Aileen: [00:00:00] Thank you, everyone for joining today’s episode of the, How Did They Do It? Real Estate podcast. We are your hosts, Seyla and Aileen and today’s guest, we have Bernard Reisz.  Bernard, is a CPA and is the founder of 401kCheckbook.com, which gives investors direct control of their tax-sheltered funds for real estate equity and debt opportunities using Checkbook Control IRAs, QRPs, Solo 401(k)s, and Checkbook Life Insurance.  He’s an expert on self-directed IRAs and how to compliantly use this vehicle to invest in real estate.

He is also the founder of AgentFinancial.com, which provides tax, entity, and financial services to real estate professionals, including real estate agents, real estate investors, and mortgage brokers.

We are so happy to have you on today, Bernard.

Bernard: [00:00:41] Thank you for having me. It’s great to be here. As I said, you have definitely done your homework. And from what I see you must have a very challenging set of questions lined up for me.

Aileen: [00:00:52] We have a lot to get into. This is a fun topic.

Bernard: [00:00:55] All right, let’s dive right in.

Aileen: [00:00:57] So can we start off by telling our listeners a little bit more about your background and your business?

Bernard: [00:01:02] So I am a CPA and my background is diverse. What I noticed as a CPA, somebody helping individuals, business owners, from an array of backgrounds is that everything is very siloed and people are not getting objective information.

Specifically with regard to tax strategies, your accountant may be an expert at preparing tax returns. And I assure you that for those that have not tried to prepare their own tax returns that have complexity, it is a true skill. To figure out how to get all that information to flow correctly into a tax return.

But accountants are not experts in many other areas of tax strategy. They may have a good gut feeling,  but they’re not, they don’t have that expertise. And there are always people that are coming in pitching do this strategy, the other strategy. And these are people that want to sell things to people. And so I realized there’s a need for somebody to approach this in a professional way and say, all right, what can you do? What can’t you do?  Give people true advice without trying to promote and sell things, and keep their interests first.  So that’s the philosophy. So from that, I’m active in many areas of tax and financial advisory, with a special focus on self directed retirement accounts, helping people use a tax shelter, these incredible tax shelters,  for investing in real estate, cryptocurrency tax liens notes, so many different opportunities.

Seyla: [00:02:32] Thank you for the background, many people that get started in real estate because of the many tax benefits that this assets class has to offer. Can you talk about some of the main tax benefits that both passive and active investors can utilize when investing in real estate?

 Bernard: [00:02:51] Yes, we can divide that into, I’d say three, three components to that.

So the first is now let’s talk about when you actually own real estate and you own an asset and it’s generating rental income.  Rental income, the first advantage that it has over earned income, is that it is not subject to payroll tax. So many people think about taxes. They think about income tax.  But the truth is a big slice of your taxes are going towards what I call the payroll taxes, which is FICA, FUTA, SUTA. So if you’ve ever looked at your W2,  you’re going to see that there are all sorts of withholding other than income tax. And in boxes, three, four, five, you want to focus on those on your W2, and you’re going to see there all sorts of other taxes that you pay about 7% of that, the rest is picked up by your employer.  But of course you’re also paying that, cause an employer, the, that when they make a salary offer, in addition to paying the salary, they’re also gonna have to pay the payroll tax. So you’re salary gets pushed down because the employer looks at it as what’s the total cost of  having the employee. So that’s one of the additional tax that you pay. On most types of earned income rental income does not have payroll tax.  so that’s one component of it.  now the other side of this is a rental income tends to be tax efficient because of depreciation write-offs.

And now’s a good time to give a shout out to our good friend, Yonah Weiss.  I think we all know him. And so he obviously is the King of depreciation deductions.

Aileen: [00:04:26] He is, we had him earlier on as a guest, as our podcast guest too and he has a lot of great advice.

Bernard: [00:04:32] Yeah. So that’s, he takes, depreciation and turbocharges it, before getting into turbocharging, the appreciation lets us understand what the value of it is.

What is the depreciation deduction?  Many people toss out the word depreciation deduction, but let’s try to break it down.  Any type of capital asset.  Here’s the thing when you have an expense in your business, right? So say you took in a hundred dollars of income and you had $10 of advertising expense. All right. Your net income is going to be $90, a hundred dollars of revenue, $10 of expense, you netted $90 of income.

Now say your business, you buy a long-term asset, right? You need some sort of equipment for your business and you buy that. Is that an expense that you get to reduce? So you bought some sort of equipment and it’s a thousand dollars. So do we say that you had a $900 loss that year because you had revenue of a hundred dollars and you bought this equipment for a thousand dollars.

So would you report a tax loss of $900 on your return? And the answer is that you wouldn’t generally barring any specific exceptions because you just had a thousand dollars in cash and you traded it for a thousand dollar asset.  It’s not something that you used up. You’re going to use that equipment to produce income for years to come.

And the idea is that each year say this asset is a seven year asset. So each year you take a deduction for one seventh of the cost of that item. So rather than taking an expense in year one, you get to a claim this expense over seven years, ratably.  So any business that has capital assets will have depreciation deductions, but with most assets that have depreciation deductions, you know what happens to that equipment after seven years? It goes to the garbage, right? Equipment doesn’t last forever. It’s losing value.

If you try to sell it after seven years, it would have $0 salvage value. Now with the real estate, you bought a building for a million dollars you’re claiming and expense each year based on your million dollar purchase price. But is your asset after 10 years, is the building worth a million dollars, less or a million dollars more.

Aileen: [00:06:47] We’re all hoping a million dollars more.

Bernard: [00:06:49] So that’s what tends to happen. So with real estate, you end up with this kind of Phantom expense, right? But your asset is going up in value, but you’re still claiming the cost of the asset as an expense. Now is the cost of that asset and money that’s going out of your pocket.

 You spent that money up front right on 80% of it came from the bank anyway.  But you get it right. If you buy the asset for a million dollars, but you put in 200,000, the bank put an 800  you’re getting depreciation deductions for a million dollars, not on 200,000. The appreciation is based on the total cost of the asset.

 So each year you may be reporting if you took it, your financial statement. For your rental business, you may show all right, revenue, rental income of $50,000 repairs and maintenance, various expenses. And now you’re netted you’re down to net income of $15,000. And then comes in this depreciation deduction, which is not money out of your pocket.

And all of a sudden, now you’re showing $15,000, $30,000 appreciation deduction. And now you’re reporting a $15,000 loss, but from a cash flow perspective, you have positive cash flow. So you have positive cash flow with negative taxable income. Right now in any most other businesses, when you have negative taxable income, it also means you have negative cash flow, right?

So business real estate, because of this depreciation, this non-cash expense, this Phantom expense, your net worth is going up because the value of your asset has gone up. So your wealth has gone up. You have positive cashflow, but on your tax return, the IRS, Hey, I lost $15,000.  I don’t pay no taxes this year because I lost money.

But meanwhile, your bank account and your net wealth had may have doubled or tripled or quadrupled. So that’s the second component of real estate tax advantages. How does that sound?

Aileen: [00:08:40] That sounds good.  How about the depreciation recapture at the end?

Bernard: [00:08:44] Okay. Yeah. So depreciation recapture, by the way, it’s not as terrible, not as intimidating as people make it sound, but that’s a good way to segue into the next component of real estate benefits, right? When you sell, we’re talking about now, when you hold the asset, now, how about when you sell the asset?

 So when you sell the asset, if it’s been a longterm hold, the tax rates that you’re going to pay are going to be longterm. Capital gains rates would go from zero to 20% in contrast with ordinary income tax rates, which currently go up to 37%. So when you sell the building and you may be recognizing all the accumulated gain, that appreciation that happened over the 10 years that you’ve held it, right?

So you may be cashing in now in a really big way, but rather than paying 37%, you pay 15% or 20%,  which is longterm capital gains rates, unless you have depreciation recapture. So the appreciation recapture can bring your tax rate on the sale up to 25%.  So 25%. There’s a lot worse than 20%, but it’s nowhere near 37.

So it’s just gotta be put in perspective. and what depreciation recapture is to the extent that you were allowed to claim depreciation, expense deductions, they get recaptured at the 25% rate rather than the standard longterm capital gains rates. How’s that?

Aileen: [00:10:11] Yep. That makes sense.

Bernard: [00:10:12] Okay. So this brings us to another real benefit of real estate, which is a 1031 exchange, right?

So it used to be that 10 31 exchanges could be done for your plane on horses and boats and all sorts of stuff.  But regardless their greatest value is always with real estate. And again, for the same thing, the idea of a 1031 exchange, just listeners or anybody that may not be completely familiar with what it is, is it takes a sale of an asset and kind of makes it irrelevant for tax purposes.

It lets you forget tax purposes and is treated as if you didn’t sell the asset.  So you don’t recognize any gain. So before the Trump tax changes, this was available for just about any asset.  But for most assets after you had the asset for 10 years, Was probably worth a lot less, right? So they didn’t have that much application, who wants to for a loss, right?

If you haven’t asked yet and you’re going to sell it for a loss, you want to recognize the loss. You don’t want a 10 31 exchange it, but really you listed again, you’re in this place where you hold onto the asset for 10 years, you’ve had this incredible appreciation. If you sell it, you may have, depending on the size of the asset, a few hundred thousand to a few hundred million dollars in gain.

And with a 10 31 exchange, you can totally sidestep all this depreciation recapture longterm capital gains, and you can take your money and roll it into a new asset. So 10 31 exchange is another key component. One of the benefits of real estate, not when you’re operating it, but when you selling the asset.

Aileen: [00:11:43] Okay. And then with the 10 31 exchange, is there a time period where you would have to completely 10 31 exchange and identify the next opportunity?

Bernard: [00:11:52] Oh, yes. So there are lots and lots of rules surrounding this at a high level. You have a 45 day identification period and 180 days to close. So we’re looking at, and that hundred 80 days runs concurrently with the 45 day identification period.

So you have to identify, and you’ve got to close within the 180 days.  If that doesn’t work out, then you’ve got a failed exchange. Now there are other strategies or other tools that may be, can be used to save a failed exchange and then obviously you can also use opportunities zones.  So there are all sorts of things that can be done,  but unique to real estate, is the 10 31 exchange.

Seyla: [00:12:34] So if we want to start with real estate and using the funds in our retirement accounts. How do we do that?

Bernard: [00:12:40] That’s an excellent question and the key thing here is to understand that there is no one on size fits all approach.

So there are a lot of ways to do it, but the fundamental premise to all this is that it is certainly allowable to use any type of tax sheltered retirement account. For real estate investing now for every individual, there’s going to be their own termination as to what is the best account structure for them.

So within the account, there are so many different types of tax sheltered, retirement accounts, and they’re all there for a reason. anything in the world tax is not one size fits all. and I’d say broadly speaking, even the world of not just tax in the financial world, you have to identify your own tax profile, your own financial profile,  your own goals, and then tailor the solution.

To that, that being said,  I’ll come kick this off with giving us a brief introduction to the two broad classes of retirement accounts. And then you just throw any questions you got. You’ve got a so broadly speaking, there are two groups of retirement accounts. There are qualified retirement plans and individual retirement arrangements.

So qualified retirement plans is one set of plans. The most well known of those qualified retirement plans are 401K plans, profit sharing plans.  But there are also money purchase plans. There are also defined benefit plans and cash balance plans. So qualified retirement plan is one group of retirement accounts.

Individual retirement arrangements is another group of retirement accounts and those the most well known are traditional IRA and Roth IRA.  But there’s also SEP IRA and simple IRA. So two broad groups, every one of those has its application and its proper place.  we don’t want somebody coming out and telling everybody you should all be using this retirement account.

This is the best one.  If there was a best one that fit everybody, there would only be one in the retirement account and the, in the tax code, the reason we have so many is because everybody’s got to figure out what works best for them.

Aileen: [00:14:51] So when you’re approaching your CPA, in this space, what kind of questions should you be asking to making sure that you’re making the best use of the time and, getting the best information, when you’re trying to utilize these different vehicles?

Bernard: [00:15:05] That’s a tough question.

And it comes back to what we began with CPAs. I have to be cautious here, tread with caution, right? So this is area where a, CPA’s definitely a key piece of the puzzle, your CPA. And when we help people, these retirement accounts, we love interacting with their CPAs and oftentimes their CPAs are the ones that suggest, they get in touch with me.

But the actual figuring out and navigating the space is usually falls outside of the realm of your CPA. Now you may have a CPA that is an expert in this, but the majority of CPAs are not experts in this space. And one of the things I tell people is as important as it is good to know a lot and to know what, it’s perhaps more important to be ready to acknowledge,  that may be, Hey, there’s something that I need more research that I may not have the answer off the top of my head.

So we want to collaborate with your CPA. To get the best fit for you.  So there’s times, we do unfortunately have to correct mistakes that are made by CPAs in this space, but the best outcome is achieved when we all work together as a team, especially because,  sometimes when we’re trying to figure out what would be the best fit for you, we’re going to try to understand your tax profile and the one that oftentimes knows your tax profile best is your CPA and then there are certain things that fall into a gray area and that can go either way. And what we have to aim for is internal consistency and I’ll illustrate, there are certain things that,  can maybe go on a schedule C or a schedule D and you can find two CPAs with addressing the same scenario, treating them differently.

Neither one of them is incorrect or correct. Because a lot of areas of tax come down to, there are no hard and fast rules and you can have two CPAs diverging on it. And they’re both correct. Maybe one is more aggressive. One is less, more conservative.  But they’re neither is incorrect. They’re both correct.

Now somebody gets in touch with me. I’m like Bernard, ah, this is what I’m doing. This is my business. I want this type of retirement account. Now. It would be wrong of me to say, Oh, sure, are you doing that kind of business? That’s a schedule C business. You can have this type of retirement account. Right?

And then we go set up the retirement account with him on the premise that it’s a schedule C business, meanwhile, on his 1040, his CPA, put it on a schedule D. And now we are not, this doesn’t jive, right? If the IRS looks at this or like, all right, this does not fit because, all right. I understand. Okay.  Hint 1040 had a schedule C and you had this time retirement account that all fits together like a jigsaw puzzle.

But his retirement account says that it’s his taxes turns says that it’s a schedule D. So if he’s a schedule D he is not a good fit for this retirement account. So we really have to make sure that everything,  clicks, and that’s what we aim to do with our clients. And we’re happy to get on the phone and talk their CPA and kind of strategize, because our, some things that actually, when viewed from one perspective, the optimal tax strategy is put it on schedule D but when viewed holistically, the tax strategy can change and say, let’s put on a schedule C a, but you have to have that discussion.

 So we figure out what the best thing gets. How does that sound?

Aileen: [00:18:19] Yup. That sounds good. So you work together with the CPA in partnership to make sure that everything is lined and that nothing poses as a red flag when the IRS does their audit.

Bernard: [00:18:27] Yeah, we want it. We really, it takes a, an incredible knowledge, takes broader knowledge of tax than just knowing retirement accounts in order to give people the best service, we have to understand everything about their taxes, not just know the retirement account,  and, beyond that, we don’t want to just say, Oh, yeah, you can have this. And  if they get in trouble, who bears the ultimate risk of making a wrong a tax misstep?

Aileen: [00:18:55] The client.

Bernard: [00:18:56] Yes.

So  it’s, we’re the financial industry is plagued by people that are, want to sell this tax shelter, sell that tax shelter. And they’re selling it and they’re promoting it, but who bears the risk?

Aileen: [00:19:09] The client and investors.

Bernard: [00:19:11] Exactly. The taxpayer is the one that bears the ultimate risk. and they don’t recognize that, Hey, this guy is really selling me something and just you have to exercise caution when you go by, if you go to buy a used car, you have to watch out,  when people pitch you tax and financials, filters watch out,  because they’re compensated by selling you this vehicle.  and they may have. Done, whatever it takes to protect themselves just in case you get in trouble.

 So they’re going to say, Hey, it’s on you. We said, talk to your CPA and so they washed their hands of it, but you may be at the taxpayer may be in trouble. So if anybody’s going out there promoting things, you want to be really cautious because the other thing about promoters is that they’re wearing a big bulls lay on them,  because whenever the IRS gets around,  Looking into things they like to be efficient.

And you know how they get to be efficient. They point their finger at this. All right. He it’s all his clients. He’s the troublemaker. We just get his list of clients. Then we can just get them all rather than trying to find the needles in the haystack. Caveat and tour,  Which means let the buyer beware. and it just understand the relationship, understand that unless you’re getting advice from somebody that doesn’t have a conflict of interest, you’re really in an adversarial relationship, in the financial services place, what happens is the way things are generally sold is that.

The seller tries to present themselves as being on your side of the table. and you have to recognize that if they’re only getting paid because they sell you something and they have only one product they can sell you. It is impossible for them to put your interests first. The conflicts of interests are just too huge and anybody that frankly has set themselves up with that business model has said that, all right, I’m here to sell things.  I’m not really here to give advice. I’m here to sell and it’s unfortunate. This happens every day and I’ve seen it happen so many times. I don’t know if you can go Google a syndicated conservation.  So that’s something I’ve done webinars about that.

You can go Google captive insurance, IRS. The IRS is all over it. something that I’ve been heavily involved in.  So I’ve seen how these things get promoted. And then they come back to haunt people. So now when you go out there, the financial space, make sure you’re working with somebody that is really trying to help you.

Not just says that they want to help you.

Seyla: [00:21:29] Yep. That makes sense. one of the services that your company provided is a 401k checkbook.  what is a checkbook and how can it be set up and utilized? Yeah.

Bernard: [00:21:39] Great question. So we, when we say 401k checkbook, what we’re referring to is a 401k plan.

And would you get the direct access to the money to invest on your terms? Now we can do that for, with an IRA. We can do it with any type of qualified retirement plan.  401k is the kind of when it’s a good fit, it’s the optimal vehicle to do that.  So what happens is most 401ks are set up with a financial institution and financial institutions see 401ks as an IRAs, all these accounts as a way to get assets under management, right?

They’re primarily in the business of managing your money, investing your money. And getting fees that way, which is fine. There’s nothing wrong with that. As long as everybody recognizes what’s going on.  It’s okay to pay a fee for a service. It’s not okay if people have all sorts of hidden fees. But if you say, all right, this is the service I’m getting, and this is the fee, that’s wonderful.  Unfortunately it doesn’t really work that way. The fees are usually hidden.  And when it comes to fees, one thing that is very apropos is better the devil, than the devil you don’t. So hidden fees tend to be much more expensive than the visible fees.  Your standard 401k is set up that the financial institution restricts your access to the money and the only choices you have are to invest in what they make available to you. Nowhere in 401k tax law, does it say it has to be that way.  Our service to you is we’ll set up a 401k plan. We have nothing to sell you.  So we’re just going to set up a plan and you get the unrestricted access as envisioned by the tax code,  and we will help people with the compliance and we’ll help people with the strategy. And then there’s a fee for our service, but it is transparent. It’s simple, it’s straightforward. It provides incredible value.  There are no hidden fees, no transaction fees, you get direct access.

And so that’s what we’re referring to when we say, 401k checkbook. Or checkbook, QRP, checkbook, IRA. These are all different structures.  where you get their rent control.  and you can do the investments that you choose.

Seyla: [00:23:52] So for, 401kcheckbook, is it really that we actually got a checkbook and we can just write like a normal check?

Bernard: [00:24:00] Yes. And you get, you can get the money in a bank account. And so you can check, you can wire you can ACH.  so it really does function like a bank account.  and. Maybe it’s good to explain a little bit how it works. You understand the logic here, a 401k, an IRA, or any type of qualified retirement plan in any type of IRA are trusts.

The difference between an IRA and a qualified retirement plan is that a qualified retirement plan is a trust that is set up for the benefit of employees. And an IRA is a trust that is set up for the benefit of an individual. So these tax shelters are set up as trusts. Now a trust can hold all sorts of assets, right?

So where would a trust hold it’s cash. In a bank account, right? and now when the trustee who manages the trust and runs the trust, if they want to do something on behalf of the trust, they want to buy realism half of the trust.  So they just write a check from the trust bank account to buy that real estate or they wired into escrow so the money is there, the closing company has it.  It’s just business as usual.  So it functions very much like a trust. There are many types of trusts out there. There are living trusts. There are revocable trusts, irrevocable trusts, charitable trusts trust, come in an infinite number of flavors.

So these are trusts that are designed by the tax code and governed by tax laws. I’m assuming you want it to have all the tax benefits, but at their core they’re trusts and they’re run like trusts. And so they have bank accounts.

Seyla: [00:25:35] What is your recommendation to making sure that we take the full benefit of the tax for 401kcheckbook?

Bernard: [00:25:43] It’s a really niche area, where there are really only a handful of true experts, nationwide.  that’s not an exaggeration. Now, there are many that promote this, but in terms of individuals and companies that are really out there to help you, based on your unique scenario, you probably don’t even need all the fingers on one hand,  to calculate that. There are overall in the space probably about 70 different companies.

But they’re, almost without exception, their focus focuses on giving you the paperwork,  to get your account set up, but not to try to advise you, and try to figure out what’s gonna be best for you, and making not getting the right setup, can be very costly.  The irony of this is,  is that people that work with us can actually end up paying a lot less then they would pay to want it to some of the companies that are just giving them the piece of paper, and not really giving them the type of individual attention that they need and deserve.  So I would love to say that there are so many options out there. But there really are very few, so there are other people in the space where they have mutual respect, and admiration for them.

I don’t think a podcast is the right place to mention names, but there are not that many of them. That’s the truth.

Seyla: [00:27:04] So for someone who actually working as a full time and they already have a employer’s sponsored 401K are they still allowed to open a 401k checkbook?

Bernard: [00:27:16] So they can definitely have, another retirement account and they can technically have another 401k. There are no rules limiting the number of returns and accounts that you can have.  But, there are other barriers or hurdles that they may encounter. So you can have an employer 401k and obviously we don’t control that.  We could set up your employer 401k to give it the same type of control.

 But that’s probably not going to happen. Definitely doable. Absolutely positively doable.  if you want to talk to your employer and discuss it, we may be able to make it happen. Generally it will be a fit for a smaller firm,  here’s the deal, having a qualified retirement plan with employees certainly have a large number of employees gets opens up the employer to a range of liabilities.

And if you give people the type of flexibility that we give them, right? So we have people that are investing in say cryptocurrency, right? And we see many of them have done very well. But there they’re also people that make missteps. Cryptocurrency is very volatile.  and we’re not here to tell people you should do this, you shouldn’t do this. We’re here to say, all right, you want to invest in cryptocurrency. We’re going to help you figure out the best retirement account to do that because there are actually very cool stuff that you can do with retirement accounts and cryptocurrency. But if an employer lets an employee invest in cryptocurrency, and it tanks because of incredible volatility, the employer can open himself up to incredible liability, which they don’t want. So they’re really, employers are primarily focused on protecting themselves from any type of liability that can arise. So they want to keep everything plain vanilla so that nobody can complain to them and say, Oh, why you let me invest in.

Bitcoin, that you wanted to let me do that. That was a breach of your fiduciary duty. So when this would work, if somebody has worked for a small business where they have a handful of employees and they know each other well, and they all appreciate the value of alternative investments. It can be a great fit.

So that being said as somebody who wants to sit up for themselves, so we would have a discussion with them to figure out what would fit. Do we set up another 401k for you? Do we set up some sort of IRA for you?  Everybody is going to have a fit. There’s nobody that does not have an account.

That’s going to be the best fit for them. It’s just that the best fit for Seyla may not be the best fit for Aileen.  So everybody is their own gotta find what’s gonna be best for them. The type of obstacle you may encounter though, is can you get your money out? So say you’ve got $200,000 in your company’s 401k plan. And you have no other retirement accounts. Can we tap into that $200,000,  for investing in real estate? It depends.  Money that was contributed to your company 401k plan. If it was going to attribute it while you’re at that, while you were at that company, meaning it’s not a rollover, it’s not from a prior employer that you rolled into this current employer.

You actually, the money went into the 401k as an initial contribution while you worked for this company.  you’re probably not going to be able to get that out until you’re 59 and a half.  there are some exceptions. But that’s the rule of thumb.  now there is actually right now, a little, a limited window of opportunity,  because the cures act created something called a Corona virus related distribution,  which many people qualify for.

And that enables you to pull out a hundred thousand dollars. So generally money, the tax code did not allow you to access. From your retirement account is now accessible. So you could pull a hundred thousand dollars out.  and then you have a couple options of what you can do with that.  but you have the option of get out and then putting it into any type of structure that we could set up for you and then you can put it into an alternative asset, hard money lending, real estate, equity, syndications, whatever it is. That you are pursuing, in a retirement account that you control.

Seyla: [00:31:12] So just to confirm with the 401K checkbook, you can actually invest it in any type of assets or any type of investments or is there any limitation that our listeners should know?

Bernard: [00:31:24] Yes.  But before I talk about limitations, what I like to ask is, I love asking this question. Based on all that we’ve discussed till now, does the tax code say that a 401k you’re qualified retirement time or plan or IRA can invest in real estate?

Aileen: [00:31:39] It does not.

Bernard: [00:31:40] it does not. You’re right.  how do you guess? Usually we’d reach this point of the conversation people are like, yeah, of course. You just told us for last bit, last 30 minutes telling us that they can invest in real estate.

Tax code says nothing about what you could invest in. Now what the tax code does say is, and there’s some variation here between the different types of retirement accounts. So one thing that’s Off limits for all of these are collectibles.

Collectibles refers to antiques rugs, alcohol fine art, which many purchase as an investment, those are off limits to all retirement accounts. Life insurance is off limit to IRAs and HSA.

So collectibles off limits to everything, life insurance, to HSA and IRAs.  now life insurance can be held in a qualified retirement plan, lots of complex rules, but it’s doable within the rules.

Another thing to be aware of is S corporation stock. So it does not say anywhere in the retirement account rules that our retirement account can not invest in S-corp stock. But in the S-corp rules, which is a completely different area of the tax code. It says that an S Corp cannot be owned by an IRA.

So if the IRA invest in an S-corp, nothing happens to the IRA, but that company is no longer an S-Corp for tax purposes. if an investor in an S Corp , qualified retirement plans that are rules a bit dicey, but there are instances where they can invest in S-Corp.

 So that’s one set out of things. what can you from a asset class perspective,  what you can or can’t,  any questions about that? No. And then there’s another set of rules, which is not a, from an asset class perspective, but it’s about who you can transact with. And so our set of rules that keep you and people that are close to you from transacting with your retirement account.

So you can control your retirement account, but it’s not, you. And you can not do business with your retirement account. So again, you can control it. You can write the checks and in direct the investments on behalf of your retirement account, but you have to be very cautious. If you are in any way, a party to the transaction in your individual capacity.

A lot of technical jargon there. but the idea is when you’re acting on behalf of retirement account, you’re like the trustee, you’re not acting as yourself, right? You’re you know, when a corporate officer in a company, They signed the checks. But they’re not signing the checks on behalf of themselves.

They’re acting in their capacity as a representative of the company. As a corporate officer.  when they signed a personal check, they’ll write the signature looks the same, but on a personal check, they’re signing it. And then their individual capacity, when they sign on behalf of the corporation, they’re signing in their capacity as an officer of the entity.

So when you’re doing business, when your IRA or 401k, QRP is transacting, you should be signing, at, in your capacity as a trustee, as the person that’s running the retirement account.  the moment you are as an individual. Are involved in the transaction, it gets dicey.  so these are what we call the self-dealing rules and they’re there to prevent any conflicts of interest.

And to ensure that everything that you do is for the long term savings and not to somehow give you current benefit today.

So that’s what kind of people know to what their appetite and get them interested.  but if the extent of the investor is knowledge, doesn’t their, either their knowledge doesn’t go way beyond that. Or they’re not working with somebody that can guide them through all the minutia, it can be actually be detrimental to have these accounts because a misstep can be very costly. And there are all sorts of little details,  that can make a big difference.  so if you violate the rules, it can be jeopardized, deicing.  people have retirement accounts. I have a million dollars in them.

 A misstep there can be very potentially be very costly.  so you want to make sure again, that you’re working with somebody that is not there to give you the control of the money. give you that good feeling, but not really looking out for your best interests. you want to work with somebody that may tell you this is not for you based on what you’re trying to do.

Don’t do this or understand, here are the risks.  Look at tax the same way you would approach an investment.  There’s kind of risk reward, and sometimes things are clear. Sometimes things are unclear and it’s okay to take action in that gray zone provided you’re making an informed and decision.

But if people are sweeping things under the rug and not pointing out. All right. You just ended a gray zone.  If they’re not pointing that out to you, you may be taking on risk that you would not otherwise take on.  So you want to be making informed decisions. and then again, it comes back to funding.

The industry is plagued with conflicts of interest. The overwhelming majority of companies,  promoters and salespeople in the financial industry only get paid if you buy their product.  so they’re not in the most objective position to tell you, Hey, this is not for you. We’ll some do it. Absolutely.  but the challenge is figuring out, alright, I might dealing with somebody that is really going to be.

Be honest and upfront with me or my dealing with somebody that is going to deliberately conceal things from me. We’re going to be less than a hundred percent transparent.

Aileen: [00:37:06] Absolutely. Especially when you’re working, when you’re working with someone who’s trying to help you with your retirement hard earned retirement money, you want to make sure that you trust them, that they’re going to do right by you.

Bernard: [00:37:17] Absolutely.

Seyla: [00:37:18] so for your service and if someone, wanted to, set up this type of service, where do they go and how do they find you?

Bernard: [00:37:25] All right. Excellent. 

If they Google Bernard Reisz, that’s B ER N A R D R E I S Z. They are going to find lots and lots of very helpful resources. And hopefully from those resources, it’ll take you on to further helpful resources and ultimately find a lot of those haven’t been able to put them all up.

bernard@401kcheckbook.com or Google ResureFinancial, go to Resure LLC.  We’ve put out lots of great info just like this one. I think this has been, particularly great.  But there are so many resources. We try to make this, freely available so that people there’s a greater awareness of both the possibilities and the pitfalls.

Seyla: [00:38:09] Sounds good. Thank you so much, Bernard for taking the time out today and talking to us about 401K checkbook. We really appreciate your time.

 Bernard: [00:38:16] Seyla and Aileen, thank you so much for hosting me. I’ve enjoyed this so much and do look forward to staying in touch.

Aileen: [00:38:23] Thank you.