In the first of today’s show, Jason Hartman talks to Nathan about out-of-state rental properties, credit history, asset-based financing, and bankruptcy. Then he welcomes Edwin Kelly from Specialized IRA Services. They discuss the cost of self-directed IRA investing, the difference between IRA custodians and administrators, and Health Saving Account.
Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts, visit Hartman media.com.
Announcer 0:13
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it on now. here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:04
Welcome to the creating wealth show and thank you so much for joining me. This is Jason Hartman and we are at episode number 542 542. Going fast, you know, we’re putting out 100 and what would that be 156 episodes per year now, we are trucking through these episodes really quickly. And we By the way, we got some great flashback Friday stuff coming up for you. I’ve really dug through our archives and looked at some stuff and found some good episodes. I remember recording them and and I think you’ll enjoy those. And now on Monday we’ve got Harry dent back on the show, not a flashback Friday, he’s back to talk about how to profit from the demographic cliff. Next week on Wednesday, we’ve got Ben Mezrich on the show talking about Russia, Putin, some really interesting things. If you like interesting stories, you will love that episode next week. So a lot of great stuff coming up for you. And today, we are going to talk about self directed IRA investing. Now look, I gotta tell you something, folks, when we have self directed IRA, people call us constantly, constantly, constantly, constantly, okay. And it seems like many people are in this business of doing self directed IRAs. And one of the things, I always tell them, as I said, Look, our clients, we are a well informed audience. And I’m assuming, you know, if you’re not new to the show, you are well informed. Okay? If you are new, just go back and listen to the episodes and you will be well informed. And I don’t want to hear the same speech about how to do a self directed IRA. I don’t want to hear this basic knowledge, this stuff that we covered hundreds of episodes ago, I want to hear some advanced techniques, some unique stuff, some things that people can do, that you’re not hearing in the mainstream media. And I’ll say in the mainstream podcast media, because there’s a lot of quacks out there, crap, crap. I’m not one of them. But there are many quacks out there talking about a lot of this stuff. So we’re gonna hear some things about self directed IRAs solo 401 K’s health savings accounts, and how to really maximize those today with our guests. But first, let’s take a couple of listener questions and listeners. Thank you so much for leaving messages at Jason hartman.com. just leaving a little voicemail message there. We absolutely love it. And we appreciate that because your question is the same question many other people have. By the way, I will a little note on technical stuff. I can hardly wait because tomorrow, my sound wall comes. Yes, it’s being shipped to me tomorrow. So this kind of echo that you hear a little bit here with my marble floors and high ceilings that should disappear. And it’s going to sound really good. So I can’t wait. That’ll be common right up on the next episode or two. You You should hear the new sound. So I’m looking forward to that. But anyway, let’s take a couple of listener questions. And here we go. This is Nathan.
Listener 4:19
Hi, Jason. This is Nathan calling from Minneapolis, Minnesota. My wife and I just bought our first rental property. And we love the concept of investing in out of state rental properties. We’re new to the real estate investing world. And we’re wondering how much time do you recommend we have an experience? And how much financial cushion Do you think we should have before we start investing your second, third and fourth properties out of state whether it be Alabama, Georgia, Texas, or the like, love to hear back from you and look forward to hearing your insight as to how much lead time we should have before we get jump fall away into the whole world. Thanks so much.
Jason Hartman 4:56
Hey, Nathan, thank you for the question. That is a great question. It’s An excellent question. And it’s not really a matter of time as it is a matter of capital A matter of money. How much do you have to invest? Now, many have asked over the years. And I just want to repeat this again, because it’s it’s an important point in that is that it’s very important to make sure you have at least 4% of the value of each property in reserve in cash in the bank, that is not money that you spend, it’s your emergency fund. So for example, if you bought your first $100,000 property, and you have at least and by the way, this is a minimum, okay, of $4,000 4% of the value saved up in the bank as your emergency fund, you should be okay. Certainly, you can have more than 4%, that’s the minimum, okay, maybe you want to have 6% of the value of the portfolio saved up. So if you’ve got a $1 million portfolio, you would have 40 to $60,000, in the bank, in your emergency fund ready to go. Now, the more the larger your portfolio, the more you can be tolerant of having the minimum amount of 4%. The smaller your portfolio, the larger your reserve fund should be. Why is that? Well, it’s because you’re not diversified, right? If one property goes vacant, you have a 100% vacancy rate. So if you’ve just got one property, and it’s your first one, and it’s $100,000, in value, I would say, you know, you, you might want to have five or $6,000, in cash reserves just dedicated to the property. This is not for other emergencies in your life, it’s just for the property. Okay, that’s the property’s emergency fund. It’s not your general life emergency fund. That is another matter. So it’s just a question of capital, Nathan. And, you know, go as fast as you can. If you believe in the stuff we’re talking about on the show, if you believe, as do I, that income property is the most historically proven asset class in the entire world, then accumulated as quickly as you can, but always make sure you have a good sensible reserve fund. Okay, let’s do one more question before we get to our guests.
Listener 7:23
Hi, Jason, this is Steve from Canada. We met once when you went to Whistler, and you will come back from the Whistler trip. Anyway. So I had a couple of questions to ask you which my interest the general audience on the podcast, as well as questions that I have. One is, first of all, for people who like to invest, but don’t have a credit history in the US. I remember one time you mentioning that there’s a Jason Hartman Foundation, which might assist or help prospective investors who are interested in your properties.
Jason Hartman 8:03
Just let me stop there for just a moment, before we get to the rest of Steve’s question and comment, the foundation does not assist with investing. My foundation is purely for charity work. But I do that, okay. on my own. I have another company that does private lending. And we did actually a long time ago, and it was quite a while ago, look into the concept of downpayment assistance. And that just does not work. So far as I know, I mean, the regulations were insane. It’s, it’s not good, because the lender doesn’t want it in there. And so we don’t do anything like that. We never did anything like that. So I just wanted to interrupt that question. Right there. But if you’re looking for funding to invest, and I know the rest of your question coming up, Steve, because I listened to it before. We do have some opportunities in terms of hard money lending, and so forth. So let’s finish your question.
Listener 9:04
So I wonder if that’s something that plays a role for those of us who are from out of the country. Second of all, for some of your audience who may not have the credit score, or perhaps have gone through a bankruptcy A few years ago, in the States, if they don’t have a credit, history or a good credit history, what kind of avenues are there available for those people? Another question I have in more of a comment really is the flashback Fridays. While I enjoy listening to them, sometimes I have trouble figuring out what time or what era they came from. So it would be really helpful if you could preface each fBf with the year and hopefully the month of that particular podcasts so that it will put things in context when we listen to these older but insightful podcasts. I’ve been listening to you Since I discovered your podcast since Christmas 2014 and trying to catch up on all the episodes, really enjoy them and hope to invest more with you guys. Thanks.
Jason Hartman 10:13
Hey, Steve. So those are great questions. And it was great meeting you in Vancouver when I was up there. When was that? January? Yeah, I guess that was January. You know, it’s always great to when I come to a city, and I mentioned it on the podcast that I’m going there that one of our listeners reaches out. I’ve had this happen many, many times. I’ve had it happen in other countries. I just, I just love meeting all of you. And of course, coming when you come to our events, I love meeting you there too. So yes, I definitely remember you. And I remember your story about when you lived in California and so forth. So appreciate the comments there. Steve on flashback Friday, you are absolutely right. We should be doing that. Another listener did ask us a question about that. And what we did do immediately and that you’ll see it’s in the show notes for all of the fashion flashback Fridays, it shows you the original episode number. I know it’s not as simple as a specific recording that would tell you exactly when it was originally published. And we have thought about and we’re still thinking about doing that. But here’s the thing. When we record the episodes, we don’t always publish them right away. This stuff is not always super time sensitive. It’s not like the news where you really got to have a date on the article that says Associated Press, you know, June 1 2020. By the way, what will be happening on June 1 2020? It’s an interesting question. So you do see the episode number, the original episode number, right in the top of the show notes, it’s right at the very top. So that should help you. But we are definitely wanting to and actually planning to just working out the logistics of having that little blurb in there that would tell you the original publishing date. Okay, but you do have the episode number, it’s in the show notes for you now. And that is a great comment. In terms of financing, though, you can do anything that’s an asset based loan, many, many 10s of millions of people have credit challenges since the Great Recession. And so that is certainly understandable, you are not alone, you just want to do an asset based loan, a hard money loan. And there are lots of options out there. I do hard money lending. So you can talk to your investment counselor at my company about funding for your deals. And they can refer you to me and we can discuss specific terms, lots of options out there in terms of hard money lending, and some more unique stuff. That’s asset based financing. That’s the key word asset based financing, and you should have no problem getting that. Alright, let’s jump to our guests. Let’s talk about solo 401 K’s health savings accounts, and SD IRAs. Here we go.
It’s my pleasure to introduce Edwin Kelly, he is CEO of specialized IRA services. And we are going to dive in and talk about some advanced IRA health savings accounts and solo 401k strategies today. I think you’ll find this interview to be very interesting. The mission here is to talk about some more advanced techniques, not the basic generic stuff. You’ve heard with other past guests that I’ve had on the show. So Edwin has committed to that. And I think he’s got some good information for us, Edwin, welcome. How are you? Jason? I am great. Thanks for having me on today. And I have been a huge fan of your show for years followed it for a long time. So I’ve really been looking forward to this good stuff. And I didn’t know you until just now this is the first time we’ve ever spoken, at least as far as I know. But we were introduced by someone else in the real estate business. And so I didn’t know you were out there listening, Edwin. Yeah, yeah. Lots of mutual friends. Funny how that works. It is It’s a small world. Definitely. So how many years? Have you been listening to the show? I’m just curious. Do you know?
Edwin Kelly 14:02
Oh, man, it’s five in about five years.
Jason Hartman 14:04
Yeah. Fantastic. Fantastic. Well, we love loyal listeners. So thank you for listening. And I hope I have, you know, offended you appropriately.
Edwin Kelly 14:14
have me laugh all at the same time.
Jason Hartman 14:18
It’s funny, I was talking with some one of our one of our team members. And I was saying, you know, I could never run for office because I’ve offended everybody.
Edwin Kelly 14:29
So there we go. I don’t know, you know, you’re a good company. I mean, look.
Jason Hartman 14:33
I don’t know, you know, as much as I, I, I don’t like Donald Trump. Like I think he’s, you know, pompous, obviously. But I actually think he’d be kind of a good president To tell you the truth. Because the way I look at a country is it’s just basically a big giant corporation. A very mismanaged one. I don’t know. I can’t like some of the stuff. He says, you know, what do you what do you think? Do you think he’s terrible? No, I
Edwin Kelly 14:56
you know, I think it would be helpful. You know, he offends everybody’s sensibility. But he is a business guy. He’s very successful guy. And I think if you want to fix Washington, which I spent a lot of time in Washington actually lobbying on behalf of our industry, our clients in our company. So we meet with all the regulators, various members of Congress, I do that every year. And what you really need is a shift in the mindset in DC, in my opinion, and he’s so you need somebody from outside of that world to come in and effect that world.
Jason Hartman 15:27
I couldn’t agree more, you know, the founding fathers never ever intended us to have career politicians. You know, in fact, they intended that we have a part time legislature, you know, it’s, this is absurd the way we have these career politicians, it’s terrible for the country. It really is, you know, I think we could all agree on that. Well, you
Edwin Kelly 15:47
know, as a side note to that don’t know if you know this or not, but Warren Buffett’s dad was in the Senate, and he had that same philosophy and when the Senate would pass raises for themselves. Warren Buffett’s dad actually put the additional pay back in the Treasury, he would not accept it.
Jason Hartman 16:05
Well, at least that’s not hypocritical. I find a lot of other things about the sun Warren Buffett to be very hypocritical as you, as I’m sure you’ve heard me say on the show, see, I’ve offended him. If he you know, I’ll never get him as a guest. You never know, maybe he’d want to have a chance to set the record straight for himself. Warren Buffett, we’d love to have you on the show. I admire everything you’ve done in so many ways in your earlier life. You know, your your value investing philosophy is very much like mine. I just think a lot of your political stuff is very hypocritical. So, anyway, we’re going to talk about IRA services, right?
Edwin Kelly 16:41
That’s what we’re that’s what we’re here to do. That’s right.
Jason Hartman 16:43
Okay. Well, um, So, tell us the difference had when, if you would, what types of companies are out here in the self directed IRA world, there are administrators and custodians, and maybe there’s something else? What’s the difference?
Edwin Kelly 16:56
Yeah, so so that’s a good question is one that people should be aware of. So a custodian is a licensed regulated financial institution, and many custodians have administrators as part of that the administrator is the portion of the company that actually does all the processing of the paperwork, processes investments, you know, does the tax reporting. So the custodian, the custodian, the way it works is it holds the assets, if you think about it that way, the administrator is the one that actually does all the work in terms of processing those assets, processing the investments, cutting the checks, tax reporting, all those things that have to be done to provide the service and keep that IRA in compliance from a tax perspective.
Jason Hartman 17:39
Now, you know, you’ve been around the industry for many years, you worked for the largest provider of these services for many years. Some companies do both, right.
Edwin Kelly 17:50
Yes. Yeah. And in fact, many companies on our in our industry do both.
Jason Hartman 17:55
Absolutely. And I’ve always wondered how do they really make their money? Is it on all those all that money under management?
Edwin Kelly 18:01
Yeah. So that’s a great question. Because I hear two things. When we talk about fees with clients. One, one thing I hear is, that seems kind of expensive. And that’s usually because they don’t know what they’re paying for their current retirement account, because, you know, they hide all the fees and mutual funds and everything like that. Self directing is actually far cheaper than that. Which is the other thing that I hear, which is, how do you guys make any money, it doesn’t seem like you charge that much. And so the thing that I can tell you, Jason, is that it’s a volume business, it requires a high level of expertise to do this well, to make clients happy to process process investments quickly and accurately. And so you’ve got to be able to manage the company operated efficiently, and you’ve got to have a good number of accounts on the books to, to make it a very viable profitable company. And so that’s really what it amounts to.
Jason Hartman 18:53
Well, I remember when I owned an escrow company, you know, these, these banks would just totally compete to get our escrow trust account business. And they would pay, they couldn’t pay us interest, but they would pay, I don’t know, like analysis credits. And you know, they could buy your software that you ran your escrow company with and all kinds of stuff like that. Is that kind of what’s going on a lot? Are there is there a lot of back end money in this?
Edwin Kelly 19:23
No, there’s there’s no, there’s no back end it from a feature standpoint, like one of the examples you use there. There’s no fee share going on. But the main money is what you see on the fee schedule. And so it’s it’s one reason why truthfully, there aren’t that many competitors in our industry now from from some people who’ve been around the industry, like you have been for a long, long time. One of the things is is that people say, Well, you the industry is grown a lot. There’s a lot of competitors out there. Well, if you knew how it started out, you’re right, because when I started the business, there was three of us basically, and the three of us were competing for the business now. We probably have about 20 to 30 people in our space. But relatively speaking for an industry, it’s a small number of competitors. And the reason why is what we’re talking about it, it requires a high level of expertise, it requires an ability to operate a business efficiently. And you’ve got to be able to generate a decent amount of volume and happy clients to to make it a viable enterprise. Okay, so we talked about the two different types of entities in the business, and many of them are merged together.
Jason Hartman 20:31
Talk to us about some strategies, if you will, that can really make the IRA far more profitable for investors.
Edwin Kelly 20:38
Okay, that’s a great question. And one of the things that we do is we do a fair amount of consulting with with our clients. Because, you know, one thing I’ll say about self directing, and one of the reasons why I see people limit their success, when they’re when they, they might have a self directed IRA, or they may not because they’re not sure how to use it. The reason why that is, is because it requires a very customized approach, you know, everybody’s in a different situation. And and so to answer that question, I’ll give you kind of two, two examples on on both ends of the spectrum. Because it really comes down to the specifics of this person’s situation. So let’s say we’re talking about somebody who’s just starting out, and this, this happens all the time. You know, we have people who say, you know, what, I believe in self directing, I need to get control of my retirement account, I want these incredible tax benefits that the government has blessed us with. But But what do I do if I’m just starting out with with an IRA. And so in fact, I’ll give you I’ll give you a case study, and I could give you several but let’s, let’s start with this one. I had a gentleman His name is Gary. And he lives in Ohio, he he opened up his very first Roth IRA with us with $4,000 in it, because the year that he opened his Roth IRA, he that’s all you could contribute at that point in time. So we put $4,000 in the Roth IRA. And he said, you know, what, what do you do with $4,000 in a Roth IRA? And how do you get started with that? So one of the things we talked to him about was the fact that you’re actually able to borrow money in your IRA to buy an investment. And so it’s a it’s kind of like, I call it a legal backdoor Jason, to the contribution limit, the the IRS will allow us to actually borrow money inside of that account. And so he says, Well, he says, you know, that sounds pretty appealing. He says, like, I know, people who have retirement accounts, can they lend their retirement money from their retirement account to my retirement account. And I said, you can absolutely do that. So what he ended up doing was in his particular market in small town, Ohio, he was able to buy properties between 15 and $25,000. And so what he would do is he would go out and talk to someone and, and give them a fixed rate of interest and secure their money, buy the property, they would lend it to his Roth IRA to acquire that property. And then he would fully amortize that mortgage over three to five years. And keep in mind, he started late in life, he started at 53. Gary is now 61 years old, and he’s paying off one property a month. Currently, he is spending $7,000 a month 100% tax free from that particular account. And as time goes on, he said in the next three years, that check is going to grow from 7000 a month to about $40,000 a month. And so, you know, I think that’s a great example of just one strategy that we’ve helped people put together and engineer to grow an account from very little money to very large cat, you know, assets and cash flow. So that’s on what am I
Jason Hartman 23:38
missing a big aha there? I mean, what’s the difference between, you know, many, many hard money lenders out there? Our you know, our private lenders, hard money, lenders, whatever you want to call them? They’re, they’re loaning via their IRA. Okay. So IRAs loan people money all the time. That’s not super uncommon by any means. What’s the AHA here? What is there something I didn’t quite catch?
Edwin Kelly 24:03
Yeah. So I think the big aha is that and this is what I really view as the the power of self directing, is that that the number one thing that people need, and I’ve heard you talk about this, in your, in your, some of your previous shows, is that people need passive income, right? They need to generate consistent, predictable income. And this is a way and this is the big takeaway in that, you know, I look at somebody like Gary, and like, keep in mind, he was 53 years old, he didn’t have a dime, save for retirement. He woke up one day and said, I need to do something about this. He opened up a self directed IRA, and with a little bit of information and knowledge was able to go out use other people’s money to acquire a real estate portfolio inside that IRA in about seven years. That will fully fund his retirement and put him in the top 1% of all income earners in the country. To me, that’s the AHA The fact that it can all come together and it can happen in a relatively short period of time.
Jason Hartman 25:04
Okay, okay, good. Good. So other strategies with IRAs before because I definitely want to talk to you, Edwin about health savings accounts and so forth, too.
Edwin Kelly 25:13
Yeah. So so another strategy that so that’s on one end of the spectrum, right? What are good strategies for people? Well, that worked for Gary, because he was starting with very little money. Now, there’s other what we call small dollar strategies with self directed IRAs. But that’s an example or case study of one. Now, if you go to the other end, this is something that and I’ll use john as an example, in again, I think I’m sharing these case studies, Jason, because I think it illustrates the power of what people can really accomplish. And I also want to address the real challenges that people are faced with today. So john is a very typical American, regular, everyday person that probably at times might have listened to your show, you know, he had a career his whole life, not a super high paying career. And he contributed to his company sponsored 401k plan. When it came time to retire, right? He was he was about 60 years old. Anyone to stop working? He had accumulated about $94,000, in his company sponsored 401k. And so he said, Well, you know, I don’t want to work. And he, he knew what he was going to get from Social Security, right? Because everybody gets that statement every year around their birthday, and they know what they’re gonna make. And so what john john lives in Michigan, by the way, john statement showed him is that he was eligible for about $1,246 a month, that’s what his his income was going to be from Social Security. He had Social Security, and he had $94,000 in his company sponsored 401k. And so what do you do with that? Because you can’t live on 1200 dollars a month. So what he did was, of course, he did what what most people do, and they call your traditional bank or brokerage. And he said, Hey, you know, I’ve got this $94,000 I need to generate some income, because I want to retire. And what can I do with this? Now, you probably know this, Jason. But if you ask the average financial advisor, what you can spend, based on, you know, stock market and mutual funds and things of that nature, what they typically will tell you, and this is what they told john, is that you could spend probably three to 4% of your account every year. Okay, so that amounts to a little over $300 a month. And john said, there’s no way I can live on my social security and $300 a month, it’s just not going to cut it, particularly if the market drops that that 3% goes down, right? So it’s not even $300 anymore. He said, that’s just I can’t I can’t live on that. So he started researching and looking for some different options and what what what were the alternatives, you know, to what the the advisors were telling him. And what he came across was real estate investing, specifically buy and hold real estate. Now, this is a this is a gentleman he’s never been to, to one of your terrific you know, events Jason and learn how to do real estate investing themselves. So what he did was he found someone, another investor who purchased properties, fixed up the properties, put the tenants in the properties and manage those properties. So it was passive from from his standpoint, what he ended up doing was transferring the $94,000 in his company sponsored 401k into a self directed IRA with us. He then purchased two properties. One was 43,000. The other was 42,000. Both of those properties, pay about after expenses, around $700 a month, per unit, right, in terms of rental income back to his IRA, which he now distributes out. So total, that’s about 1400 dollars a month. Now, 1400 dollars a month may not sound like a lot to people, but you asked about the big aha, this is the big aha to me. Think about what he accomplished. The only guaranteed income he had was $1,246 from Social Security, that’s it. And within 90 days of retiring, he was able to move from his 401k into a self directed IRA purchase to real estate assets. And he didn’t know anything really about real estate. And he doubled his monthly retirement income for the rest of his life. To me that is pretty remarkable. When you take somebody who you know just a regular everyday person they’ve never even heard about this you know, 90 days before he did it. Just never even heard of it.
Jason Hartman 29:34
You know, it’s it’s amazing how just by structuring things better you can make such a difference you know, same amount of money. Yeah, yeah. Wow. Amazing. Okay, good. So if you want to say anything more about IRA tips, or you know, just general IRA stuff, I want to move into some of the other topics here we’ve got solo 401, K’s and health savings accounts too, but anything else on the IRA topic?
Edwin Kelly 29:59
No, I do. I know you want to cover some of the more advanced stuff more more, you know, specialized stuff, so so we can we can jump into that.
Jason Hartman 30:05
Okay, good. Take it away, I’ll let you lead it wherever you like.
Edwin Kelly 30:08
Okay, so one of the things that, that we have a lot of clients asking about now, what are other things that they can do to to some, some some of the challenges that they have, right. And, and so there’s two accounts that we are starting to really see people adopt on a larger and larger scale. One of those is the solo, or it’s also referred to as an individual 401k, or a solo k goes by different names, but it’s basically all the same thing. And that particular account has a lot a lot of benefits. And I’ll just go over some of the high level benefits. And if you think it’s worth drilling down on you feel free to ask questions, but on the sole, okay, one of the first benefits is, is that you can contribute a lot more money to that account. So there’s a number of people, particularly once they become successful investors, they’ve got a business going, and they say, you know what, the challenge of the downside of the IRA is I can only put you know, 5500 in a year or 6000 in a year, you know, that the contribution limits are lower? Well, the great thing about a 401k plan is that clients can put between 50 and $60,000 per year into that account. And if they’re married, they can include their spouse on the account, there’s ways to do that. And you can basically double that number. So we literally see some of our high income earners, our higher net worth clients using this as a way of protecting more money, taking more money off the table from the government, and putting it in that that type of an environment. Now another benefit, and a lot of people are not aware of this, so I’ll share this with you is that there’s a thing called a Roth solo K or a Roth 401k. And that 50 to $60,000 can be contributed, you have a choice, you can put it in as tax deferred or traditional money, you can put it in as tax free or Roth money. And you can do that on all 50 to $60,000. And so regardless of the tax benefit you’re looking for, you can achieve that with that particular plan. That’s a long time. But it’s been a challenge for people who said, You know, I make too much money to put money in a Roth IRA. Well, you never make too much money to put money in a Roth 401k because there’s no income limitations on that account.
Jason Hartman 32:26
So that’s it, that’s another huge benefit that we see clients using, okay, and can they can the solo K or the 401? k, what, it’s really a solo 401k or a solo K, or, you know, they call it different names. But is that something that can be a Roth or a non Roth, what do you call a non Roth?
Edwin Kelly 32:46
We call it tax deferred or traditional?
Jason Hartman 32:48
Yeah, traditional. So Can that be either way? Can all of these accounts be either way? I mean, Health Savings Account HSA? I mean, can that be that way to your you’re gonna be really excited about the HSA? Because guess what, you don’t have to choose you get both benefits with the HSA? Yeah.
Edwin Kelly 33:03
So. And, in fact, since you brought up the HSA, let’s kind of jump into that. But let me just say two quick things about the 401k, that that are really compelling for people. One is that, in addition to the two benefits I just mentioned, one of the reason why people don’t use solo K’s is because they don’t know how to get money in there. And so one of the things that we allow clients to do is take money from a traditional IRA and move it into a 401k. At most companies don’t allow you to do that. A lot of people are under the false assumption. That’s an IRS rule. That’s not true. It’s a a rule that the administrator the custodian sets, but there’s no rule that says you’re not allowed to take traditional IRA money and move it into a traditional 401k. You’re absolutely allowed to do that. Now, why do many people are allowed to? Why do many people choose to fund a solo 401k that way? Well, is because the 401 k is the only account that allows someone to take out a personal loan. Right, which I know you know, that Jason, but a lot of people are not aware of that, that, that you’re not allowed to borrow money personally from your own IRA. So for somebody who says, I want to get into real estate investing, and I but I want to lend money to myself, well, you can’t do that from an IRA, but you can take a personal loan tax free penalty free from your 401k. So the 401k gives people access to their retirement savings today, as well as tomorrow.
Jason Hartman 34:21
So again, just another couple quick benefits on that one. Okay. All right. That’s good to know. I want to make sure when, by the way, as we’re talking about these things, that you tell people how to set them up. You know, how much does it cost? How difficult or easy is it? Hopefully it’s easy, because when I when I did my solo one K, I thought it was you know, it was kind of difficult, you know, and I haven’t done a health savings account. Yeah,
Edwin Kelly 34:44
yeah. Well, so the answer is and that’s a good question because it took us a while to really figure out the 401k. And the reason why is what you said that the paperwork is cumbersome, it can be confusing to clients, they don’t know how to fill it out. Typical paperwork that we’ve seen, you know, some others in the industry, if they even offer it most, most of our competitors, truthfully, don’t even do a solo 401k. Because it’s a very different type of plan, very complex to administer, you know, not so much for you. But but but for us. And so a lot of people don’t want to get into that. And but the applications were like 30 pages long. And we said, there’s no way we can ask somebody to go through a 30 page application, that’s just not going to work. And so we’ve we’ve cut our application down to about seven pages. And we walk people through it every step of the way. So they never fill it out on their own, they always fill it out with us, and anything that they can’t fill in, we help we help fill in those blanks. So So the plan is, it’s a little bit more involved than setting up an IRA. But we made it pretty easy.
Jason Hartman 35:47
I mean, I hope everybody listening has a self directed IRA. What how do you set that up? How much does it cost and so forth?
Edwin Kelly 35:53
Yeah, so the typical, yeah, the typical, the way that the fees work is as based on the asset value account, but as an example, so when we start a brand new account and contribute money to it, the starting fee is $219. a year, so not a
Jason Hartman 36:06
lot of money. Okay? say they have $100,000 $100,000. So
Edwin Kelly 36:09
$100,000 account will be about $400 a year, again, not a lot of money,
Jason Hartman 36:13
okay? So $400 per year, and now compare that with a solo K. And that that’s only if you have a business, right? The solo okay. And but but having a business is sort of a little bit of a subjective term anyway, because that just means center setting up an entity.
Edwin Kelly 36:31
Yeah. And in fact, you know, what a lot of people think you have to have an entity. Now truthfully, most people do who set these up, but you can actually, the rules allow you to be a sole proprietor,
Jason Hartman 36:39
you can you can do it as a sole proprietor,
Edwin Kelly 36:41
or you can you can actually be a sole proprietor, again, don’t see it very often, but it can’t, you know, you’re allowed. I mean, that’s, you know, that’s, that’s the point. So how did the fees compare between a 401k and an IRA? Well, the 401k fees are a few hundred dollars more a year. So, again, for the right person, it offers tremendous benefits. And, but that’s where, you know, I’ll go back to what I said earlier, every conversation we have with someone, we’re really trying to understand where they’re coming from, what they’re looking for, what they want to accomplish. And then we do something that we call plan design, which is just a fancy way of saying, you know, which plan or plans are the best plans for you based on fees, the benefits you’re looking for, you know, your your, your income situation, investment strategy, all those types of things.
Jason Hartman 37:23
Okay. And cost wise. And let’s always do it with $100,000, just to use a round number.
Edwin Kelly 37:29
So So yeah, so the the fee on like a 401k, would be probably between seven and $800 a year for $100,000 account versus the the 400 on an IRA?
Jason Hartman 37:39
And how about the setup fees on both of these, compare those? Yeah,
Edwin Kelly 37:42
so the setup fees on an IRA start are basically 50 bucks to set the account up. And then on a on a solo K, I want to say it’s around 250. There’s more involved in setting those plans up. And there’s actually one of the reasons why Just so you know, and people may not be aware of this, you know, they see the higher fee. I’d love to tell you, Jason that I get to keep all that money, but it doesn’t work that way. The reality is, is that 401 K’s are called qualified plans. Why are they called qualified because the IRS actually qualifies them. And they have to be filed with the IRS, and there’s filing fees that get paid to the IRS. So some of the those additional fees that people see on those plans. Don’t go to your administrator or custodian, they go someplace else. So that’s one reason why the cost structure is a little different. And there’s more involved in terms of record keeping and those kinds of things.
Jason Hartman 38:29
All right. Okay. And now, do you want to move to HSS? Yeah, so I love the HSA particularly, that’s a health savings account.
Edwin Kelly 38:38
Yeah, health savings account. And this is something that I’m a big, big advocate of, we’ve implemented this strategy here at specialized IRA services. So we use it as a business. It’s great for business owners, entrepreneurs, it’s great for individuals, if you’re paying your own health insurance. Here’s kind of the concept behind it. And I’ll kind of walk through with the benefits of it. Right now, today, right? People have seen their insurance premiums go up this year, and they’ve seen their coverage go down in many instances. And so that doesn’t work for a lot of people. I mean, people are already spending a lot of money on health insurance. And because of the recent legislation, right, premiums went up. This is a strategy that helps bring those costs back in line. So the way this works is that there’s there’s one thing that you need to qualify to open and contribute to an HSA. And that is what’s called an hdhp a high deductible health insurance plan. And the way that works is that we think about it like your car insurance, Jason, that you know, if we have an accident, right, we have a deductible on our car insurance, we pay up to that deductible anything over that deductible, the insurance company pays for same concept that they’ve now applied to health insurance. So the way it works is that you have a high deductible on your Your health insurance plan and you pay up to that deductible out of pocket. And then anything over that the health insurance company pays. That’s how that’s how that works in a nutshell. Now the question is, though, okay, if you’re going to have a deductible, and you have to pay first dollar up to that deductible, where does the money come from? Well, that’s where the government created something called the HSA or the health savings account. And the idea with the Health Savings Account, is that you put money in it, you can contribute money to it. And the great thing about the HSA is that it’s the only account that marries both the tax benefits of the traditional IRA, as well as the Roth IRA. So every dollar you contribute to that HSA is 100%, tax deductible to you, regardless of your income, you can make a million dollars this year, and you can contribute to that account and take a full tax deduction. When the money is inside that account, you get to invest it, if you choose, grow it, all that money that you generate, and profits are 100%, tax protected. And then when you spend the money on qualified medical expenses, and we want to get some details on that we can but I’ll make it simple and say that most things are covered. Anything that’s medically necessary, orthodontics, doctor visits, you know, medication, prescription medications. Well, one area
Jason Hartman 41:20
that’s interesting on my longevity, and biohacking show I talked about to some extent, is these executive health screenings or executive health physicals and insurance will usually not cover them from what I understand. But they can be really good. You know, what can you pay for that with your HSA? You know, there’s like $5,000, maybe for a full day at a clinic and, and then an ongoing program, you know, the more proactive health things that people want to do sometimes even massage and chiropractic, you know, those things or? Or is it pretty strict, like your insurance company is going to be?
Edwin Kelly 41:58
No, no, actually, you have a lot of flexibility on it. That’s one of the great things about it. And the the question comes back,
Jason Hartman 42:04
I mean, can you pay for supplements and vitamins and food do know
Edwin Kelly 42:09
that now they draw the line there. And in fact, they’ve, they’ve augmented or updated the rules a little bit in that they used to let you buy, you know, Tylenol? Well, they said, Now, it’s got to be prescription medication, they don’t want you to go into the drugstore and use your HSA or your debit card on the account. Because you know, when you might buy candy and pop. So they’ve limited that to prescription meds and things of that nature. But the other things that you’re bringing up, you can absolutely do it again, it kind of comes back to is it really for? Is it isn’t medically vital important? Is it medically necessary? Let me give you a practical example. So we actually had this question come up. And so I actually just, I’m gonna throw this question out to you. Okay, so I want you to answer this, I just want you to take a stab at this. You tell me you think I hope I can answer it? Well, you’re gonna kind of come up with the answer. We’ll see what your thought processes on it. So we had we had a female client. And she asked the question, she says, breast augmentation? Can Can I pay for that using these pre tax dollars from an HSA? She’s gonna say it’s part of my psychological health.
Jason Hartman 43:13
It’s my self esteem.
Edwin Kelly 43:15
Now, if you ask her husband, he would tell you it’s medically necessary, right? But the question is coming from her, what what do you think about that scenario, just just on the surface, I haven’t given you a ton of information. So just on the surface, what do you think?
Jason Hartman 43:27
Well, I’m gonna say no, but I bet you’re gonna say yes, you can use the HSA account for it. I mean, I don’t think it should be allowed. But
Edwin Kelly 43:35
that’s a good answer. Because it is it’s kind of a trick question. The answer is, if it was because it was for cosmetic purposes only, then it’s not. It’s not an allowable expense. Okay. But in her particular case, she was a breast cancer survivor. Oh, yeah. But that’s reconstructive.
Jason Hartman 43:53
That’s really, truly medical. Yeah,
Edwin Kelly 43:55
that’s instructive. And it’s so it’s so that’s where that’s where I say the rules are, I call them pretty liberal. Right? They, they’re very flexible in terms of what we can can do and what we can spend money on and what they do consider qualified medical expenses. So it’s it is so yeah, so there’s a lot of options there. Now, I’ll share a couple quick things on that as well.
Jason Hartman 44:18
I would just add one more thing to that, you know, I would think she could probably go visit a psychiatrist or psychologist and get a note that says it’s medically necessary even if, you know, there wasn’t the cancer history there. I you know, I think a lot of things like that. You could probably you could probably push the issue if you wanted to.
Edwin Kelly 44:35
Yeah, you could argue it for sure. I mean, and that’s only if it even got audited. I mean it you know, do they audit the the way that people spend money from these accounts? I don’t I’ve never personally seen one not saying that you should do whatever you want with it, but I’m just saying it, you know, I haven’t seen it. You know, people are using them for medical expenses because they have them and so you need the money. You know the one of the advantages to this strategy, Jason. is the fact that it will drop people’s health insurance premiums by 30 40% a month. So when I first switched from a standard health insurance plan to a high deductible health insurance plan, my insurance premium went down $300 a month. So what do I do with that? $300 I put it in that HSA and I get a tax deduction on it. And now it’s my money. The other thing to keep in mind is that this is not like a flexible savings account. That’s one question that comes up all the time. Right. So a lot of people are familiar with flexible savings accounts. And the problem with a flexible savings account is that you have to be Nostradamus to figure out how to make that thing work. Because you got to get to the penny, the first day of the year, how much money you’re going to need out of pocket. And if you guess too little, you’re using after tax dollars, if you guess too much, the money goes away, they just take it away from you. That’s not true with an HSA. That is your money. That is your account that money rolls over and grows from year to year. So one of the things that clients are doing, and we’ve just seen this recently, we’ve been teaching this for a while. And so people are starting to adopt it. They’re putting money into that account, and they’re beginning to invest that money. And one of the strategies that people have is that they’re buying a buy and hold piece of real estate in that account. And then that monthly rental income, guess what, that’s what pays all their expenses, they don’t even need to make another contribution to that account, because they now have a cash flow machine in the sense inside that HSA that funds, all their health care expenses. Pretty incredible stuff.
Jason Hartman 46:25
Yeah, it really is. What’s the cost of setup and ongoing administration fees.
Edwin Kelly 46:30
So that’s cheap, that’s a cheap account. I say cheap, you know, it’s on the cheaper side for sure. It’s about it’s a $50 setup plus 195 a year. So it’s again, it’s not a lot of money. Okay, so
Jason Hartman 46:41
why did I talk to a law firm once and they told me it would be like 1000 or 1500 dollars to set up an HSA?
Edwin Kelly 46:48
That’s a great question. I you know, if I could get by charging that I probably would. Yeah.
Edwin Kelly 46:56
$1,000 I think that’s the answer. Really, maybe it is yeah,
Jason Hartman 46:59
interesting. Okay. Okay. So the HSA is that that’s pretty it sounds like it’s pretty easy, you know, this stuff gets to be a hassle to administrate and, and, you know, just philosophically, like, backing up, this is the problem with government and government trying to influence behavior and all this stuff. It’s just flippin complicated, you know, but we, you know, we got to do it. If we want to win the financial game, you know, you’ve got to learn this stuff and use it and it can be powerful is the HSA the easiest of the three that we’ve talked about to administrator the four I guess there are four things IRA, self directed IRA, so Okay, HSA? No, three?
Edwin Kelly 47:39
Yeah, so the HSA and the IRA are basically on the same, same level, the 401k is a one that from our standpoint is more complex to to work with, from a client’s perspective, there really aren’t too many differences, the initial paperwork is a difference. And then, you know, the way they title stuff, to title investments, to those accounts is a little different. But you know, we give people the tiling is like, here’s how it needs to appear. So again, that’s not really an issue at all.
Jason Hartman 48:06
Yeah, good stuff. Interesting. give out your website.
Edwin Kelly 48:08
Yeah. So So Our website is www dot specialized IRA services with an S on the end.com. Specialized Ira services.com.
Jason Hartman 48:18
Edwin, I got another question for you. What do you think of having an LLC inside one’s IRA?
Edwin Kelly 48:24
That’s a great question. It’s a hot topic, as you know, and here’s my answer to it. Yeah, we allow it. I can’t tell you if it’s a good idea or a bad idea, it depends on your purposes for having an LLC, what I can tell you is about 95% of our clients elect to work directly through us on the processing and their investments and everything that goes along with that, about 5% of our clients choose to use an LLC, and handle more of that record keeping and administration and those responsibilities themselves. It can be done either way, it really comes back to client preference. Our philosophy is that we’re here to support our clients that if a client wants to use an LLC, we allow them to do it. If the client doesn’t want to use an LLC. They don’t have to
Jason Hartman 49:15
why did the last company you were with discourage that so heavily?
Edwin Kelly 49:18
You know, that’s a really good question. And there’s a few different philosophies or answers to that floating around out there their belief, at least the outspoken belief is that you that that that the rules were unclear, and that the client can get themselves into trouble with that type of arrangement, that they might have too much control that they might miss manage something or not do the proper due diligence for record keeping like they’re supposed to. That’s that’s their, their blanket statement effectively in terms of why they discourage that. Having said that, again, I used to argue that point at one point when I was there, and as time has gone on, I’ve said, You know what, I’ve had enough conversations and I’ve seen enough people do these arrangements that clients are aware, if they’re taking on and they want the LLC, they know they want it in many cases, then we allow it, you know, is it that’s the whole point of self directing, in my opinion, is that if if you want to effect let me give you a more specific example about that, you know, if you call that particular company, and you ask them certain questions, then they say to you, well, Jason, you need to go talk to your attorney, or your CPA, because that’s legal advice or tax advice, and we don’t provide that. And so what do you do? Well, you go back to your attorney, you say, Okay, I want to set this up, how do I do it? Can I do it? And they say, yes. And here’s what we recommend. And we’ll go over the do’s and don’ts as long as you’re good with that. We’ll set it you know, we’ll set up for you say, Okay, great, you call that that that company back and you say, Okay, I talked to my attorney, I paid him $1,000. He’s helping me out. He’s doing this all and they say, Well, guess what, we’re not gonna hold it.
Jason Hartman 51:01
Well, wait a minute, you just did what they told you to do. Right? That doesn’t seem like a very client friendly policy. And therefore, that’s why we’ve we’ve adopted the philosophy we have, which is, we’re here to support our clients. So if it’s not prohibited, we’re gonna allow it, I just think it’s too difficult to not have an LLC. Now remember, folks, asset protection wise, you may want to have multiple LLC is depending on how big your your account is, whether it be an IRA or solo 401k within that plan. But, you know, I just think it’s too hard not to have that checkbook control. I mean, you got to be careful. You know, Mike Dillard in the Elevation Group had a guest, I think, a few years back that was talking about, you know, how to take possession of gold and other precious metals inside your self directed IRA. And I just knew that had to be illegal. Because if you touch it, Now, granted, you can touch the piece of real estate, of course, okay. But, you know, if you’re if you’re holding that gold, for example, then, you know, I mean, the IRS has no way to keep track of that, you know, you have a checkbook control, LLC. That’s how they do it, right. checkbook control, LLC, and then you buy the gold, you say, Hey, I bought some gold in my plan. That’s what you tell the IRS, but then you have it in your possession? That’s crazy. There’s no way no way that’s allowed?
Edwin Kelly 52:20
Yeah, that’s if somebody says you can do that, you know,
Jason Hartman 52:23
you’re gonna get into trouble with that one.
Edwin Kelly 52:25
Yeah, you’re going to get into trouble. And the thing is, is that, you know, I tell people look, it’s just not worth, there’s certain battles you fight, and there’s certain battles you don’t fight. That’s a pretty clear losing battle, in my opinion, you know, you’re not going to win that argument with the IRS. But you
Jason Hartman 52:43
know, if you’re doing real estate, I mean, there are little expenses that crop up here and there, yeah, like you need to, you need a debit card to pay for the utilities, right? or be able to write a check to the utility company, when you first get that property up and going and you’re, you know, showing it to tenants or something, or in between tenants. I mean, it’s just too hard not to have the LLC and be able to do that stuff.
Edwin Kelly 53:06
Yeah, I mean, and that’s why I say we, we, we have the philosophy that if a client wants to do it, we certainly allow it. And they are able to do that with us. And so it really comes back to personal preference, because like you’re saying is that, you know, some people say, Hey, you know, what, I want an LLC, and they take on certain roles themselves, many of our clients have property managers who take care of a lot of those issues for them, you know, that that’s, I think that’s one of the great things about real estate, Jason, and what you teach is that there’s a lot of different ways to structure things. And there’s obviously your recommendations and what you think is best. And at the same time, there’s, there’s some, there’s some allowance there for, for what works for people, and when what they’re trying to accomplish. And so what we’ve decided is, is the best way to be a long term partner with our clients, and be a strategic partner for them, and important team member is is to really develop systems and processes that support what the clients are doing. And what I’ve seen is and the reality of it is, there isn’t a cookie cutter, you know, square pegs don’t go in round holes. And that’s why so much of what we do is highly, highly customized to support our clients. And we can do it because we’ve been doing it for 24 years. I mean, that’s, you know, that’s and that’s why we’re able to create those types of things.
Jason Hartman 54:18
Is there an extra fee for having an LLC and having checkbook control with inside a plan?
Edwin Kelly 54:24
Not from our standpoint, but obviously it depends where they register that LLC and fees to the state and to get set up but that’s those are the fees, they don’t pay us as an example any additional fee if they opt to use an LLC.
Jason Hartman 54:38
Okay, good stuff. Edwin, any closing thoughts?
Edwin Kelly 54:42
You know, I really appreciate you having me on and I hope the information that we shared today is really beneficial. And if people want to find out more about the benefits of the HSA or the soul, okay, feel free to give us a call. Check out our website. We have a lot of great content and information out there to help people get those questions answered. Good stuff. Edwin
Jason Hartman 54:57
Kelly, thanks so much for joining us.
Edwin Kelly 54:59
Okay. Thank you, Jason.
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