IRAs and CPAs with Amanda Han, Matthew MacFarland, and Kaaren Hall #661

On Friday, September 27, the Norris Group proudly presents its 12th annual award-winning black tie event I Survived Real Estate.  An incredible lineup of industry experts will join Bruce and Aaron Norris to discuss perplexing industry trends, head-scratching legislation, massive tech disruption, and opportunities emerging for real estate professionals. All proceeds from the event benefit Make A Wish and St. Jude Children’s Research Hospital. This event is not possible without the generous help of the following platinum partners: the San Diego Creative Real Estate Investors Association, InvestClub, ThinkRealty, Coach Fullerton, Keller Williams Corona, PropertyRadar, the Apartment Owners Association, MVT Productions, and Realty411. Visit for event information.

This week’s radio show hosts are both Bruce and Aaron Norris. I Survived Real Estate is next week, and typically within three or four weeks after that, they have the annual Financial Tactics Breakfast. This is the ninth year, which is very difficult to believe, and it has become more popular over time. They started producing it on Amazon Prime. You can see past events that they’ve done, and it’s by far the most sophisticated thing they do when it comes to estate planning.  Aaron always learns a ton. Today’s guests on the show are Kaaren Hall of uDirect IRA. She is a longtime friend and board member at the Retirement Industry Trust Association. The Norris Group has an account with her. Joining her are Matt MacFarland and Amanda Han with Keystone CPA. They are real estate all-stars when it comes to CPAs and working with real estate investors.

Episode Highlights

  • How long has it been possible to do alternative assets in IRAs?
  • Is money in a retirement account bulletproof from lawsuits?
  • What is a checkbook LLC?
  • Who were the big beneficiaries of last year’s tax changes, and who didn’t get much?
  • What type of business or entity can contribute the most to a retirement account, and who contributes the least?
  • Are there any surprises for the tax year 2020?
  • Is there a big influx of people migrating out of California?

Episode Notes

Bruce began by adding that he learns something every time that I go. It would seem like he has been through a fair amount of thing, so you would think he has it wired. But, he doesn’t. There’s always something new, and then there are things that change. If people have never seen the show, what they have landed on over the last couple of years is they don’t cover the basics. You should not go if you don’t know anything about things like 1031 exchanges or how to set up a trust. The first hour and a half is related a joke they make during the advertising: “A CPA, an attorney, and an IRA walk into a bar.” It sounds like a joke, but whenever you meet with those professionals individually, you typically get told, “Oh, I can’t answer that you, need to speak to A, B, or C. They have everybody on stage and updating us on things that are happening in the industry, regulatory wise, legislative wise, tax-wise. With the last hour and a half, people may not know that not all of it ends up online because some of it becomes very inappropriate. Sometimes people are told what they asked about is illegal and they should not do it. Aaron always learns a ton, and it’s extremely valuable. He doesn’t know why they do it, but they keep coming back for more, and we’re in your 9, so it’s fun.

Bruce said a good book would be Tricks You’re Not Allowed To Use With Your IRA. Matt and Amanda can talk about. It’s called Yeah, Somebody’s Thought of That, and No, the IRS Doesn’t Allow It. Aaron told Amanda that maybe that’s book number three with BiggerPockets, almost like IRS Private Letter Rulings for Real Estate Investors. She definitely liked the idea and was taking notes.

Bruce started with Kaaren Hall. He was pretty late in the game in realizing he could do things inside of a retirement account with real estate. He didn’t always attend seminars, which was his fault. His friend Rick Solis has a lot of his stuff in an IRA because he planned that out. Bruce asked how long it has been possible to do alternative assets in IRAs what percentage of people actually do it. Kaaren said you’ve been able to self direct your IRA ever since IRAs were created. For that, you have to go back to Gerald Ford in 1974 when the ERISA laws were created: the Employment Retirement Income Security Act. That went into effect in 1975, 44 years ago. A lot of people are familiar with it now, more now than before, but plenty of people are still asking if this is something new. It’s not new at all.

Bruce asked about if the money in a retirement account is bulletproof from lawsuits or if that is a misconception. Kaaren said this is something Harry Barth can touch on, and it’s a great teaser for coming to the brunch because you’ll hear from Harry. However, what he has told Kaaren is that there is some retirement money that may have a risk of protection. There’s something called the anti-alienation provision, informally called the OJ clause. It answers the question of why OJ Simpson still had his NFL pension. It’s because pensions and plans that are employer plans have this anti-alienation provision, and it’s protection from creditors. Sometimes when that money moves from an ERISA plan into an IRA, it retains its risk of protection. Harry will go deep on this during the brunch. Otherwise, an IRA, especially in California, does not essentially have this kind of asset protection. However, it could if the money came over from an ERISA plan.

Another extension of this is a lot of people start doing real estate investing inside their retirement accounts, and they create a checkbook LLC. Bruce asked Kaaren to explain what this is. She said it is like the word “Kleenex.” It doesn’t really mean anything, but you know that it’s a brand name. That’s what a checkbook IRA is. If you go to the IRS’s website and you type in checkbook IRA, nothing comes up because it’s just a jargon term. But it is really an IRA-owned LLC, and that LLC is not just something you can get off and type it in yourself. First off, you can’t do that. Second, it’s a special purpose LLC and has special language saying that it’s set up just for the IRA. Harry and Keystone can go deep on this, but it’s a pass-through entity. If it’s a single-member LLC, it’s not paying income tax. What it’s doing is it passes through. If you’re in California, you still get to pay $800 a year to the Franchise Tax Board for the privilege. With all that said, your IRA owns this asset called this IRA owned LLC. The money goes in the LLC, and now you get to write checks for assets or asset-related expenses for your IRA. As long as you steer clear of what’s called prohibited transactions, then you’re fine. If you ever get audited and the IRS looks at that, they’re going to ask if there any prohibited transactions in this LLC. You just want to steer clear of that.

The Norris Group has been doing hard money loans for self-directed IRAs for some time, but there are very few people who use them. Aaron loved last year when he, Matt, and Amanda got to talk about 1031 exchanges inside IRAs as a result of the tax ramifications from leverage taken inside the IRA. Aaron asked Matt and Amanda if they see real estate investors being very risky inside these accounts right now. Matt said they see a lot of clients using IRAs to invest, more harder assets like notes or trust deeds. Maybe it’s because that’s what they understand or think they understand, or maybe they don’t know they can do lending in their IRA. Aaron likes to be conservative in his and does not like leverage.

Amanda said most people with asset retirement accounts are for directly owned real estate or equity ownership in an LLC, like syndication that owns real estate. They try to encourage their clients who invest in notes and trust deeds to consider using retirement money rather than their cash. If you’re someone who wants to have rentals but also wants to invest in notes, oftentimes it’s more beneficial to use self-directed money in retirement to buy note investments and then use your cash for real estate. The reason for that is purely from a tax perspective. When you’re a note investor, there’s generally not a lot of expenses. We don’t have repairs, we don’t have management fees, we don’t have depreciation. This is because we don’t own real estate. Interest income made from a note investment is taxed at ordinary rates because note investment is generally an asset that doesn’t have a lot of expenses. It could make sense to consider a retirement account because it’s already tax-deferred or tax-free anyway by design.

Bruce asked who the big beneficiaries were of last year’s tax changes, and who didn’t get much. Matt and Amanda had just completed a lot of business returns that were extended to September 15th. They’re working on the individuals now that have been extended. A lot of the people that Iare benefiting from the changes are real estate investors and also people that have select businesses. This does not include accountants, lawyers, and service businesses. However, they have clients that are real estate agents and marketing companies that are benefiting a lot from the law changes in terms of getting deductions that they didn’t get prior. Some of their money is totally tax-free now. Those seem to be the big winners with respect to the changes that happened at the end of 2017.

Amanda said the people who benefited the least or had laws that are less favorable to them are regular W-2 income earners who don’t have real estate or other businesses on the site. A lot of the deductions they saw being taken away are with respect to expenses relating to W-2 or limits on the primary home. These are things on the personal side. The government has always incentivized taxpayers to invest in real estate and start businesses. Tax reform further supports that concept.

Bruce next asked Kaaren what type of business or entity gets to contribute most to a retirement account and who can contribute the least. She said with retirement accounts, we’re talking about a 401K when it comes to a business. uDirect provides the solo 401K for a business that has no full-time employees. For the 401K and for the SEP, or Simplified Employment Plan, in 2019 the contributions increased. It used to be you could contribute $55,000 a year, and now it is $56,000 a year, or 25% of your income. It’s a lesser of if you have a SEP IRA or solo 401K. She has seen the contribution limits increase in 2016, 2017, 2018, and 2019. It’s been clicking up every year. When we started this nine years ago, you could put $49,000 in and it keeps increasing. These work with the Solo 401K and SEP IRA. There’s also something called a Simple IRA, which is almost fading out because it’s more complicated to administer and the benefits are not as great as the other two mentioned. Aaron joked that calling it a Simple IRA is false advertising. When the government calls something simple, you can pretty much guess that it isn’t.

Bruce asked if there are any surprise changes for the tax year 2020 or if it is even decided yet. Sometimes they create laws that actually are retroactive. Amanda said she is not aware of any upcoming things that may be surprising. With respect to Opportunity Zone tax benefits, which came out in 2018, even today we’re still waiting for the IRS to define certain things and really clarify how things will work and what needs to happen in order to get some tax benefits. This will be touched on during the upcoming brunch. Some of those things might be surprises because when people say they are making improvements and then come out later to define what they mean by improvements, that could change how things are done in order to capture any tax benefits. She thinks we’ll see more of that in the coming years in terms of clarifying what things mean. Under tax reform, there was a brand new benefit for lots of businesses, and certain businesses didn’t get the tax break.

It will be interesting to find out exactly. Obviously, the IRS was not able to define every single business that was eligible or ineligible. Amanda said with a lot of their claims, they have to make a guess as to where you comfortable and whether you fit into the eligible or non-eligible category. She thinks we’ll see more of that as court cases come out or new information is released on the IRS to provide more detail on who’s eligible for the tax breaks and who is not.

Bruce said one of the laws that is still in place that that really shocks him is the $500,000 tax-free exclusion for joint ownership on a sale of your residence. Bruce asked if that law is still exactly the way it was and if it will stay. Matt said it is currently the same way it has been for a while. A married couple can exclude $500,000 a gain if they’ve lived in and used the house for two of the previous five years. It had been on the table to at least change it when they came out with the tax reform bill two years ago, but at some point, they took it off the table. They think they were going to change it to you had to live in it five out of the previous eight years. He hasn’t heard if they are changing it or if it is on the table to be changed, but that doesn’t it won’t.

Kaaren said there’s something on the horizon in the IRA world, which doesn’t always happen because the IRA world is pretty stable. However, on May 23rd the House of Representatives passed the SECURE Act, which is another acronym for Setting Every Community Up for Retirement Enhancement. They must have had an acronym division that spent a year working on that.

And so there’s another acronym is RMD, or Required Minimum Distribution. This is what the SECURE Act is looking to do. It wants to raise that RMD since we are living longer. Instead of having to take money out of your pre-tax retirement account at 70 1/2, they want to raise it to 72 and then incrementally go on up to 75 years old when your RMD phase begins. That’s passed the House, although it hasn’t passed the Senate yet. That’s something to be looking for on the horizon. The funny thing is, Bruce already had that question in mind as to what age they have to take and if they are considering extending it because people are getting older. Bruce wonders if they’re going to do that with Social Security since right now you have to take it at 70. The same thing could apply except for it growing at an 8% rate after you’re eligible. That’s a pretty good return if you don’t need it. This assumes that people buy the premise that it’s going to be around for them to get that return.

Pretty soon, it won’t matter how much we owe because we’ll be paying negative interest rates on it, so it will be fine. Aaron has been taking a lot of phone calls lately of investors wanting to leave the state. What’s unusual is that it’s not just because they’re afraid of a recession. Increasingly, they’re uncomfortable with the politics of California and the uncertainty of the politics in combination with a recession. It’s all very cute and fine when the sun is shining and California is doing well in the economy, but he is definitely getting the sense that investors are getting out, and not just because of the economy. Aaron first asked Kaaren if she receives a lot of calls concerning this. She said she does see a lot of people migrating out of state. She will hear from her realtor friends how many of their recent listings are for people leaving the state. She does not have a hard statistic, but she knows it is quite a number of them. They still see a lot of people investing in real estate in California. There’s still deals to be made. Kaaren was talking to OCREIA every month about doing real estate deals in California, so that’s never going to stop, but migration outside the state is happening.

Amanda said from their clients’ perspective, they are seeing more tears. One of the questions they always ask their potential new clients is whether they foresee themselves in California in the long run. She’s hearing a lot more people over these last year or two saying that once they sell their business or real estate or stop working full time, the goal is to no longer be a California resident. From a tax perspective, the state tax rate is very high. Kaaren mentioned LLCs earlier. For the legal entities in California, that’s a high cost, especially with the proposed legislation on having more strict or costly rules coming out for investors. A lot of people are looking to exit California, but the questions they ask are when they should get out, if they should sell their properties, where they should reinvest. These are topics that will hopefully be covered at the brunch.

What’s interesting is rent control just occurred, and Bruce did not remember getting to vote on that. When they did get when we did get a chance to vote on it, we said no. Now. All of a sudden it’s a yes. That’s pretty uncomfortable because you’re asking yourself what else we don’t get to vote on.

Aaron went on to say if you’re interested in finding out more about the brunch, you can go to and look under the Calendar tab. This is something they do every year. Most of the crew is here on the radio show, and they also have Dino Champagne She’s the vice president of Asset Preservation. She’s there representing the 1031 exchange world. They also have Harry Barth with Barth Calderon Attorneys. They will have a plethora of experience on the stage talking about all things estate planning, and it does get a little bit sophisticated. However, Aaron always walks away learning quite a bit and is excited to see what we come up with this year. Everyone on the panel is people The Norris Group trusts and does business with too.

Matt and Amanda are looking forward to the event, and they always learn something when they go there themselves. They are looking forward to both presenting and learning. Kaaren said it is great chance to sharpen the skills. The venue is great also. She loves the club and valet parking, and it’s a beautiful place. It’s also a great chance to see a lot of old friends from the investing community.

For the brunch, Aaron thinks they are going to sell out a little bit earlier this year. Some investors will be showing up for the first time, and one called to say they have never seen one of these done before. They want to come because they are finally making some moves and are leaving California. Can’t wait for the Financial Tactics Breakfast.

The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669.  For more information on hard money lending, go and click the Hard Money tab.

The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate: Coldwell Banker Town and Country, In A Day Development, Inland Valley Association of Realtors, Keystone CPA, Las Brisas Escrow, LA South REIA, Michael Ryan and Associates, NorcalREIA, NSDREI, Orange County Real Estate Investors, Pacific Premier Bank, Pasadena FIBI, Shenbaum Group, SJREI, Spinnaker Loans, South OC REIA, uDirect IRA Services, White House Catering, Wilson Investment Properties. See for event information.

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