'm ready to open up my account. I'll say, when are you planning on closing? And you'll say, in seven business days, and I'll say, better luck next time. At least you're setting up the account now. Right? So make sure you have it set up and funded

David Wiener: What step do most people often skip?

Daniel Tercey: They skip the funding. I I don't know why. I like they set up the account and then they're like, Well, it's set up and then they go and find a deal and they're like, I forgot to move the money over. And like, I know my f I have an entire funding team who's calling you and being like, Are you ready to fund? Are you ready to fund?

David Wiener: So so step one is to contact a custodian. And

Daniel Tercey: Yes, sir.

David Wiener: we're gonna get your contact information so they can contact you if they want to. at

Daniel Tercey: Hey, Find who fits you best, right? We're good over here. We're the leaders in education. I know that we're very good, but again, find somebody that will take the time to to speak with you. Again, it only takes fifteen minutes.

David Wiener: And Daniel's contact information will all be in the show notes at at taxstrategyplaybook.com So when somebody follows the playbook the right way from day one, it seems like it should be fairly simple.

Daniel Tercey: It is. And and I'll tell you right now, this is going to be new for you. So when you fill out the direction of investment form that's going to tell us what you're investing in, right? We can do that in 24 to 48 hours of good standing paperwork, which by the way, would make Einstein freak out of how fast that is. Because custodians are so slow in this space. But that's within good standing paperwork. With your first deal, give yourself 72 hours, okay? Don't rush yourself. Be prepared to mess up one time. the one thing that people hold themselves back on is getting the paperwork correct the first time. If I mess up, I'm gonna have a disqualified account. We get audited. We can't have bad paperwork on our books. So your paperwork has to pass our fine-toothed comb. And if it looks good, then we'll cut the check. If it doesn't, we give you a call, send you an email and say, Hey, you messed up here. So it's okay.

David Wiener: That makes sense.

Daniel Tercey: Just give yourself a little time. That's all. one you'll be fine with, I promise.

David Wiener: I'm gonna add two more steps to that playbook 'cause I think it's really important.

Daniel Tercey: Okay. Okay.

David Wiener: One is know the disqualified persons and prohibited transaction rules before you do a deal.

Daniel Tercey: That's good too.

David Wiener: Read them, put a sign up on your wall, look at it all the time, make sure you know. And then the fifth one is loop in your tax strategist or your CPA, your cost segregation professional so that everybody works together. It works much better in a team. But if you get those five steps right, you're using the account exactly the way it's designed to be used, it can be a very, very profitable thing for you. So let's pause right here. If you want more conversations like this, where we take a tool most people have never heard of and turn it into a simple playbook you can actually use. Subscribe to the show, share this episode with the real real estate investor or business owner in your life who's still leaving old retirement accounts sitting out there on the sidelines. So, Daniel, before we wrap, I want to leave listeners with one clear next step. If somebody Listening remembers only one thing from this whole conversation. What should it be?

Daniel Tercey: The only thing better than other people's money in real estate investing is other people's retirement.

David Wiener: That's good. I should put a banner up. The first concrete step they need to take is contact a custodian. If you have if

Daniel Tercey: Book a call. Yep, book a call. Book a

David Wiener: you have an idea that you might want to do this, talk to somebody who really knows the roadmap and can help you along. where's the best way to get in touch with you or directed IRA?

Daniel Tercey: Yep. Directed IRA dot com. You can book a call right there. It's literally top right hand corner. My contact information is my name. It's written right there. Daniel dot turcy. I know it's a weird last name. Daniel.tercy at directed IRA dot com. Daniel.Tercey@directedira.com

David Wiener: and since when the podcast posts, your name won't be there. It's T E R C E Y. So you're just pointing down at the corner of the screen.

Daniel Tercey: yeah.

David Wiener: it'll all be in the show notes. So Daniel, thank you so much. This was this was genuinely eye-opening. I think the biggest takeaway is that most investors are sitting on capital that they've never been told they're allowed to deploy. And the rules aren't complicated once somebody actually explains them clearly, which I think you did. For everybody listening, this is this is exactly the kind of strategy this show exists to surface. Legal, available to you right now, almost never mentioned by a traditional advisor. Pair this with smart entity structuring and yes, cost segregation on the properties you own, and you've got a real playbook for building wealth on every side of the tax code. Daniel, once again, thanks so much for coming and breaking this down so clearly.

Daniel Tercey: Yeah. Thank you for having me. Appreciate it.

David Wiener: This has been the Tax Strategy Playbook. I hope you got something good out of this one. Subscribe to our newsletter at Tax Strategiplaybook dot com slash newsletter. Every episode has a physical check sheet you can use, as well as my twenty twenty six tax planning guide. I'm David Wiener, Mr. Cashflow. We'll see you next Tuesday on the next episode.