 Welcome to Inside Hawai'i Real Estate, a show dedicated to providing up-to-date information news to Hawai'i home buyers, sellers, and investors. I'm Will Tanaka with my co-host, business partner, and wife, Leone Lam, a realtor with over 20 years of experience and various leadership roles in the Hawai'i real estate industry. Thanks, Will. Will is a lawyer and also the former head of a Hawai'i title and astral company. And now that we're full-time in real estate, we work together as a team to bring you the latest in Hawai'i real estate. So do you have an individual retirement account also known as an IRA? Maybe you have a Roth IRA, maybe you have a 401K plan. How do you think that your accounts are doing in this market these days? Well, you know, today we are highlighting another IRA option for you. And it's nothing new. We've been around since 1975, but this is where you have the control and you can self-direct the funds within your own retirement plan to purchase real estate right here in Hawai'i as an investment. You have the freedom to choose what you are investing in. And we have a very special guest with us today. We have Dan Fullardo, and he is going to be talking to us all about self-directed IRAs. Dan has been facilitating and locally supporting Hawai'i real estate investors just like you and me over the last 16 years, together with New Direction Trust Company. Dan is the Hawai'i division president and specialized in helping investors with self-directed IRAs. So welcome, Dan. Welcome, Dan. Thanks for having me. Thanks for being with us. So Dan, somebody told me that you are the only person in the entire state of Hawai'i doing what you do over the last 16 years. So in simple terms, what is your job, Dan? What is it that you're doing? Well, it is true. As far as I know, I am the only guy in town in the state. So we're self-directed IRA custodians. So most people don't know what that means, but we are the custodians that hold the asset to keep the tax advantages in the retirement account. So you need to have that to have the tax advantages, or it's a personal investment. So if you want to have a retirement account investment, there needs to be a custodian. So we're the custodians, but what that means is we don't sell anything. We don't promote anything. We don't give any advice. There's a lot of things we don't do as a neutral custodian. So the client is the self in self-direction. Real estate is the number one asset that our clients in Hawai'i choose. So most of the time, new clients, prospective clients, they're asking questions about real estate. But real estate is something that they understand already. So we just keep them on the straight and narrow of how to make the investment with their IRAs. All right, Dan. So I mean, self-directed IRAs, for me, it's new. I recently learned it, you know, probably this year over the last year or two. But you know, self-directed IRAs are not a new concept. Like Leonie mentioned, they've been available since 1975, almost 50 years. So is there any difference between a self-directed IRA and a traditional IRA? Or is it the same? And how common is a strategy of self-directing IRAs? Well, like she said, I have been doing this for 16 years. And 16 years ago and today, I still hear people say, I didn't know I could do that. I've never heard of this before. So I do try to preach from the mountaintops about self-directed IRAs because it really is liberating for clients to be able to invest in things that they want to invest in. I don't like the control of it. We follow the same guidelines, the same codes as any other IRA. So the individual retirement accounts and there are many types of them. The rules are set by the IRS. So we follow those same rules as, you know, if you had a half a million dollars in mutual funds with a company, we follow the same rules. Rules to contributions, rules of prohibitiveness, rules of prohibited transactions, rules on distribution, all of those same rules apply. It's not that there's a different self-directed IRA is a different legal. Now it's the same as any other IRA. The difference is the custodian. The custodians allow all the assets that the law will allow, or the custodians only allow stocks and mutual funds. But, you know, most of the companies only, they promote certain mutual funds, right? So if you go to your bank and you say, I want to get an IRA, they're going to have retirement products, you go to a stock broker and say, I want an IRA, they're going to have mutual funds and different financial products, but they're selling those products and promoting specifically those products. So if you want to invest in something that they don't have, they're going to say, well, you can't do that, or go see Dan, you know, that's a really nice part. In the banks, they really want to buy property and we don't allow that. So can you help them out? That's always been very nice. And you've been talking about custodians and I, you know, you mentioned that IRS gives tax advantages to hold and manage real estate assets. So what are some of the specific tax advantages with self-directed IRAs when used for real estate purchases? I mean, can you buy and sell in the self-directed IRA? How much control do you really have? There are quite a few advantages over what it would be in a mutual fund, right? You have the control of, well, we follow the same rules about contributions. So one of the advantages of all retirement accounts IRAs are when you make the contribution, your annual contribution, it adjusts your income down. So you're not paying as much taxes that year because your adjusted gross income is now lower because you've contributed to your retirement account. So that's one. And with the SEP IRA, which is what many realtors have and independent business people, people that are 1099 and not W2 employees, those people can have a SEP IRA and you may or may not have heard of a SEP IRA and that's OK. Most people have it. But in the real estate world and independent small businesses, SEP IRAs are a wonderful vehicle. I was just saying that the IRS has come out with the new annual contribution limits and that is $66,000 or 25% of your annual income can be contributed to a SEP. So you can imagine if you made quite a bit of money and you didn't want to pay income taxes year on all of that money, you could contribute up to $66,000 to your SEP with lower your tax bill for the year. So that's one advantage. The other advantages are the actual buying and selling of the real estate. So if you bought a property with your personal money, then you're going to pay taxes on the income from that rental property in the year that you made that. Right. So most people understand that you have rental income and that income is taxed because it's personal. But when it's inside of a retirement account, that income is deferred till retirement time. So when you sell the property, there's no capital gains tax. So if you bought a property for $500,000 and you sold the property for $600,000 whenever you wanted to sell it, if you wanted to sell it, those are still choices of the self directed account. There wouldn't be capital gains on that additional $100,000 of profit. You would just have $600,000 back in your retirement account to make a new investment or multiple investments. So that's really nice. And one of the other advantages is you don't have to worry about 1031 exchanges because there's no timeline. There's no tick tock of the 1031 because if you don't find another property, that cash is still in your account waiting to be reinvested. So that's one of the nice benefits as well. Capital gains, nobody likes to talk about capital gains, but you can defer the capital gains. It is just going back into the IRA. Wow. So I'm getting really excited about this self directed IRA because for me, I have a pretty stagnant 401k that I started back when I was an employee before I became an independent contractor. I also have a small Roth IRA. So I'm kind of wondering if I have those two available and I wanted to put them into a self directed IRA, would I need to have two different self directed IRA accounts or could I put those both into one self directed IRA account? They are separate. So the traditional, the 401k rolls into a traditional IRA, which is tax deferred, the Roth is tax free because you've already paid the taxes on the contributions. So it's after tax money that you contributed into the Roth. So many people have that situation. They have a larger 401k that rolls into a traditional IRA and they have a smaller Roth that they put in extra money when they had extra money to contribute to the Roth. So if you have the traditional IRA and the Roth IRA, it's possible for those two accounts to co-invest into the same property, but the accounts themselves need to remain separate. Got it. Okay. And then for those accounts, like so say the traditional IRA, like you're saying, and then, you know, the Roth IRA account and make them into two different self directed IRA accounts. Then do I have to transfer all of the funds in those accounts into myself directed or is it their flexibility in the amount I can transfer? So always up to the client. And when I talk about self directed IRAs, there's a lot of choices and decisions that the self, the client gets to make. Right. So my answer to that is typically if you have a dollar amount for a property you're looking at and you need that much money, then it doesn't matter if it's all or partial, it's up to you. So if you have a traditional IRA or 401k, whether you're going to move over the full amount or a partial amount, that's always up to the client to decide how much and the answer is typically how much is the property going to be and how much do you need to make that investment. But sometimes they don't like where they are. So they want to leave that company over there. And sometimes they like that company over there, but they really want to buy that piece of real estate over there. And that company won't let them. So they move over just enough to buy that piece of property. And those are just decisions that the clients are going to make. So it sounds like there's just a lot of flexibility and also a lot of control for the client that has these type of accounts. And then I was wondering too, like for the initial setup, you know, the fees, right? And is there, what are the fees look like? Are there annual fees associated with self directed IRAs? Is it comparable to the fees that you would have with a traditional IRA for, for example, or how, how did, what does that look like? Nobody likes the word fees. Nobody like, I don't like fees. They don't charge me fees. And I was like, yeah, that fidelity, that big charity, right? You know, there are fees you either pay up front or there are commissions from buying and selling the mutual funds. They're not doing it for free. Businesses need to make a living. So our fees are very clear right up front. $30 to open in the account when your IRA is purchasing a piece of real estate, it's $250 on the transaction. So we handle the escrow signing and the paperwork and the closing for the IRA. And then our annual administration fee is $390 to hold per asset. So one asset means one piece of property, typically. We do charge $30 to wire funds to escrow. Escrow likes to have wire funds. So if we send them by wire, but those are typically our fees. We do have other fees. But when it comes to real estate, those are the main ones. Opening the account is $30. Purchasing the property is $250. And then the annual fee is $390. Well, thanks for sharing that because those fees don't sound so scary to me, so it's good to know, you know. So thank you for sharing that. You're welcome. I'm trying to put it up front because if you ever look at your statement from your stockbroker and try to find out how much their fees are, what are they charging to buy and sell? And when do you break even points? They make it very difficult to find. So we try not to be that way. We try to let the clients know up front, hey, if you want to sell that property, it's going to be $250. You know, if you want to buy that property, it's going to be $250. I totally agree with you. And then, you know, so are there, so once I set up my self-directed IRA, and I'm getting really excited about it, are there caps limiting how much I can contribute on an annual basis? Or is it like I can put in as much as I want every year? How does that work? I often get that question from people that are just about to sell a property and make some, some big cash money, and they want to put it all into the IRA. So that unfortunately is not possible. There are contribution limits. So with a traditional and a Roth IRA, it's $7,000 a year. So that's not very much to be talking about buying real estate if you're only contributing $7,000 a year. With the SAP IRA for 1099 independent business owners, it's up to $66,000. I think it's about $27,000 on the simple, but there are, there are caps and it's always go talk to your CPA, talk to your tax professional. How much can you afford to contribute? Because unlike a 401k, we're not taking the money. You're sending the money to your IRA. So if you have the money, you can make the contribution. If you don't have the money, that's your responsibility that you didn't make the contribution, right? So it's always being neutral. We refer clients to talk to their people. And when you have a CPA and a tax professional that knows your tax situation, knows how much. If you contribute X amount, you might be lowered into the lower tax bracket and pay less taxes. Listen to those people because they're very helpful on how much you can contribute. And they're always in favor of their clients contributing to the retirement accounts. That's without a doubt, whoever they are, they're going to tell you, this is how much you can put in. And you should put all of that in. You know, we don't tell you how much you should put in. We can tell you how much you can put in, but not what you should do. That will leave to the CPAs and tax professionals. Yeah, and you're so refreshing. You're just straight up chanted and love it. We love it. Okay, so when it comes to investment properties owned by self-directed IRAs, it cannot be used as a personal private residence, right? So only for investment purchase. But let's say that we purchased a self-directed IRA property and laid it down the line in the future. What if I decided we want to live in that investment property, is this option available and how does this work, right? That is often the case. And I tried to, you know, like I said, IRAs come in all sizes, but we know the price point of entry real estate in Hawaii. So I try to use a number that people can understand. And they're like, I don't have that, but whether it's 100,000 or a million, it really doesn't matter. It's still the same rules. So let's say your IRA had a half a million dollars, $500,000 and you bought a rental property and it's got a nice income, the rental income going back to the IRA, the expenses are being paid from the IRA, be a property manager or no property manager. But when people have a half a million dollars in mutual funds in their IRA, they never think about living in it, right? You can't live in your mutual funds. So the IRS says that's an IRA worth a half a million dollars. When you have a piece of property that's worth a half a million dollars in the IRA, the IRS rules still apply. You can't live in it. You can't have personal benefits from it because the IRA hasn't paid its taxes yet and it's being held within a retirement account. But people do think about living in the house that their IRA owns a lot, you know, that's the normal question. It's human nature to see that this is a physical asset and while I'm using it as an investment property for my retirement, maybe I might want to live in it someday. So what would that look like? Well, it's called an in-kind distribution. So when you get to retirement age, you start taking money out of your IRA and that's a distribution. So that's what most people are familiar with. You want $50,000 this year to go have a nice retirement trip or whatever it might be and the money is in your IRA, you take a distribution. When you take the distribution, that's when it's taxable. It's taxable at your income bracket. So you haven't paid taxes yet, but when you take it out and put it in your pocket, it's taxable. So that's when you talk to your tax professional, your CPA about, hey, I want to get some money out of my retirement account. But how much is it going to cost me in taxes and how often should I take it out? So that's typically with cash, but you can also do an in-kind distribution, taking the asset itself as a distribution instead of taking out cash, you're taking out value. So that looks like a quick claim deed. You are changing the ownership from being the IRA to yourself personally, and that can be it is a tax, taxable transaction. So clients have different feelings about wanting to do that, not wanting to do it. Everybody wants to do it, but can I afford to do it with the tax implications? Talk to your tax professional about that. But it is possible. And sometimes clients will spread out the distribution over a period of time with taking off a slice amount. So let's say 100% of the property is owned by the IRA and you're going to take 20% for five years, then you're going to pay tax on the 20% distribution. And at the end of the fifth year, the IRA owns 0% and you personally own 100% of that property, then you can live in it because you own 100% of it. So that's how some clients do it when they just really think, maybe I want to live in that house someday, we're going to rent it for the next 10 years. But as I get closer to retirement age, that could be the place we're going to retire. And if they don't have to buy the house, they can distribute the value out and pay the taxes along the way when they can afford to when their CPA tells them they can. Then that's how that works. Hey Dan, what is that age? So under the IRS, what is the retirement age he says? Well, the age of 59 and a half is when the early distribution penalty goes away forever. So if you are under 59 and a half and you want $20,000 out of your IRA, for example, then it's taxable. So let's just say you're at a 20% tax bracket, right? So if you're under 59 and a half, there's a 10% penalty for early distribution. So that would be 30% off of the $20,000 that you take out. And that's very expensive money. So 59 and a half is when the early distribution penalty goes away. So our start of most distributions of clients in retirement is after 59 and a half because nobody wants to pay the 10% penalty. They might be able to pay the taxes, but that 10% penalty is the government saying keep the money in there. You're still too young. This is for retirement. Okay, good to know. And then how about foreclosures or properties to flip, leasehold properties? Can you use self-directed IRAs to buy those type of properties? All of those things are fine. Whatever type of property they're looking at, the clients, what they're interested in, the price point that they needed to be, it all works. Leasehold, buy, fix and flips, raw land, developed land, condo, tell, the simple leasehold, whatever they choose, it's fine because it's an asset held by the IRA. Love it. So much flexibility, so much control empowerment, I guess is kind of a better word. So with a self-directed IRA, can you partner with other investors or maybe even yourself to make the purchase? Yes. The answer is yes to that. And it can be structured either for talking about real estate, it could be tenants in common and that other tenant could be you or it could be another IRA or it could be anybody that chooses to pony up the money to be the tenants in common. It could be 5050, it could be 7525 and that's how smaller IRAs are often in a deal on a real estate investment, right? There may not be enough in your IRA to buy that property, but there could be tenants in common or it could be under the structure of a Huey in an LLC where the IRA is not the owner on title, but the IRA is a member of the LLC Huey and there's other investors that own the property and they get their percentage of the benefits of it. So yes, you don't have to have always just one IRA by one property and often spouses both have retirement accounts that can co-invest into the same property as tenants in common or in a Huey. So I think we're definitely thinking about opening ourselves right now. We purchased real estate here in Hawaii. What are some tips that you can offer us and our viewers? You were thinking about this. Well, I think the best is, you know, our advice is open the account, fund the account and purchase the asset. Go smoother if there's already a self-directed IRA and that IRA has money in it before you try to buy a piece of property. So you want things to go smoothly just as you would, you wouldn't go put in an offer on a house if you didn't have any money or financing coming, right? So you can shop all you want and dream all you want, but it's the money in the account that's going to be buying it. So that's really makes it smoother with the transaction and try to look at a property that might have low HOA dues, you know, or is appreciating faster than something around might be or a neighborhood, you know, it's the same things that you would think about with any other real estate investment, right? Is this a good neighborhood? Is it up and coming? Is it broad land? And is there any appreciation happening? Are the rents high? Can I buy it and fix it up and sell it for a profit or rent it for more money? Those are the same kinds of questions that any real estate investor would be looking at. Great to know. So in terms of self-directed IRAs to purchase real property, basically you cannot use your personal money, everything. So even like renovation costs, hiring contractors, plumbers, electricians, you have to use money from the self-directed IRA, correct? That's correct. So the IRA is the buyer and the owner. So who pays expenses? The owner, right? So if you want to use your personal money, it could be a contribution. If you have a set and you can make a nice contribution for the year, or maybe it's the end of the year and the new year is just around the corner and you can do a 2023 contribution and a 2024 contribution. I mean, that's quite a bit of money if you're looking at $132,000 or, you know, that's some money for a fix. Or maybe you're just going to lend the money to a flipper. That can be another way to be involved in a real estate transaction. You know, maybe the flipper has money to buy the house, but not enough money to fix the house, to sell the house a nice profit. So they were looking for bridge loans, you know, something to get them through the fix. Those are all ways that IRAs can invest in real estate, whether it's on title in an entity like a Huey or tenants in common or lending money to somebody else's real estate project. So you were amazing. You're amazing. So much good stuff. And I think we could do a part two next year. We was really happy. Yeah. So how do people, yeah, how do people reach out to you? I know there's a website. Yes, of course. And you know, your website. IRA, Hawaii.com IRA, Hawaii.com local number 808-521-4472. And I'd be glad to talk to people. It's there's the same questions all the time. And I do this. Can I do that? How does this work? You know, and after 16 years, I've heard all the questions and I can't say I know all the answers, but I know most of the answers. And if I don't know the answer, I can find the answer. And I'm always happy to be stumped by not knowing the answer. You know, 16 years ago, I didn't know all the answers. And now I'm pretty much know the answers. Well, you've been so kind to us in answering all of our many questions. And I wish we had more time. But thank you so much for being a guest on Inside Hawaii Real Estate, Dan. Thank you for having me. Thank you, Dan and Aloha. Aloha.