Self-directed IRAs are a good way to take control of your retirement money and invest it into something that you have knowledge about, like real estate. The thing about this kind of account, however, is that it can be tricky to work with, given all the rules that surround it. Joining Monick Halm on the show, Kaaren Hall of uDirect IRA Services explains why you should educate yourself on the rules before diving right into self-directed IRAs. She thinks of it as a sport where you have to win, and to do that, you have to play by the rules. After all, it’s your retirement money at stake. Listen in as Kaaren explains every detail you need to make money out of this strategy.

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How To Use Your Retirement Funds To Invest In Real Estate – Kaaren Hall Interview

I am here with another incredible woman real estate investor. This particular woman has invested in real estate but I’m going to have her talking about something else. A lot of women want to invest in real estate but they don’t think they have enough money, but they’re in fact sitting on thousands and sometimes hundreds of thousands of dollars that they could tap in their retirement accounts. In this episode, we’re going to interview Kaaren Hall to learn how you can use your retirement funds to invest and grow your wealth. Despite being in the midst of a recession and mortgage market collapse, Kaaren Hall founded and made a resounding success of uDirect IRA Services.

The single mom discovered a strategic way to put her twenty-plus years of experience in mortgage banking, real estate, and property management to use. The solution was an untapped market for both her skills and for investors’ self-directed IRAs. Through uDirect IRA, she has guided tens of thousands of Americans through the process of diversifying their investments using self-directed IRAs. I am super excited that she’s here to tell us about them, what they are, how you can use them to invest, how you can’t use them to invest, and more. Welcome, Kaaren.

Monick, thank you. I appreciate being your guest.

I mentioned that in the midst of the recession and the mortgage market collapsing, you decided to get into self-directed IRAs. What made you start that? What made you decide that was the time to get into it?

Mostly getting fired from my job. That was a catalyst. That’ll motivate you. The recession was in full bloom and not a good time for a lot of people. I have experience in self-directed IRAs. Some of the other things that I’ve been able to do in my life, those skills don’t apply in the recession. What am I going to do? I thought, “Let’s give this a shot.” I created a business plan, did a lot of research, put it all together, and came up with uDirect IRA Services. Since then, we’ve opened 4,500 accounts or something like that, and our clients are sitting on about $500 million in assets, so it’s been a successful one.

Let’s back up a bit because I bet there are people reading and going, “What is a self-directed IRA?” Can you explain that? What is a self-directed retirement account?

If you know what an IRA is, then it’s easy to make the trip to knowing what a self-directed IRA is. An IRA is something like a bucket that holds assets. That’s what it is. This bucket gives you tax-preferred treatment on the proceeds of your assets. If you use the IRA to invest, the gain is going to be tax-free or tax-deferred. That’s whether or not you invest in the stock market or outside the stock market in self-directed IRAs. The only thing that makes a self-directed IRA unique from a typical IRA is the kind of asset class that you can invest in. You’re not just limited to what the stock market offers or CDs or something. The door is wide open and you can invest in all kinds of assets.

Real estate, of course, is a huge asset class that our investors invest in many ways like buying a property directly, maybe buying a property through a private placement where somebody is collecting funds and asset sponsor raising capital to maybe buy an apartment building and then your IRA is part owner. Your IRA can lend money to other people so they can invest in real estate, raw land, trust deeds, performing and nonperforming notes, and many different kinds of assets. That’s what a self-directed IRA is. It’s an IRA that lets you invest in non-correlated assets, non-traditional assets, alternative assets. All those words mean is just not the stock market.

That’s what we do. We help people take their retirement and invest in the asset classes that they know and understand because not everyone is an expert on Wall Street and what’s happening there. You don’t have a lot of control. Also, people like real estate in particular because when they invest in it, rarely does real estate go to a true zero value as a stock can. There are a lot of reasons that people love self-directed IRAs, and that’s what they are.

A lot of people like to invest in real estate because it rarely goes to a true zero value as a stock can. Share on X

You get a limited menu of things that you can invest in most IRAs. When I found out about self-directed IRAs, I was like, “You can do this?” It opened up a whole universe of other investment possibilities and that was exciting to find out about it. I know that you can’t necessarily invest in everything, so what can’t you? What are some of the right ways you can use these retirement accounts and what are some of the wrong ways?

You’re right because there are definitely things you can and can’t do. First off, it was 1974 when the ERISA laws were created and they went into effect in 1975. You think about how long ago that was. Some of your readers weren’t even born yet, so it’s been a long time, which shows you that the self-directed IRA is nothing new. When the laws came out, what they said is that your IRA can invest in anything except life insurance contracts and collectibles. That’s what the IRS said. Another asset class that you can’t invest in would be, for example, having your IRA be a member of an S corporation. Only because S corps don’t let non-human entities be members or shareholders. That’s something you can’t do.

One of the rules about things you need to watch out for is like, “What can’t your IRA do?” It can’t invest in life insurance or collectibles, and that’s important to know. Also, when you’ve got a self-directed IRA, they revolve around rules called a prohibited transaction. A lot of times, this conversation is all about what you can’t do because you need to be careful. There’s so much you can do but you do have to follow the rules. Here are the IRS and they’re giving us a chance to save for our retirement, which we all need to do like, “We know you need to save for retirement, so here’s a special way to do it. We’ll even give you a tax break.”

All the tax breaks seem to be going away, but not this one. This one’s hanging in and we had a lot of positive comments about keeping this tax benefit from the government. This is the one thing that we can do so we need to utilize it. We need to be able to save and invest. The benefit is that your proceeds are tax-free in a Roth or tax-deferred. If you want to play their game, you’ve got to follow the rules. Here’s how you can find the rules. There are two places. One is on the IRS website, which is IRS.gov and look at Publication 590. That tells you about IRAs and all the rules of how the money comes in and how the money goes out. That’s a good place to look.

Another place that talks about prohibited transactions, the things to stay away from. That’s in the Internal Revenue Code. IRC 4975 is where prohibited transactions are listed. Those are the things that you can’t do. Not only you don’t benefit from the IRA, but disallowed people can’t benefit either. Who are they? They’re your lineal ascendants and descendants. Your parents and grandparents and their spouses, you and your spouse, and then your children and your grandchildren and their spouses cannot benefit. Plus, anybody who has a 50/50 business partner with you or anybody offering what they call services to the plan. Those people are prohibited. For example, your IRA can make a loan to your nephew to go to college, but not your son because your nephew is allowed and your son is disallowed. Your son is up and down that family tree, so that’s important to know. IRAs are all about saving for later. They’re not about now. They’re not about making money now. They’re about making money now for tomorrow, so make sure that everything is about saving.

You could do something that helps your sister or your nephew or an aunt or uncle. They’re not part of the disallowed individuals, but it’s just that direct up and down line. Is that correct?

Correct. You say, “Great. I understand that.” Another rule is that your IRA doesn’t do business with those people at all. Your IRA isn’t going to buy, sell, or exchange any assets between the plan and those people. That’s easy to comprehend. The next level is that these disallowed people, these parents, grandparents, children, and grandchildren, can’t provide services to the plan. Here’s what that means. Say, for example, your IRA owns a house and it’s got a yard that needs to be mowed. You think, “My son is just sitting around playing video games. I’m going to send him out to do this.” Your son is a disallowed person so he can’t go to mow the lawn even for free.

I don’t know how the IRS polices that. I’ve never seen them police that, but technically, it’s a disallowed person offering services to the plan and it’s disallowed. The same thing, you’re disallowed to your IRA. If your IRA owns a house and you think, “I’m good at planning and I want to install this one little garbage disposal,” you’re not supposed to do that. What you’re supposed to do is keep everything at arm’s length and hire a third-party vendor. Your IRA owns a house and you have renters. What can you do regarding property management? Can you do something? You can do something, but you can’t get paid to be the property manager. That’s for sure. You’d be receiving a personal benefit from the IRA.

What you can do is you can screen the tenants, you can pick up and collect their rent checks that must be made payable to the IRA, and you can hire third-party vendors to do the work. A lot of real estate investors, what they will do is they will hire a property manager. The property manager collects the rent checks and if something breaks, then that way, you don’t get the call at 3:00 in the morning when the water heater breaks. That’s great, and then you keep it at arm’s length. That worked out for a lot of self-directed IRA account holders who own real estate directly.

 

We were talking about private placements. That’s one thing that I do. We bring groups of investors together to buy apartment buildings and other larger commercial properties and we’ve had quite a few people invest using their IRAs. My husband and I have also invested using IRAs, but we can’t put money from our IRAs into the deals that we ourselves are working on. We can’t run the deal and have our IRA money in it, but we can passively put our money into IRA deals. Right?

You’re right. It sounds like you’ve got a good grasp of how to use a self-directed IRA.

We’ve used it that way, but I didn’t realize before what little you could do. If you have that single-family house, I didn’t know you go in and paint a wall, change the light bulb, or do anything. What happens if you go in and you’re like, “Let me fix this little thing,” in a house that’s owned by your IRA? What could happen?

I’ve never heard of anybody being called on a prohibited transaction for doing something small. You’re not supposed to have any personal use of the property, so you’re not supposed to, for example, even spend one night there and you’re supposed to let other people do the work. If you did something, there is no IRS police that is monitoring you 24/7 in a video camera, so you’ll be okay probably. If you want to know what the rules are, the rule is don’t do it. If you just follow the rules, you’re good. Sometimes, people break this one rule because they don’t understand it. I’ll explain this one too. That is that you don’t take constructive use of your IRA. Taking constructive use could be a lot of things.

We had one account holder who had a house in her IRA and she took the rent checks and put those proceeds in a different IRA account. Those proceeds must go back to the account that owns the asset. She acted like the custodian and she took it upon herself to put the money where it didn’t belong, so she took constructive use of her assets. Her account was dispersed for doing that. You need to make sure that you’re careful about the rules. That’s why we’re here because if you have questions, you just call us. “I’m thinking about doing this. What if I do this? I’m looking at making this investment?”

We’ll take a look at it for you and say, “That looks good,” or “Maybe you better watch out for this.” Maybe you even need to go so far as to get an attorney opinion letter before you proceed. We’re going to help you navigate this, but whether or not you commit a prohibited transaction, that’s 100% on you. You need to make sure you do your homework, your due diligence, and understand self-directed IRAs. That’s what we’re here to do. We’re here to help you understand that.

What is the difference between a self-directed IRA and a self-directed 401(k)?

An IRA is an individual retirement arrangement. That’s in one world in the retirement world, then there’s a different world, the ERISA world, which is employer plans. There’s a world of individual plans, the IRA world, and the world of employer plans. The individual 401(k) is sitting right on the cusp of those two worlds because it’s for an individual but it’s a 401(k). The rules are the same for when you have a 401(k), except if you’re self-employed, you have no full-time employees in any of the companies that you work for. For example, you could have a SEP-IRA and you could be an employer and have a similar contribution as you can with the solo 401(k), but there are different rules because a SEP is an IRA and a solo 401(k) is a 401(k). They’re different kinds of animals.

I have a self-directed 401(k) for me and my husband. We each have one, but they act a little differently in terms of how much you can put in. It’s only for somebody who’s self-employed without any other full-time employees, right?

IRAs are all about saving for later, not for making money today. Share on X

That’s exactly right. You can have full-time employees with a SEP-IRA, but you can’t have full-time employees if you’re using the solo 401(k).

What’s the biggest mistake that you’ve seen someone make with herself with a self-directed retirement account?

One of the biggest mistakes that we saw is somebody getting a home equity line of credit on their own house to replace the roof on an IRA on property. You can’t do that. You’re making an over-contribution to your IRA. You don’t put your personal money into IRA deals. You’re allowed to contribute and there are contribution limits, and you can talk to your tax person about what the contribution limits are but you don’t put your personal money into your IRA deals. That is definitely a big mistake.

When they did that, what happened?

How do you unring that bell? What do you do? If you commit a prohibited transaction and you want to argue this, you can request what’s called a private letter ruling and it’s not free. It’s about $10,000 for the private letter ruling plus attorney fees, but you can say, “I didn’t mean to commit a prohibited transaction.” The IRS says, “This is a prohibited transaction. This is what you did.” If that was the case, then you could be taxed a lot on the house. Your tax bill could be high. Spending $10,000 versus how much you pay in tax and fees might not be that much in comparison. There’s nothing that you could do, and then you could say, “This is what we did and this is what we did to resolve the issue. We’re taking this as an over-contribution.” Whatever it is, you could argue it and you get an attorney to help you with that. It’s called a private letter ruling, which is the I’d say get out of jail free card, but it’s not free.

You were saying that it is on the person. You can give guidance, but you’re not going to say yes or no, or you can do this or you can’t.

We’re going to give guidance for sure. For example, we had somebody and their IRA made a loan to an asset sponsor, so their IRA lent money. Great. Without us knowing about it behind the scenes, they agreed to a loan modification and bypassed the custodian entirely. That’s a mistake. You can’t do that because the custodian has custody of the asset. She went ahead and signed a loan modification and signed a brand new note by herself bypassing the custodian, she took constructive use of her funds. That’s when you could face a taxable event, so you have to be careful.

On the flip side of mistakes, what are some of the creative ways in which investors have used these accounts to legally invest?

With a self-directed IRA, yes, you can be creative, but you don’t want to be too creative. You can make so much money the typical way. When it’s a little creative financing and it’s something no one’s ever heard of before. You’re going to face a lot of scrutiny with your deal. There are a lot of creative things you can do with your cash that you’re not going to be doing with the self-directed IRA. Of course, it’s been a long time and I don’t think we would do this now. We haven’t seen it, but where somebody bought tickets with their self-directed IRA and sold these tickets for profit, the profit went back in their IRA. At the same time, you have to prove that you don’t have personal possession of the tickets are being held by a third party.

 

There are a lot of details about something like that and that’s an old story that may not fly now because the rules do tighten and the guidelines do tighten. The IRS says, “This is what you can and can’t do and what you can and can’t invest in.” If what you can invest in is just a shortlist, great. That’s what the IRS says, but then the custodian can say, “This is an asset we don’t consider to be administratively feasible.” How do you like that? What does that mean? It means for business reasons, it’s an asset that the custodian doesn’t wish to hold. For example, your IRA can invest in livestock as an investment because livestock is definitely an investment. It’s a commodity, I suppose. Each and every self-directed IRA custodian can decide for themselves whether or not they choose to custody that particular asset. There’s one thing about what the IRS says and the other thing is what the custodian says is administratively feasible. There are two layers of what you can and can’t do.

I have heard of somebody investing in a herd of cattle with their IRA, but that might be something that uDirect IRA might say, “We’re not doing the cows.”

They’re smelly to keep in the office.

In summary, because this is my understanding, besides the life insurance, collectible, S corps, and then working with any of the personal benefits and any of the prohibited parties, anything else is okay, the entire universe. As long as your IRA custodian will all agree to it, then you can do much anything else you can go for. Right?

That’s exactly right. There’s something else about IRAs that’s unique. My background includes mortgage lending. When I got into self-directed IRAs, I was surprised to find out that a bank will make a loan to an IRA, and it’s called a non-recourse loan. Coming from the residential lending background that I had, I was surprised that a bank would make a loan to an IRA. Let me back up and say this. The number one probably biggest misunderstanding about self-directed IRA investing is that your IRA can get a bank loan. You can go to Bank of America, Wells Fargo, Chase, or whatever and get a regular mortgage like you and I will get our primary residence. You can’t do that because there’s no recourse against an IRA, so those banks won’t lend to an IRA.

You can get a special non-recourse loan, and I do have a list of non-recourse lenders that I’d be happy to share with your readers. If they want to email me at [email protected], I’ll send you a list of the non-recourse lenders because these lenders will lend money to an IRA so your IRA can buy real estate and that’s great. However, there is a caveat. That is to say that when your IRA borrows money to buy real estate, the proceeds can be taxable. This is something to do your homework on before you do this. Call us and talk to us. We’ll help you through it and help you understand it. It could be the best deal you ever did, but it doesn’t mean you certainly can do it. It is likely taxable. We can discuss that with you over the phone and talk about your particular needs. That’s interesting that a bank would lend money to an IRA account.

If you wanted to buy a property, your IRA could put 20% down. One of these special banks that people can get emailed or get access to will maybe do a mortgage for 80% of the property.

Sometimes, they want to lower LTV. They want the IRA to have more skin in the game, but anytime there’s a loan, there’s an underwriter, so they’re underwriting the risk. They’re going to take a look and they’re looking at your deal, they’ll tell you, “We’re going to require that your IRA come up with 40%,” or the underwriters will come up with their criteria or say, “This is the rate if it’s 20%. This is the rate if it’s 30%.” They’re going to price the risk like any underwriter.

You may be taxed on proceeds from that money?

Self-invested IRA is a game you want to win because it’s your retirement that is at stake. Make sure you know the rules before you play. Share on X

Yes. That’s a tax that’s called UDFI. It’s Unrelated Debt-Financed Income tax. You can read about it if you go back to the IRS website. They have a little search bar there and you type in Publication 598. That is the publication that will tell you about this special tax and you better know about it before you start to self-direct. If you’re going to play a game, you want to know the rules because if you’re going to play a game, you want to win. Your retirement isn’t a game. It’s a serious game if it is. It’s more like a sport where it’s serious and intense and you want to win, so make sure the rules before you play. That’s what we’re here for. That’s what uDirect is for, which is to help you understand.

There are some wonderful benefits of winning that game but some severe penalties if you are breaking the rules. Definitely you’ll want to connect with Kaaren. Kaaren, how can people find out more about uDirect IRA and what you do?

We’ve got a website which has so much information. It’s UDirectIRA.com. There’s a tremendous amount of information. It has a calendar that shows when I will be speaking or one of us will be speaking and has a calendar about events that we do networking events from time to time. That’s a great way to get ahold of us. We have a toll-free number and it’s (866) 447-6598.

I know that you are here in California. Do you work with investors or do you work with people all over?

We do. We have IRAs in every state in America. We are a national company. We have accounts all over the place.

Wherever you are, you can contact her and get some help. Thank you. That was amazing and informative. It’s time for our famed trinity where our guests share a brag, gratitude, and desire. It’s how we conclude every interview. Tell us what’s one thing you’re celebrating. What’s one brag?

My personal brag is that both my kids graduated from college.

What’s one thing you’re grateful for?

I’m grateful for the company and I’m grateful for every one of our account holders that is saving for retirement. I’m grateful to have the opportunity to make an impact in the lives of people’s retirement because when you get to be a certain age and you’re not going to make any more income, you need to live off your retirement. If you want to have something, you want to invest in assets that you understand. I’m grateful that I have a role in that. We’ve got a real retirement crisis coming up with all the Baby Boomers and this can be a solution for people.

 

Last but not least, what’s one thing you desire?

I feel like I’m happy and grateful for what I have. What else can I have? Health and so forth. I have a place to live, good work to do, and a car that runs. I’ve got a family I love so I’ve got a lot. Maybe go on vacation. How about that?

Where?

Norway.

So shall your desire be or so much better than you can imagine. Thank you. That was great. If you want to connect with Kaaren, go to UDirectIRA.com and you can also email her at [email protected] to get that list of non-recourse banks. You can connect with me at RealEstateInvestorGoddesses.com and there, you can join our incredible community of women from all over the world that are real estate investing goddesses. You can also click on Invest to get into our Real Estate Investor Goddess Investor Club and find out about investment opportunities. You can join our Wealth Builder Program to learn how to successfully invest in real estate and get the education piece. That’s it. We’ll catch you next time for another real estate investor goddess interview. Thank you.

Important Links:

• uDirect IRA Services
• IRS.gov
• UDirectIRA.com
• [email protected]
• Real Estate Investor Goddess Investor Club

About Kaaren Hall

Board of Directors – Retirement Industry Trust Association

• CEO/President – uDirect IRA Services
• Founder – Orange County Real Estate Investors Association
• Certified IRA Services Professional (CISP)
• Self-Directed IRA Professional (SDIP)
• 16 years in residential mortgage lending & real estate
• 17 years as a broadcast professional
• Board of Directors – Council on Aging, Southern California
• CA Real Estate License
• Specialties: Self-Directed Retirement Services

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