Jake Marchini: Move on to the next slide there, please.
Jake Marchini: Now, before we get started in earnest, I do just have to give a small disclaimer. The Entrust Group does not provide investment advice or endorse any products. All information and materials presented here are for educational purposes only, and all parties are encouraged to consult with their attorneys, accountants, and financial advisors before entering into any type of investment.
Jake Marchini: Moving on.
Jake Marchini: Take some look at today's agenda. We'll be giving a very brief
Jake Marchini: intro about the Entrust Group, for those of you who might not yet be familiar with us. Then we'll have our topic presented today by Mr. Ryan Finch, Roth Conversion Strategies, and after the presentation, there will be a Q&A session, so if you have any questions.
Jake Marchini: That you'd like to discuss about the material during the presentation, please feel free to type those into the chat so we can read those out and answer those at the end of the presentation.
Jake Marchini: Some information about myself. My name is Jacob Marchini. I'll be the host from the Entrust Group for today. I have over 9 years at the Entrust Group here, actually 10 as of last month.
Jake Marchini: And I, provide service and support to new clients and referral partners here at the Intrust Group, and have my CISP certification. That is, I have my certified IRA Services Professional designation from the Bankers Association of America.
Jake Marchini: Some general information about the Entrust Group. For those of you that might be new, we are self-directed IRA administrators. We keep records and provide financial services for IRAs for our clients to help them invest in alternative assets. We are very proud of our knowledgeable staff.
Jake Marchini: Many of whom have the same CISP certifications that I do, and we host monthly educational webinars for the benefit of our clients and prospective clients.
Jake Marchini: Some stats about the Entrust Group. We have over $5 billion of assets under administration across 24,000 or more active investors. We've been in business since 1980, so over 40 years of service. And for those of you who might wish to start up an account with us, we offer a single point of contact for personalized service, if you decide to open an account with us here at the Entrust Group.
Jake Marchini: And without further ado, I'll turn things over to our presenter today, Mr. Ryan Finch.
Ryan Finch: Thank you, Jacob. Thank you, everyone, for being here. My name is Ryan Finch, president and founder of Tangible Wealth Solutions. We are a wealth management firm that specializes in real estate and taxes. We don't actually do traditional money management, stocks, bonds, equities, ETFs, mutual funds like that, so we specialize in this. We work with a lot of people's
Ryan Finch: RIAs that are managing that part of their, accounts, and then we specialize here on the real estate and tax side.
Ryan Finch: Whenever I'm listening to people's advice or listening to someone speak, I kind of want to know their background, right? I like to say, you don't want a fat personal trainer or a skinny chef, so giving my background on what I've done, my career has been in real estate. I started out as a commercial analyst for U.S. Bank.
Ryan Finch: doing large commercial real estate loans, and then I went to a development company. We built senior housing and apartments, and then the 08-09 real estate crash happened.
Ryan Finch: Went back to banking and did problem commercial real estate loans for several years. Once I got through my portfolio, the bank said, where do you want to work next? I said, well, I want to be a financial advisor. Nobody helps anybody with their real estate.
Ryan Finch: So I, did level one of the CFA, got my CFP, and then became a comprehensive financial planner. And then several years in, we got a new manager who
Ryan Finch: decided that because I was giving advice on real estate and not charging for it, that that didn't fit the business model, and that I should stick to stocks and bonds. So I went to everyone I worked with and said, if I don't, touch stocks or bonds and I leave, will you send me all your clients if I stick to real estate and taxes? And so I went on my own, we just had our 11-year anniversary, but…
Ryan Finch: With the whole goal of creating a team that specializes in this area, then this is the void, that we really fill, is we don't feel like there's enough financial advisors that really know and understand and look at the real estate component, and then that's where we can come in and add a lot of value. So that's me, Ryan Finch with Tangible Wealth Solutions.
Ryan Finch: Here's some of our disclosures that we have to have with all presentations, with investments.
Ryan Finch: second page of disclosures, including real estate risk and oil and gas risk. We're going to mention an oil and gas, investment at the very end.
Ryan Finch: Here's some of the topics we'll be talking about today. So we've got Roth conversion fundamentals, sequencing, and asset allocation, so how you take these different investments and combine one or two strategies together to kind of get you further close to your goals.
Ryan Finch: self-directed IRA flexibility. The J-curve advantage, so that's the advantage of what real estate development deals have to them that allow for this Roth conversion strategy.
Ryan Finch: inheritance and RMD, so, required minimum distributions that happen at 73. The advantages of the Roth versus a traditional IRA, especially at, you know.
Ryan Finch: during required minimum distributions, and also when you're passing along these investments to your heirs, and then combining this with an oil and gas fund at the end. And that's just a strategy where, when you do a Roth conversion, you create some
Ryan Finch: taxable income for yourself, and then we just want to show there's another step that can now reduce that, taxable income. It's just giving you ideas, knowing what's out there.
Ryan Finch: The key strategy, though, we're talking about today is the Roth conversion discount, where when you roll it over from your IRA to a Roth IRA, you can do it at a 30% to 40% discount using some of the tools that we have.
Ryan Finch: And that we're making you aware of.
Ryan Finch: So, Roth conversion with valuation discount. So, this is a tax strategy using private placements. And, what private placements are, you'll hear them, called by several things.
Ryan Finch: Private placement, regulation Ds, syndications, private funds, private real estate, those are all kind of under the same umbrella. And what a private placement is.
Ryan Finch: It's an investment where a sponsor, that's the company that's putting it together, that's who you're trusting with your capital, and that's who you're trusting to make the right decisions, and do the right thing, and implement the strategy. The sponsor will raise capital for their specific
Ryan Finch: investment. So they might be building a multifamily property, they might be building a self-storage property, but they will put together a private placement, which is a private placement memorandum. So it has 200, 300 pages describing who the sponsors are, who the executive team is, their experience, their strategy, all the disclosures, all the risks, every… the targeted hold period.
Ryan Finch: targeted returns, all that information that someone needs to make an informed decision on investment goes in the private placement memorandum, which is why we call these private placements. But that's what that investment is. And so now you have a fully packaged investment, and then you're reviewing these different investments to decide.
Ryan Finch: which ones you want to invest in. So, you know, private placement A is this self-storage one, private placement B might be multifamily, but when you're looking at the world of these alts.
Ryan Finch: or private placements. The Roth conversion with the discount
Ryan Finch: is done through a private placement. So this is not a strategy that can be done with a stock portfolio, or an ETF portfolio, or mutual funds. This is, unique to these types of private placements.
Ryan Finch: And then, within the private placement is… your capital is typically tied up for 3 to 5 years.
Ryan Finch: And, and then it's development risk, so you're taking a property and you're building it from the ground up, and so you need several of these factors for this to work.
Ryan Finch: And then how the math works for the investor is you have $100,000 in your traditional IRA, so it's all pre-tax.
Ryan Finch: And now you're reviewing all these different private placements, and you've narrowed it down to one that you really like, you feel like the sponsor is a really good sponsor, has a really good track record, you're comfortable with the risks of the development, you feel like the market they're building in is strong, the property type fits with that market, and now you're… that's the private placement you're good with. So then, you would invest $100,000 in your IRA into that
Ryan Finch: private placement, so private placement A. That private placement's now going to sit in your account, in your IRA at Intrust.
Ryan Finch: And you've now invested $100,000, and your value per share is $100,000.
Ryan Finch: And it's now in the investment, and it's completed.
Ryan Finch: Well, during this hold period, they're gonna do an updated evaluation. Once they've, you know, usually once they've broken ground.
Ryan Finch: and they started construction, and they're gonna get… what if this sold today? What if I had to get out of this investment? I just invested $100,000 3 months ago, but what if I had to get out of this today? That's basically what they're doing, is they're taking the valuation of what it would be worth.
Ryan Finch: right now. And so, if you try to sell a half-built building where they just, you know, set all the sticks on site, set all the bricks on site, but nothing's been built yet, you have all these sunk costs into the land and architecture, engineering, well, that's not worth as much as when you started. And then you also have
Ryan Finch: The other factors where it is an illiquid investment that you cannot get out of or sell out of prior to that 3-, 5-, 7-year hold period, depending on the private placement.
Ryan Finch: So you can't get out early. So that also reduces your current value today. The hold period… if… the longer the hold period, the more of a discount, because if someone were to buy you out of your shares, they've got to wait longer till they can see the end. So all these factors go into this valuation.
Ryan Finch: Now, the valuation's done, and in this example, they've reduced the value of your original investment by 40%. So my $100,000 is now valued
Ryan Finch: on paper, at $60,000. So my account value is going to be updated by Entrust at the Entrust Group at $60,000, because that's the current value per share. So if there's one share, $60,000 per share, or it might be multiple shares, but now they're giving you an updated valuation, so now my value is $60,000.
Ryan Finch: I'm going to now roll that investment from my traditional IRA into my Roth IRA. And when I roll it over, all of my shares, my 100 shares, my 1,000 shares, my 1 share, whatever shares make up my original investment.
Ryan Finch: When I roll those over, all the shares roll over, so all… in this case, all $100,000 worth of shares roll over, but my current value as of the rollover date is $60,000.
Ryan Finch: So I am going to pay taxes on the $60,000
Ryan Finch: of the value that I transferred over, but I was able to roll over $100,000 worth of investments, and then I would pay taxes on the $60,000 instead of the $100,000. So if I'm in the 30-40% tax bracket, that's a savings between $12,000 and $16,000 today.
Ryan Finch: So if I were to take a portfolio of $100,000 of stock and roll it from my IRA into my Roth IRA, I would pay taxes on all 100, because that's the current value.
Ryan Finch: the way this Roth conversion discount works is I'm able to roll it over at that discounted value, and then once that is inside my
Ryan Finch: Roth IRA, now it's tax-free forever, so when that
Ryan Finch: They, so let's say that this is a successful project, they've finished the multifamily property, they've now leased it up, sold it.
Ryan Finch: Well, they're going to return my capital at $100,000, plus all the returns I've made. And so, in this example, say I made a 10% annualized return, this is 3 years later, well, now $100,000
Ryan Finch: plus $30,000 of gains is going to get deposited in my Roth, and now I have $130,000 in my Roth tax-free, and then I can redeploy that capital inside my Roth and other investments.
Ryan Finch: So it's not just the discount on the front end, but then all the gains, all the cash flow, everything that's paid out now goes into the Roth.
Ryan Finch: And now it's inside the Roth ecosystem, where now we're, you know, it's a tax-free environment for that investor. So that's how the Roth conversion works, but it has to be using a private placement where the ones that we do are through real estate.
Ryan Finch: And then we're using the J curve. And then, what does the J-curve look like?
Ryan Finch: or, let me go back one more step.
Ryan Finch: this… for the J-curve, you've got your, you know, blueprints project, equity raise, then the project's acquired, then they build it, stabilize, and sell it. And then this is what the value looks like from an investor. So I invested my $100,000 here.
Ryan Finch: now they've started construction, they've started coming out of the ground. Well, now it's a partially built building, so it's not worth as much, because if someone wanted to come in there, they got to take over a partially complete building. Not worth as much.
Ryan Finch: There's a long hold period, it's illiquid.
Ryan Finch: And then right around this bottom part of the curve.
Ryan Finch: you know, about Q4, that's when it's going to have its lowest possible valuation, and that's when they're going to time the valuation that they're doing for the investor. So now they're going to do the valuation discount, now it's a 40% discount from where it started over here at the 100.
Ryan Finch: And then it's going to… you know, they're starting to complete it, the value's coming up.
Ryan Finch: Now the property's complete. Maybe in year 3, it's finished, but it's not full, so it still doesn't have its maximum value, because whoever bought it would now have to fill that property up.
Ryan Finch: Now, at the end of year four, it's fully occupied, and it's… and now we're… at the end of year five, we're starting to increase rents, and now we have this fully stabilized
Ryan Finch: brand new building in a really good market, and then we're going to exit at the highest possible value. So you can see, as they're developing the property, you have your entry point when you originally invest, and then the value is actually going to decline over the next
Ryan Finch: couple quarters or years as it's being developed, and then as it's getting towards completion, that's where you get this big upside. It would be similar when, you know, people say, well, are you allowed to value it that way? As someone who had a bond portfolio.
Ryan Finch: And depending on how interest rates move, that bond portfolio could move significantly up or down. And that bond portfolio could move down quite a ways.
Ryan Finch: But as long as you're going to hold it to maturity and everything works as planned, you'll get that full value at the end. So this is very similar when you're thinking, well, are they really allowed to do this, or how does this work? You know, how does this pass those tests if the IRS were to question this? It's really the same way that a bond portfolio would be marked to market, is how this is. And this is just real estate, and these are the factors that come into this when they're valuing it.
Ryan Finch: And then,
Ryan Finch: now we're going to kind of compare the traditional 401K IRA versus a Roth IRA. So, you know, well, what are all the benefits of getting my money moved over, right? I'm going to have to pay taxes today.
Ryan Finch: maybe I'm in a higher tax bracket today than I think I'll be in the future, which all needs to come into the math that we're doing. But a traditional IRA, that's all pre-tax. I haven't paid taxes on it yet.
Ryan Finch: And the Roth is after-tax money, so that's why when I roll it from the IRA to the Roth, I've got to pay taxes at that time.
Ryan Finch: My growth in the traditional 401K is tax-deferred, which is very different. So tax-deferred means I don't have to pay taxes on it yet. So I am going to pay taxes on it when I pull it out in 5, 10, 20, 30 years, but I will have to pay taxes on it.
Ryan Finch: the Roth is truly tax-free. Because I paid taxes before it went into the Roth, I've paid the government what they, you know, were expecting, and now it can grow tax-free. So it's truly tax-free, not tax-deferred.
Ryan Finch: Withdrawal… withdrawals are taxed as ordinary income.
Ryan Finch: And when that's coming out, if someone has to take out, maybe they've got a wedding they're trying to help someone with, or they're wanting to help a kid buy their first house, or something like that with these, when you pull it out, it's taxed as ordinary income, and if you pull out a lot, that's going to really… could push up your income into a much higher tax bracket with the tier taxes.
Ryan Finch: When you pull out of a Roth, as long as it's qualified, so it's after, you know, the ages they put in place.
Ryan Finch: where there's no penalties or anything, it's tax-free. There's no taxes on it, also does not increase your income, so it doesn't affect your current taxable income rate.
Ryan Finch: And then this is a big difference. If you inherit a traditional IRA, 401K, SEP IRA, if you inherit a pre-tax retirement account.
Ryan Finch: That, you can leave in, there's a 10-year withdrawal rule, but when you pull it out, it's going to be at your own tax rate. And typically, when someone's passed away, that's usually going to their heirs when they're in their prime earning years, and then it's typically coming out at the very highest possible tax rate.
Ryan Finch: if you inherit a Roth IRA, you have the similar 10-year rule of pulling that cash out, but that cash is going to come out tax-free. So, with a lot of other assets, when they pass, they get to step up in basis. This would look very similar.
Ryan Finch: no taxes, it can grow in the Roth for a while, but as it grows, it's gonna come out tax-free. So from a passing along an inheritance, it's a much stronger tool.
Ryan Finch: And then, the traditional IRA counts towards your taxable estate and increases your AGI, and the Roth IRA does not count against that.
Ryan Finch: So those are just some things to be aware of when comparing the traditional to the Roth of, well, I've got to pay taxes on it today to get it over, do I really want to do that? And these are just some of the big advantages.
Ryan Finch: I'm gonna skip the chart. We've been trying to model it out, but there's so many variables between your current tax rate and your future tax rate, and the growth.
Ryan Finch: That if you were, you know, with your advisor, if, you know, someone working with us, we can help model that, but there's just a lot of variables that you can with growth rates and stuff, where it's really hard to get a chart that can kind of point out the advantages throughout the long term, just because there's too many moving parts.
Ryan Finch: Here, we've got the required minimum distribution, so these start at age 73.
Ryan Finch: A Roth IRA does not have required minimum distributions.
Ryan Finch: You must withdraw in an IRA a minimum amount annually, and then that is taxed as ordinary income. That may increase your AGI for Medicare premiums, and this applies to all 401K, traditional IRA, all those pre-tax investments.
Ryan Finch: And then on the Roth, no RMDs, ever.
Ryan Finch: your money continues to grow tax-free, withdrawals are tax-free, doesn't account against your AGI, and it's not factored into Medicare premium calculations.
Ryan Finch: one of the, you know, traditionally, a lot of advisors would, you know, start doing Roth conversions early, and then the argument against that is, well, I'm in a much higher tax bracket today than I think I will be in the future.
Ryan Finch: But the other component to that is, that…
Ryan Finch: tax bracket could jump up significantly once you hit RMDs, and that's something that a lot of people aren't taking into account when they're thinking of, my income's high, then it's going to drop in retirement, but wow, I've worked really hard, I've saved really well, now I've hit 73, the amount I have to take out is actually gonna now bumped me into a much higher
Ryan Finch: tax bracket than I, ever thought I would be.
Ryan Finch: So, when we're working with clients a lot, and we're running the math, a lot of times it helps to start doing these distributions in small amounts.
Ryan Finch: and it's all relative, but doing these in small amounts so that we can get that balance in the traditional IRA much lower by the time we hit 73, so that when they're running the calculations on RMDs, it's a lot lower, and we've already moved a lot of stuff, and we were able to do it over the course of a bunch of years.
Ryan Finch: Some… because some people will come up and say, well, once I have RFDs, then I'll start doing this. When you do a Roth conversion.
Ryan Finch: you know, say I roll $100,000 from my IRA to my Roth IRA, it does not, it does not, count towards the withdrawal amount I need. So, say I needed to withdraw $200,000 that year.
Ryan Finch: and I did a $100,000 Roth conversion, that $100,000 conversion doesn't count towards the $200,000 I need to distribute out of my traditional IRA. So I… I would, you're gonna… it's, in addition to, but now, say I…
Ryan Finch: distributed 200. I also rolled over 100.
Ryan Finch: I now have $300,000 less principal the next year when the calculation happens, so I should have a lower amount. We are seeing in really good equity years, equity markets, where some people, even after their RMDs, their equity account is higher the very next year, which is a good problem to have, but that's something that we've seen as well, where the balance continues to grow, which is a great thing.
Ryan Finch: But then the RMDs keep pushing up, too.
Ryan Finch: This is just an idea of, like, what do these deals look like? So we've seen multifamily development, so building multi-family apartments.
Ryan Finch: You'll almost always, when you're looking at private placements, see a hold period, a targeted hold period of, say, 3 to 5, 3 to 4, 4 to 6. The reason they give themselves that range is, one, construction risk. They may not finish it on time, it may take longer to lease up than they thought.
Ryan Finch: But also, imagine coming out of a great multifamily property in 2009. That's not the ideal time to sell it, not the best thing for your investors. So they want to give themselves some wiggle room in case they come out of the ground, and it's just not a good market to sell, so we'll just continue to rent this thing. We'll hold for another year or two.
Ryan Finch: And that's something the investors need to be comfortable with up front, is it's not like a note maturing where in 3 years I know this is coming back. It is something where there is some, there is some flexibility on that end timing that the investors need to be aware of.
Ryan Finch: So you'll see, I mean, this one was an individual or an infill development, and then 30% to 35% discount. The most common discounts we see are 35 to 40. We've seen some higher than that, but this is really a typical range.
Ryan Finch: We've seen mixed… some mixed-use development, where it's retail, multifamily on top. We've seen senior living, we've seen self-storage. So, any property type, we've mostly seen. And then we do like, when we're looking at this for clients, or recommending clients look at this, we do like seeing them diversify between sponsors, so a different group in charge.
Ryan Finch: We like seeing them diversify between type of projects, so multifamily, senior living, self-storage.
Ryan Finch: duration, you know, how long the hold period is. We like seeing people really break it up, and so maybe this year I do one for $50,000 in self-storage, next year I'm going to do one, $50,000, but maybe I'll do multifamily, but we think that that can really lower your risk, because
Ryan Finch: you're in… typically in one project. Some will be a portfolio, it might be three to five projects, but we like to see diversification from our side, because ground-up development is, you know, the riskiest type of real estate, because you have so many people involved, construction, lenders.
Ryan Finch: You know, you're starting in one market, but it's not coming out of the ground and finished in a different market in three to five years, which may be very different. So there… we just really stress diversification from our end as much as we can get people to listen.
Ryan Finch: Here's more of the legacy planning for your client, so…
Ryan Finch: inheriting the traditional IRA, or, you know, these are reasons why we really push the Roth conversion, really recommend it for a lot of people. Heirs must withdraw all the funds in 10 years.
Ryan Finch: Tax authority and area income, no step-up in basis, could push the air into a higher tax bracket, increases their AGI, and then on the Roth, 10-year withdrawal rule, but no taxes, no income tax impact, doesn't affect tax bracket, doesn't affect AGI. So just a reminder of the difference between the two.
Ryan Finch: And then now with combining strategies, so…
Ryan Finch: you've done $100,000, you rolled it over at the $60,000 value, all right, well, Ryan, you created $6,000 of income for me.
Ryan Finch: Do I just have to take that?
Ryan Finch: There are other tax strategies out there that can reduce someone's ordinary income. So, in this example, we're using an oil and gas drilling fund. So, in the world of oil and gas, there are the drillers who, they drill the wells, take all the risk.
Ryan Finch: And, they have to pay the mineral rights owner, you know, what they're due, and then they get to keep what's above that. So that drilling fund, it's a working, operating drilling fund, they have special tax advantages where
Ryan Finch: if, say, I invest $100,000 in a drilling fund, it might pass through $75,000 of deductions through intangible drilling costs. That $75,000
Ryan Finch: could help lower the in… go against the income that I created by doing my Roth conversion.
Ryan Finch: So this is how you would combine the two. So,
Ryan Finch: Execute a Roth conversion, value a discount, right? $60,000 of income, so now I have $6,000 of income I'm gonna have to report.
Ryan Finch: If I invest in an oil and gas drilling fund.
Ryan Finch: I would need to invest, you know, about $100,000
Ryan Finch: Or, about $91,000 to create $60,000 of losses.
Ryan Finch: And then that would offset it.
Ryan Finch: And then now I have zero tax impact, but I did have to have $100,000 of separate cash, and I had to be comfortable investing in oil and gas, and I had to be comfortable now, same thing, I had to be comfortable with the sponsor, their targeted returns, that I feel comfortable with the investment itself, so I see it as
Ryan Finch: You really want to be covered with the investment first, and then the tax benefits, just like the Roth conversion.
Ryan Finch: This is how that math would look.
Ryan Finch: So, I created $19,200 of Of taxes on my $60,000.
Ryan Finch: But I invested $91,430 in this drilling fund, which created 70% deduction for me. So now I have a $64,000 deduction in my income, which can offset that $60,000 from my Roth conversion.
Ryan Finch: And then my net tax impact is a zero, and then I have an oil and gas fund that will generate income
Ryan Finch: in the future.
Ryan Finch: This, just like we talked about the 401K and IRA being tax-deferred.
Ryan Finch: This investment is tax-deferred as well, because at the end of, say, that 5-7 year hold period, and they sell those wells, and say my $100,000 now comes back at $110,000,
Ryan Finch: Well, I wrote off all that deduction, so that could get recaptured, so this could create a taxable event.
Ryan Finch: 5, 7, 10 years from now. Most people at that time would just do another… they would reinvest those funds in another drilling fund, and push that out another 10 years, but just knowing that when you're looking at these moving pieces is we haven't eliminated it, but we have pushed it further out into the future, and we can continue to defer those taxes.
Ryan Finch: This is a little bit of… more of just an example… hypothetical example with that $91,000. Okay, I invested that $91,000. Is it gone? I know I got the tax break. Know you're earning cash flow on that $91,000, so that drilling fund would pay the person cash flow, and
Ryan Finch: And then that cash flow is tax advantage because you get to write off 15% of the income on
Ryan Finch: royalty income, so you only pay tax on 85 cents on the dollar. So this is just…
Ryan Finch: One example, some people really like oil and gas and energy, some people want to stay away from it. This is not the only option, just something worth showing you, just to make you aware that, alright, I'm doing this Roth conversion, I like the discount, I really don't like the $60,000 of taxable income, you know, what else is out there? But this just to give you an idea
Ryan Finch: Of what those look like. But that is really Roth conversions, how this valuation discount works.
Ryan Finch: And just a step further than a lot of people will hear, oh, what if I, you know, do your Roth conversions early, let's move it over, but most of what people have seen to date is just a straightforward, let's roll 50 grand, pay taxes on 50 grand, and just get it over as soon as we can.
Ryan Finch: This is something that just puts a little bit more math in your favor as you're doing… as you're doing and looking at the Roth conversions.
Ryan Finch: And then here's a way to find us. We'll put this back up later, with our contact info.
Ryan Finch: And then with that, I'll turn it back over to Jake to kind of walk you through a few more things.
Jake Marchini: Thank you very much for that presentation, Ryan. So, just before we get to the Q&A session, we have a few wrap-up slides, and we'll also be putting a survey up, so you can let us know if you would like to hear from Ryan about the information that we've
Jake Marchini: presented today. So go ahead and answer that.
Jake Marchini: Alright, next slide there, Ryan, please.
Jake Marchini: Alright, for those of you who are just joining us today and might be interested in putting some of this information to use in practice, you can open up an account with the Entrust group, just following 3 steps.
Jake Marchini: And get that funded. First is to fill out an application to open an account. You can do so on our website at theentrustgroup.com very shortly. Takes about 10 to 15 minutes to fill out an application.
Jake Marchini: The next step, next slide.
Jake Marchini: would be for you to fund your account, meaning to put money into it from wherever it is currently. So if you have IRAs, or Roth IRAs, or 401Ks, or other types of employer-sponsored plans, you can roll over or transfer that money into your newly established account with the Entrust Group. We can… we'll also provide you with the paperwork for that.
Jake Marchini: And then finally, you would instruct us to make your investment in whatever it is that you wish to purchase or to invest in using the IRA, and there's paperwork for that, which, of course, we would walk you through.
Jake Marchini: And this will address some of the questions that I see have already been put into the chat about, will we be sending out slides and providing this presentation to you? Yes, we will. We'll be providing a follow-up email that will include the video replay, slides, and more educational resources. And you can also take that opportunity to sign up for next month's webinar, Real Estate Investing with Debt vs. Equity, Which Is Right For You.
Jake Marchini: All right? And if you have any further questions about the Entrust Group or SDIRAs in general, please feel free to look at our Learning Center on our website. We have a lot of articles that are very helpful for various topics, and you can find a lot of helpful information there. You can follow us on social media for updates.
Jake Marchini: Now, finally, we'll move on to the question and answer session. Ryan, the next slide has your and my contact information on it, so if you'd like to just flash that for our guests here, anybody who has any follow-up
Jake Marchini: questions about the paperwork that you'd like to ask in a more private setting, or just on a one-on-one, please feel free to reach out to Ryan or myself at this contact information. We'd be happy to provide more detailed information for you.
Jake Marchini: Alright, and I believe we can move on to the question and answer session here.
Jake Marchini: We're going to start with… we have an anonymous question. I have an inherited IRA at the Entrust Group. I want to see if I can move funds into my other Entrust SEP IRA account without tax or fees. Now, I'll handle that one. That, unfortunately, is not possible. You cannot move money
Jake Marchini: from an inherited, or as we call it, a beneficiary IRA into any other IRA. An inherited IRA is…
Jake Marchini: its own isolated thing. You can't even move money from an inherited IRA to another inherited IRA unless they were inherited from the same person. So that… the money in that inherited IRA
Jake Marchini: has to stay where it is, unless you wanted to take a distribution from that inherited IRA and take that into your personal possession, and have that removed from the tax protections of being in an IRA. So…
Jake Marchini: Cannot do that, unfortunately.
Jake Marchini: Anything to add there, Ryan?
Ryan Finch: No, that was great. Well said. It's… I know, it's one of those parts where I wish I had a better answer that you'd like, but yeah, that's unfortunately the right answer.
Jake Marchini: So…
Jake Marchini: Moving on to the next question, who does the valuation, and can the valuation be done at any time? Now, I'll take over that. I assume that is, most helpfully answered in the course in the sort of context of a
Jake Marchini: an Entrust group processing standpoint.
Jake Marchini: Yes, you… so when you want to make a Roth conversion of something at the Entrust Group, be it cash, be it a real estate asset, a oil and gas asset, any sort of thing, you would need to fill out paperwork telling us that you want to make the Roth conversion.
Jake Marchini: And you would need to fill out a form called a Fair Market Valuation Form, or FMV, which declares the value of that asset for the purposes of the conversion. So we can write that on your Form 1099-R when the conversion is done.
Jake Marchini: to support that FMV form, you would need to provide something from the investment, typically. They would have to provide some sort of statement, or a written valuation, or
Jake Marchini: If they have it, a,
Jake Marchini: an appraisal for a property, something that shows that you didn't just pull that number that you wrote on the FMV form out of a hat.
Jake Marchini: But… so you would provide that to us, but you would typically get that from your investment sponsor, who would give you a value to write down for the purposes of that valuation.
Ryan Finch: Yes, and they're gonna do… the sponsors are the ones we work with. They get an independent third-party appraisal report from typically a big national firm, and they're gonna provide you that appraisal and backup information that you would need.
Jake Marchini: Okay, next question. Can you do a partial rollover, or over a series of years to phase in the tax impact? And I assume that that rollover is meant to be a Roth conversion, just…
Jake Marchini: I hate to be pedantic, but those terms are distinct and mean different things. But a Roth conversion, yes, you can make a partial Roth conversion of an investment. There's nothing that says you have to convert your entire stake in a position all at one time. You can spread that out over multiple years.
Jake Marchini: So that you lessen your tax burden all at once.
Ryan Finch: Yep, absolutely, and what we'll see, too, is we'll know when the… they're gonna start doing appraisals on the other end as it starts to improve, so we'll be able to give you… and a lot of these, you know, we'll be able to give you a window, so they'll know, like.
Ryan Finch: the next valuation's not going to be done for 2 years, so we often see someone, they move half in December. November, if you want to make paperwork easier for interest and your custodian to do it earlier, and then do it again in January, and then you're able to
Ryan Finch: go, you know, split it between 2 years, and then if you have another one the next… so yes, you just want to be aware of whatever's… the discount is, how long it lasts, but you absolutely can move
Ryan Finch: a percentage of your shares each year, and do it over 2, 3… the longest I've seen is 3 years before that valuation starts to push back up, but breaking it up over several is a really common and a really powerful strategy.
Jake Marchini: I think we have a…
Jake Marchini: a duplicate questionnaire, who initiates and provides the valuation notice. Again, that would be… our client would provide us, the Entrust group, or the IRA custodian, with the paperwork for doing that sort of transaction and update of the valuation, but you would get that information from your investment sponsor.
Jake Marchini: Now, we have a question with a name on it. G.S. Castleman asks, can a person use this same strategy with a self-directed 401 rather than an IRA, and is there a self-directed Roth 401K?
Jake Marchini: Yes. As far as I'm aware, my expertise is mostly in IRAs. I'm a little bit more foggy on 401Ks, but to my knowledge, yes, there's no reason why you can't convert
Jake Marchini: from traditional funds in a 401K to Roth funds in a 401K, and yes, there are… it's very common for somebody to have a 401K with both traditional and Roth
Jake Marchini: contributions and investments in it. Very common, very commonly done.
Jake Marchini: Okay, then Donald…
Jake Marchini: I'm gonna say Boer, correct me if that's wrong, but to get the reduced appraisal, when a project is in an unfinished stage, can you get multiple appraisals and select the lowest one? What do you have to say about that, Ryan?
Ryan Finch: Yes, the sponsor, they'll typically get, one appraisal, but some might get
Ryan Finch: Two, especially if it's not coming in where they had kind of hoped or targeted, they need to, you know, be careful with that and have the argument of why this one's the better fit. But it's not…
Ryan Finch: Most are getting one appraisal, but some are gonna get two or three, and then take the average, or take the lowest. They just need to make sure, from a regulatory standpoint, that they're able to really support
Ryan Finch: The final appraisal that they're… that they're choosing to move forward with.
Jake Marchini: Now, here's an interesting question that we might have to make some assumptions about, but Lloyd Streisand asks, has the program been tested with the IRS? I assume, Lloyd, that you're asking is, you know, the information that we've presented here, is this above board? Is this okay? And yes, Roth conversions are
Jake Marchini: common practice. It's just a matter of paperwork to move an asset from a pre-tax traditional IRA or 401 into a post-tax Roth IRA or 401K. That's very… it's, you know.
Jake Marchini: it's an action that is allowed by the IRS, certainly, very commonly done. You just have to do the paperwork for it. And the valuation process that Ryan has described, yes, is commonly done. These assets dip in value, it's all above board.
Jake Marchini: So this… so yes, this sort of thing that has been presented today is above board and commonly done. Ryan, if you'd like to add any more information.
Ryan Finch: Yeah, the sponsors have very strict guidelines on, you know, what T's to cross and I's to dot, and what… how the valuation has to be done, and all those steps. There is… there's clear guidance from… from the IRS and, and, you know, private letter rulings and stuff like that to show how… how all this works.
Jake Marchini: And Lloyd follows up with, does the program Roth require a holding period before you can distribute? Now, there's a… there's a question with an answer with some nuance. Now.
Jake Marchini: you… there is no holding period before you can distribute from a Roth IRA. You can distribute from your Roth IRA at any time. However, I assume what you mean is that, is there a time period or a holding period before you access the full benefits of your Roth IRA distribution tax-free? And yes, there is. So, in order to distribute.
Jake Marchini: fully tax-free and without penalty from a Roth IRA with
Jake Marchini: Some exceptions, but speaking generally here for the purposes of answering this question, you have to be above the age of distribution without penalty, which is 59 and a half.
Jake Marchini: And also, you have to have your Roth IRA, or a Roth IRA, for 5 years to satisfy the 5-year rule. But if you are over the age of distribution without penalty and have had a Roth IRA for more than 5 years.
Jake Marchini: then you can distribute cash or assets from your Roth IRA without taxation or without additional penalty.
Jake Marchini: Then Lloyd also asks, is there a minimum amount to invest?
Jake Marchini: So…
Jake Marchini: that… is there a minimum amount to invest is a question for the people that you are going to invest with, typically. They're… they… the investment sponsor that you're going to be sending money to might have a minimum investment, but from an IRA standpoint, from a custodian standpoint, no, the interest group will act as custodian for an investment of any amount, for, you know, for a penny even, if you… if you really want to do that, if that's
Jake Marchini: It's worth it to you, but…
Jake Marchini: There is, from, you know, for full transparency, the interest group, and I'm
Jake Marchini: sure, any other IRA custodian you talk to will have a minimum fee. For the interest group, that minimum fee, if you were to establish an account today, the least amount that you would pay us per year, absolute bottom, is $220 per year.
Jake Marchini: So, invest… if you are in… to invest a penny for an account that would be charged a minimum $220 per year.
Jake Marchini: I hope that… that penny will return you enough return that it makes that fee worth it.
Ryan Finch: And I would say on our… the private placements that we've seen in the market, $25,000 and $50,000 are the two most common minimums that we work with. Once in a while, we'll see 100, but $25,000 and $50,000 is the most common that we see in the private placement real estate, Roth conversion discount world.
Jake Marchini: Mr. James Murath asks, how are valuations done on equity investments when real estate is not involved?
Jake Marchini: Ryan, do you have any comments on that?
Ryan Finch: We… we don't have any… I mean, if they're publicly traded equities, then it's just the, you know, the… the… you know, you could take the end-of-day value, typically, is how those are… are valued, but I,
Ryan Finch: But I don't know if, like, in the Roth conversion context, I believe it's, a lot of times that month-end statement is usually what they use, but I'm actually not sure, because we haven't, I've never helped someone with the Roth conversion of traditional securities.
Jake Marchini: And the Entrust Group would not be able to really offer any insight onto that. That's a question for the investment sponsor most of the time.
Jake Marchini: Typically, for the purposes of making a, you know, for the purposes of valuing an asset where there's not a, you know, an asset like real estate or oil and gas, the… it's very difficult to
Jake Marchini: value those. And so, often, the only valuation that we have is what the client paid for it. Now, sometimes people will go and get an independent valuation
Jake Marchini: from a third party or something like that. Those can be a bit uncommon because they can be expensive to obtain.
Jake Marchini: But if they provide some sort of paperwork to the Entrust group that says, hey, I've got somebody who has
Jake Marchini: Put their name on this valuation with this paperwork to back it up.
Jake Marchini: we'll take that, if you've got it, but often that can be hard to obtain for the purposes of a Roth conversion for
Jake Marchini: you know, private equity assets that are, you know, not backed up by something. That depends on your situation.
Jake Marchini: I think this one will be for you, Ryan. Mr. Castleman asks again, would you mention some other offsetting strategies that don't involve fossil fuels?
Ryan Finch: Some, yes, I know there have been some solar programs in the past. There are some
Ryan Finch: Bonus depreciation funds. We've seen them with… in the agricultural space with livestock. We've seen them with citrus farms, pecan farms. We have also seen with, certain types of real estate that qualify for bonus depreciation.
Ryan Finch: Some of them you have to be careful, because some bonus depreciation funds can only offset passive income, and so they can't offset that ordinary income.
Ryan Finch: There are some also bonus depreciation funds, where if the person's a real estate professional, then it's all considered ordinary income, so they can use the bonus depreciation to offset that. So, so some bonus depreciation funds could be an option. There are some solar
Ryan Finch: Funds. There's also some, different types of donate… charitable donation strategies that are out there. There's… and within that realm, there's some very, very aggressive
Ryan Finch: And then there's some down the fairway, like black and white tax code. And then those different strategies can fall anywhere along that line, but those are a few of the different ways you can offset, that income.
Jake Marchini: Nancy Gerlund asks, what do you need to show as documentation from the sponsor on the revaluation? I'll handle that question.
Jake Marchini: So, from an Entrust group standpoint, that's… that's a very varied… the answer is, it varies. There's not a hard and fast, list of things that we get.
Jake Marchini: But very generally, it comes in the form of a… just a written statement or a letter from the sponsor, essentially saying, you know, I, as representative… representative of this
Jake Marchini: asset have, determined that this valuation is appropriate for this asset, or they'll attach some sort of, you know, paperwork saying that this third-party valuator has
Jake Marchini: viewed the asset. From an interest group standpoint, as long as it's… it's very varied, but as long as there's something that we can put on file to hold up to our auditors to say.
Jake Marchini: this valuation was applied to our client's asset based on this valuation form that they submitted declaring the asset, and this paperwork that they provided to back that up. We will proceed with a Roth conversion. So, that is the paperwork.
Jake Marchini: The specifics are, you know, it's not very specific what is there, but generally it's a written statement of some kind, or a third-party valuation, or something like that from the investment sponsor.
Jake Marchini: And this is for you, Ryan. What service does Ryan's company provide us?
Ryan Finch: So, our company, so we're a wealth management firm. We are, structured as registered reps, meaning, think of us kind of like a broker, where we go out, we say we kiss a lot of frogs, we look at all these different sponsors, different investments, and then we'll have a menu, and then we earn a one-time securities commission any time we help someone invest.
Ryan Finch: So think of us as, you know, a way to think of us as a broker. We do, you know, have to act in the best interest of the client and make sure we're recommending things that, you know, are part of your total financial plan. If someone has an advisor, which we prefer it that way, want to make sure that what we're recommending on our end works with what they're recommending, and it's part of your whole plan. So think of us as someone who can
Ryan Finch: Give you guidance on which ones we think are strong.
Ryan Finch: in our realm, right, within the real estate and tax planning, and then help you pick. If we get to the end of the day, and you… and what we've put in front of you doesn't make sense, there's no invoice or bill, so we're there to help you
Ryan Finch: Discover the strategies, pick which ones might make the most sense, but if you don't move forward, there's no cost to that,
Ryan Finch: for us, because one, if we don't find the right fit for you, we don't want to put you into something that doesn't make sense. And then we get paid a securities commission from the sponsor, and then when you look at each individual offering in that private placement will be a breakout of the fees, the commissions.
Ryan Finch: And then when… the way we present them is it's always net of fees, so if we say this one pays, you know, 10% cash flow, and someone puts in $100,000, it's 10% on their $100,000 because the fees and costs for structuring the deal have been taken into account.
Jake Marchini: Okay, and then we have Nancy Gerlund. Looks like that's a duplicate question, so we're gonna skip over that. And Michael Karbowski asks, after the asset is reduced and rolled over into a Roth, does the contribution need a 5-year waiting period?
Jake Marchini: Before distributions, I assume, is the second part of that question, and if you have already satisfied the 5-year period, no, to my knowledge. If you've already satisfied the 5-year period, it's not a… it's not a rolling…
Jake Marchini: 5 years for each investment that you make, for the 5-year rule. It's… you've satisfied the 5-year period once, and then everything that you make to do with that account
Jake Marchini: afterward is tax-free, as long as you also, of course, have attained the age of distribution without penalty at 59 and a half. Ryan, does that match your understanding?
Ryan Finch: Yes.
Jake Marchini: Okay, what is the chance for the IRS to audit the discount when we convert to a Roth? I cannot speak to that, really. Ryan, what do you have to say about that?
Ryan Finch: I don't know. We have not seen anyone audited at the Roth conversion discount, or where they've questioned it before, so I don't know… I don't know what that percentage is. I wouldn't say it's… it's zero. I mean, there has to be some audit risk. I'm sure they look at these, I just haven't run into it, and I don't have an accurate estimate.
Jake Marchini: That's… same here. Many of our clients make Roth conversions. I have not heard of a client of ours having had to deal with an audit, but I'm not privy to our clients.
Jake Marchini: situations outside of the very specific paperwork that I help them complete and the transactions that they make, so we don't really have visibility on that
Jake Marchini: To answer that question, unfortunately.
Jake Marchini: Irving Lieberman asks, can you invest in an LLC or LP that acquires an asset rather than develops a property?
Jake Marchini: Certainly, yeah. Making our clients make many investments into LLCs, limited partnerships, joint ventures, many different private equity structures can be used to make investments. That is, so yes, the surface level of that question, can you invest in an LLC or LP that acquires an asset?
Jake Marchini: Certainly, yes, you can do that, but…
Jake Marchini: acquiring the asset, you just… I would simply caution you to make sure that the asset that you're acquiring using that private equity structure aligns with Section 5498 of the Code and is all above board with what you're allowed to do within an IRA.
Jake Marchini: Looks like somebody didn't quite like their… the answer to that question. We have a frowny face. But, Ryan, what kind of 5-year returns do you typically see on the real estate investment? Was the 80% gain in the example, plus the reduced tax value, typical across, say, 5 investments?
Ryan Finch: I would say when we're seeing targeted, so targeted is what they're…
Ryan Finch: shooting for, there's definitely… there's no guarantees. And for these to come out and… and to have a successful raise, we typically see, you know, between 14% and 18% IRR, so that would be your annualized return over the whole period, is the typical target.
Ryan Finch: When you think of that, is it's an illiquid investment, so you need to be paid for the illiquidity of it, so if the stock market averages 9 to 10, they really need to put something together that gets above that because of the hold period, and then you're taking, not sorry.
Ryan Finch: For the illiquidity of it, and then it's a longer hold period, so your capital's tied up
Ryan Finch: for longer than if I invested in a stock, I could be out of it, you know, a couple days if I needed to. So you need to be compensated for that. So you have your hold period risk, illiquidity risk, and some other things, so that's also why they're going to have a targeted return, because if you just think of efficient capital.
Ryan Finch: for someone to agree to put money in, they need to be compensated in returns for that hold risk, all those, and liquidity, all those things. So, most typically 14 to 18, and then we do see some, you know, that are targeting a fair amount higher.
Ryan Finch: And then, when you are looking at those, and when we're looking at those, we like to see, has the sponsor done this before? Where they target 14 to 18, but are they consistently returning 6, 7, 10, 12? You know, what are they… what's their historical track record for what we would call in the business, full cycle?
Ryan Finch: You know, they bought the property, built it, operated it, sold it, so that's a full cycle deal. And most private placements will tell you their track record.
Ryan Finch: So you can compare to see, okay, this one's targeting a 22 IRR,
Ryan Finch: do I think that's a realistic amount? Or maybe I think 16 is more realistic. Well, am I comfortable with a 16?
Ryan Finch: But I think that range, that 14 to 18, when you're thinking of the risk profile and trying to model this out, if this is something for you, I think that's a reasonable expectation to target with these. And then you do have, you know, ones where they've, you know, they've had loss of principal, stuff like that, where they built something, had a lot of cost overruns, or they weren't able to lease it up fast enough.
Ryan Finch: or, you know, we had changing credit markets where they were underwriting at, say, a 3% interest rate on the exit, and now it's 6% interest rates, they've got to sell it at discount, so all those things can affect the value, but I would say the simple answer is targeted 14 to 18, but
Ryan Finch: We do see some that underperform, we see some that overperform, and part of that due diligence up front is trying to get a good idea of, you know, do I think this sponsor can consistently hit in that area, or are they falling behind, or have they never really done it before?
Jake Marchini: All right, moving on to the next question. Is there a better time to convert? At 71, I'm already on Medicare, no RMDs yet, but in precious metals traditional IRA, what's the best way to convert a traditional to a Roth of precious metals? Can you at my age? Now, I'm going to address the one thing that I…
Jake Marchini: realistically can address in this question is, can you, at age 71, make a conversion of precious metals assets from a traditional to a Roth? Yes, you can. There's no age restriction on when you can make a Roth conversion.
Jake Marchini: So if it's worth it to you to make a metals Roth conversion, you can do that easily. Just have to fill out the paperwork for it and be prepared for the tax consequences of that conversion.
Jake Marchini: Now, for the rest of this, this is a lot of asking, is this a good time? What's the best way to do that? I, unfortunately, am not a CPA or tax advisor. I cannot give tax advice like that, or tell you if it is in your best interest.
Jake Marchini: to do something like that. That is a question for your CPA or tax advisor who is familiar with your specific financial situation across all of your portfolio.
Jake Marchini: to give you guidance on that. I cannot give that sort of guidance. Ryan, do you have anything further to put in?
Ryan Finch: I agree. I'd say it's worth evaluating. There's no hard stop, like, no, definitely not. But yes, you can, but it's really running the math is
Ryan Finch: You know, what is your taxable income now?
Ryan Finch: Versus what will be in the future, what's the tax consequences of pulling this out? So it's… it's gonna be, you know, some planning and discussion to give you a really good answer. So, like, the attorneys always say, well, it depends. This is definitely a well-it-depends answer, and so the… without knowing more context and really doing
Ryan Finch: The whole planning.
Ryan Finch: Other than saying you… you can if you wanted to, but but whether it makes the most sense for you or not, I don't have enough context to… to give you a good answer.
Jake Marchini: You know, a lawyer's favorite plant is a hedge.
Jake Marchini: Right, exactly.
Jake Marchini: But to move on to the next question, Brian Zogg asks, what is the cost of the valuation of an investment for a Roth conversion? So, the cost… I assume what you're asking for is, what is the cost that,
Jake Marchini: your investment sponsor might charge you to give you the paperwork that will allow you to tell the Entrust group to make that Roth conversion. And that… that depends. That depends on the investment. Often, it seems like these valuations are just sort of given for free. There's no cost associated with that.
Jake Marchini: You know, for these sorts of things, for oil and gas drilling, or for updates for, private equity, for real estate investment.
Jake Marchini: they hand those freely to their clients to be able to do this sort of thing. But there might be a cost, depending on your situation. Like, if you… if you ask for evaluation before they've got their… their taxes in order, and they're willing to do it, they might give you
Jake Marchini: something, but at a cost, but that depends on the investment sponsor. That is something that would be answered by the people that you are working with.
Jake Marchini: There is no cost associated with the Entrust group, just to answer that question as well. We do not charge a transaction fee or anything like that for a Roth conversion or for updating the value of your asset as part of a Roth conversion.
Jake Marchini: Now, another attendee asks, if I wanted to establish a special purpose LLC within a self-directed IRA to house investments, one, can Entrust work with that? And two, if I invested in a real estate private placement like Ryan described.
Jake Marchini: and then house it within the LLC to get the 30-40% discount upon Roth conversion? Can there be additional discounts stacked because the LLC itself has limited marketability? So…
Jake Marchini: I will answer question number one, can interest work with that? Yes. Our clients very frequently use what we call checkbook LLCs to manage their investments. They create their IRA, they set up an LLC in which their IRA is the single member, and usually themselves the manager, and they put funds from their IRA into the LLC.
Jake Marchini: And then manage that in their capacity as manager of the LLC to purchase investments. So the IRA is the custodian of the LLC, which then has investments, and the IRA extends its tax protections over the LLC and all of its contents. That's a very common structure for our clients.
Jake Marchini: Now, the… Second question about if you can stack certain
Jake Marchini: discounts and tax benefits there. Ryan, do you have anything to say about that?
Ryan Finch: I really like the creativity, because we're always looking at this, like, how do we maximize, how do we maximize? I don't have a definitive yes or no answer, and then it's really the, you know, your attorney and CPA
Ryan Finch: are really going to be the ones that would work on that, and then it would be finding a, the right appraisal company to… to appra… or, you know, the valuation company to value your kind of umbrella or the top LLC. So, I don't know if that…
Ryan Finch: can or can't work, but, I believe those would be the three…
Ryan Finch: parts of your team that you'd need to work with to see if you could make that work. I don't… I don't know. I do really like the creativity of the… of the question.
Jake Marchini: though.
Jake Marchini: Okay, anonymous attendee asks, how do you think about the proportional rule when doing Roth conversions over multiple years?
Jake Marchini: Hmm. Ryan, what do you have to say about that?
Ryan Finch: I don't… is that, like, just how much… what percentage? I think if it's what percentage of your…
Ryan Finch: IRA. We… we don't have a hard and fast on our end of what we, would roll over, but I…
Ryan Finch: I lean towards doing the minimums per investment so we can get as much depreciation as possible, and then kind of running some tax numbers over the top of it, where we can roll it over and keep the taxes as low as we can. I tend to find the
Ryan Finch: Smaller amount over many years tends to be better, because we can diversify
Ryan Finch: on the offerings, and then we can diversify over different market cycles, especially in the real estate side, so I would lean towards that, but I don't have a more specific answer.
Jake Marchini: Yeah, difficult. I have… I'm not sure how to parse the proportional rule, so I'm gonna…
Jake Marchini: You know, difficult to answer the question, but if you'd like to clarify in the comments or afterwards, please let us know.
Ryan Finch: Okay.
Jake Marchini: Then, Irving Lieberman asks, can your investment be for an acquisition rather than a development? From an interest group standpoint, from a custodian standpoint? Yeah, there's no reason why it can't, you know, you can't invest in, a…
Jake Marchini: the acquisition project for a property directly, or, you know, through an LLC or some other private equity
Jake Marchini: structure to make an investment rather than a development. If you want to purchase something that's already built and then turn it around for profit, or rent it and then get rental income into your IRA, absolutely no reason why that can't be done rather than developing it, but that's according to your financial strategy and your available capital and etc.
Ryan Finch: We've just, yeah, on our side, we've just seen the J-curve working really well on development deals, and for us, for someone who's buying and repositioning assets, or buying existing assets, the discount,
Ryan Finch: isn't… isn't enough to… to… to put together the strategy for the… the people moving forward. But yeah, someone can buy an acquisition. I just haven't seen a non-development deal have the Roth conversion strategy behind it.
Ryan Finch: That's part of it.
Jake Marchini: Can a K1 showing the capital account balance at the end of the year be used to document the conversion value for the IRS? That is a…
Jake Marchini: Question for my coworkers in the distributions department. I have to check in with them about that to see if that is
Jake Marchini: something they would accept as… specifically as part of the evaluation information. So if you'd like to send me that question so I can bring that to the folks in distributions and ask, hey guys, is this… is a K1 an acceptable document for
Jake Marchini: processing a Roth conversion, I'd be happy to ask them that, if you'd like to just shoot me a message directly after this Q&A, and I can get back to you on that, but I don't know off the top of my head.
Jake Marchini: Add-on, can Entrust do the conversion? Yes.
Jake Marchini: We very frequently do Roth conversions for our clients. We cannot do valuations. We cannot put a valuation on an asset for our clients. You have to declare that to us by filling out our paperwork and providing supporting documentation for that.
Jake Marchini: Roth conversion, but we can then, once we have that paperwork from you.
Jake Marchini: do the conversion to move your asset from traditional IRA into Roth IRA. Correct.
Jake Marchini: The underlying alternative investment needs to be sound, even more so due to liquidity.
Jake Marchini: Sounds correct, I don't see a question there.
Jake Marchini: Now, Kevin Sandstrom asks, can you do a Roth conversion, metals to metals, based on dollar value? I did one by QTY and price change
Jake Marchini: So much that it affected my tax strategy. Can you do a conversion, metals to metals, based on dollar value? A conversion metals to metals. I'm not sure what that implies, metals to…
Jake Marchini: So you can convert… you can make a Roth conversion of metals in kind. You can take
Jake Marchini: gold bars that are in your traditional IRA, and you can assign them to a Roth IRA.
Jake Marchini: How that would work at the Entrust Group is we take the valuation of our client's precious metals investments and assign a value to them based on the spot price as of the end of the previous day
Jake Marchini: from bullionvalues.org. That is where we get the information for our clients' medals. We do not have, you know, a function for our clients submitting
Jake Marchini: valuations for their metals, for the purposes of Roth conversions or distributions, we take that information from BooleanValues.org as of the end of the day from the previous day, so that's…
Jake Marchini: So on the day that your conversion of metals is completed, that is the value that would be used for the purposes of the conversion. So, I hope that answers the question that was asked there, Kevin.
Jake Marchini: Now, does the oil, gas have a liquid event? What is your experience with that, Ryan?
Ryan Finch: Most, yeah, most of the drilling funds we work with, have a liquidity event in 5 to 7 years, some are 7 to 10. There's, we… we do work with one where it's over a 20-year hold period, so they do plan to have a liquidity event.
Ryan Finch: One of the upfront things you're going to want to be aware of when you look at oil and gas drilling funds is the depletion curve. So some, you invest $100, you get the big write-off, and they're hoping to be as worth, you know, 100, 120, something more in the future. There are other ones where
Ryan Finch: you know, they're drilling, they're gonna get a lot out of the ground, so much higher returns early on, but my 100 at the end of 5, 7, 10, 15 years may only be worth 50. So when you are looking at
Ryan Finch: drilling funds. Don't assume that there is growth at the end, or that you're gonna get your equity back.
Ryan Finch: Because depending on the price of oil or natural gas or whatever they're drilling. But that is, 5 to 7 and 7 to 10 is the most common hold periods where they liquidate everything and return capital.
Ryan Finch: Typically, ones that have higher cash flow in the early years will have less capital returned at the end, so you just want to balance those things.
Jake Marchini: Now, Irving Lieberman asks, if I create a Roth IRA with my Entrust Group account, do I also have to create one with my other IRA custodian? No. There is no reason why you would be mandated to open a Roth IRA with the Entrust Group, and then also open a Roth IRA with Vanguard, or Fidelity, or any other IRA custodian. Your choice to open a Roth IRA with us is
Jake Marchini: entirely contained and isolated. You don't have to match that at any of your other
Jake Marchini: IRA custodians that you might have.
Jake Marchini: Jonathan Wu was thankful for his question being answered.
Jake Marchini: Donald Boer asks, where do you find the fee schedule? I assume you mean the Entrust Group fee schedule. That is available on our website, or you can go to thentrustgroup.com forward slash fees.
Jake Marchini: to see that, or you can see that just by logging on to our website at theentrustgroup.com. There's a link that says Fees in the top right-hand corner.
Jake Marchini: That you can click on to see that.
Jake Marchini: Lloyd Streisand asks, is there any times where the investments have not worked?
Jake Marchini: Yes.
Jake Marchini: Oftentimes, investments do not work out, but that is a… that is a risk of investment, where you might invest in a real estate project that
Jake Marchini: does not work out, cannot be sold, or you might invest in oil and gas, where they start drilling and they hit nothing. That… that does happen. It has happened, it will happen in the future.
Jake Marchini: We must be willing to take that risk.
Ryan Finch: Agreed, and yeah, when we're working with people, too, we're happy to share ones that we've seen go wrong, underperform, and then our group, what we learned from it, what we saw, what we're hoping to avoid in the future, or, oh, it was a really bad market, or what happened. But yes, that is definitely something to be aware of with these, is
Ryan Finch: There's a lot of moving parts, and they do not all work out exactly as they thought.
Jake Marchini: Another attendee asks, is there a maximum income level to have tax-free Roth IRA withdrawals above the age of 59 and a half? No. You can… if you're…
Jake Marchini: ability to take distributions or withdrawals from your Roth IRA, without paying taxes is not affected by the income that you earn. No matter how much income… your ability to contribute to a Roth IRA,
Jake Marchini: is affected by how much income you earn to put money in. But once you've made your investment, if your investment is going gangbusters and generating a ton of income, and you're also, you know, you might still be employed, you're one of those folks who just decided never to retire and keeps working and has a lot of income.
Jake Marchini: Your… your income, whatever it might be, however high or low it might be, does not have an impact on
Jake Marchini: your ability to withdraw tax-free from your Roth IRA, as long as you have met the age of distribution without penalty, and you have satisfied the 5-year rule.
Jake Marchini: James Morath then asks, private placement, non-real estate investments. Private placement, non-real estate investments.
Jake Marchini: There doesn't seem to be a question there, James, but yes, you can, and it is very frequently done, that our clients make investments in private placements that are not real estate related, if that is what you asked. If you'd like to clarify, please ask us another question.
Jake Marchini: Shane Harris asks, if a property is converted to an existing Roth account, is there a holding period to take a distribution without penalty? No, as long as, again, you have satisfied those two very important, thresholds, the 5-year rule and age 59 and a half, no. If you convert your asset into your Roth IRA, you can immediately
Jake Marchini: Take distributions of income or of the property itself.
Jake Marchini: from that IRA.
Jake Marchini: Irving Lieberman asked, my questions are showing on the screen, but you're not seeing them. How do I correct this?
Jake Marchini: We've answered a few questions from Irving Lieberman during this Q&A, but if you have any further questions that you'd like to ask afterwards, please feel free to send us, you know, direct messages via email or give us a call.
Jake Marchini: Oh, there's some more here from Mr. Lieberman. Can you invest in an LLC or LP that acquires an asset, rather develops a property? Yes, I believe we've discussed that earlier. Perhaps there was a…
Jake Marchini: technical glitch that caused that to not appear on Mr. Lieberman's end, but yes, you can invest in an LLC or a property for an acquisition rather than development. I believe Ryan mentioned, though, that the J-curve and the tax benefits of a Roth conversion at a lower valuation are more
Jake Marchini: You know, common and applicable to a development rather than an acquisition.
Jake Marchini: Then Mr. Lieberman also asked if I create a Roth IRA. Yeah, so it looks like we did already answer that question as well, so we're gonna move on.
Jake Marchini: Now, anonymous attendee, can you invest the money from the checking account of a checkbook SDIRA
Jake Marchini: SDIRA funds the LLC, rental real estate, essentially, can the rents be invested, assuming setting up a dedicated brokerage account for tax? Okay, so just to… just to clarify this for… for those folks that might not have been able to parse that question, what I understand from this question is, can you have a… an LLC, checkbook LLC,
Jake Marchini: that receives income from the investments it makes, and then can you turn around and open up a brokerage sub-account for the LLC at a brokerage firm, at Vanguard, at Fidelity, at Charles Schwab, etc?
Jake Marchini: and invest there. Yes, that is also commonly done. Our clients have a brokerage account created, importantly, in the name of the LLC.
Jake Marchini: in the name of your checkbook LLC that they direct their liquid cash to so that they can get, you know, put that in a money market and put it in short-term investments. So yes, you can do that. That is commonly done by our clients.
Jake Marchini: And Scott Campbell directs this question at you, Ryan. Are the brokerage fees on deals that specialize in this space inflated due to the tax advantages or market for real estate deals that are not specializing in Roth conversions? It's really just getting the sponsor willing to provide valuation at the low point in the J-curve.
Ryan Finch: Yes, these funds are, when they come out with a development deal, it's not Roth conversion specific.
Ryan Finch: So, when they're raising capital, they're still… 80-90% of… say they're raising $100 million, 80-90% is, cash, so non-qualified investors, and then usually 10-20% are people that are looking for the Roth conversion.
Ryan Finch: and there's, a deal that has the Roth conversion amount, or, option, and the ones without, are gonna have the same
Ryan Finch: or similar loads, so the total cost of the… on our side, where you have the broker-dealer and the commissions and all that, those loads are going to be the same, because it really is a development deal that's coming out to market that has this Roth conversion benefit. So they have… they're not marking it up due to the Roth
Ryan Finch: conversion piece, but you do want to be aware of the load in the private placement, because they're not all created equal, and there will be some where the load is higher
Ryan Finch: And then another component is the waterfall or developer promote, so the better it does, the higher it performs. A lot of times they get more and more of the upside. And that all would be in the PPM, and so it would be on a deal-to-deal basis, but just because it has the Roth conversion, I haven't seen that correlation between the fees and the load and overhead.
Jake Marchini: Okay, moving on to an… looks like this is a question for me, from Maureen Costello. Please explain prohibited transactions in a checkbook LLC. If I buy stock in a company to which I provide unpaid advice, is it okay to do it through the checkbook LLC?
Jake Marchini: Now, I will try to provide as helpful an answer as I can, Maureen, but the
Jake Marchini: the base answer for that is you should check in with your tax advisor or CPA about what exactly you're doing there. From the Entrust Group standpoint, once that money goes from your IRA to a checkbook LLC, we don't see what it is that you're doing with it, we don't have any visibility on that.
Jake Marchini: And we wouldn't be involved. So, you know, we… you know, the setup part of this to get money into your checkbook LLC is all above board, and we would make sure that that's in good order. But for what you do with the money once it's in the LLC, and where you invest, and where you put it, and who you interact with.
Jake Marchini: That is beyond our control and is something that we suggest that you check that over with a CPA or tax advisor to make sure all the I's are dotted and T's are crossed before you make any, make any investments or decisions there. Now, from a very
Jake Marchini: general standpoint, the safest and best thing to keep in mind is to avoid falling afoul of Section 5498 of the Code is to not have any investments in
Jake Marchini: a… using your IRA in a company that you are involved with. Now, since you're providing, you say, unpaid advice, if you're not on the company's books, or not, you know, receiving payment from them.
Jake Marchini: Perhaps that would be acceptable, perhaps that would be okay, but I do not have the ability to look at that through the view of
Jake Marchini: however many agencies or auditors might be looking at that for whatever reason, so my very general
Jake Marchini: feeling on this is that might be okay, but I truly urge you to check in with your CPA or tax advisor who knows the full story of your involvement with this company before you use any IRA funds to invest with them.
Jake Marchini: We have only a few more questions here. If I have a $100,000 asset in my traditional IRA, and get a revaluation from the sponsor that it is only worth $60,000, and I do a conversion, do I get a 1099-R at the end of the year that shows $60,000? Yes.
Jake Marchini: That is the mechanism by which a Roth conversion is reported. You know, just like a distribution that becomes a taxable event, a Roth conversion is also reported on your Form 1099-R for the value of the assets or cash that move from the traditional pre-tax account into the Roth post-tax account.
Jake Marchini: Now, it looks like we have only one final question.
Jake Marchini: From Mr. Irving Lieberman, who asked, do you mean you have to hold the asset for 5 years, or have the Roth for 5 years?
Jake Marchini: So satisfaction of the 5-year rule for a Roth IRA means that you have to have your Roth IRA, or a Roth IRA, any Roth IRA, for a minimum of 5 years. So if you have a
Jake Marchini: Roth IRA at Vanguard, and you have that for 5 years, and then you open up a new Roth IRA at the Entrust Group.
Jake Marchini: and make an investment. That Roth IRA that you have at the Entrust Group starts with the 5-year rule fulfilled, because you've already
Jake Marchini: had a Roth IRA somewhere for 5 years.
Jake Marchini: So I hope that answers… that answers your question there.
Jake Marchini: Maureen Costello asks, can you transfer an asset in your checkbook LLC to your Entrust self-directed Roth?
Jake Marchini: Now, yes, you can. Typically, when that is done, you are transferring part of the investment to… part of the LLC to the Roth IRA. It is possible, though less common, for you to
Jake Marchini: basically take the LLC, which contains an asset, remove the asset from the LLC, so now you have the LLC and whatever's in it, and this separated asset in your traditional IRA, and then you move that separated-out asset into the traditional… into the Roth IRA from the traditional.
Jake Marchini: Yes, you can do that. It is possible, but it involves more paperwork than simply moving a piece of your equity in the LLC, or moving the entire LLC itself from the traditional IRA to the Roth IRA.
Jake Marchini: Right, and that is the end of the current questions. If there is anything else…
Jake Marchini: Just pause for a moment to see if anybody else has any other questions.
Jake Marchini: Going once, going twice…
Jake Marchini: All right, and I believe we have reached the end of the Q&A. If anybody has any, again, any follow-up questions at all, please feel free to reach out to myself or Ryan using the contact information we've provided. There will be a replay.
Jake Marchini: And… If anybody… and we have very much
Jake Marchini: been happy to provide this information to you. Ryan, any closing comments?
Ryan Finch: No, thank you, Jake. Appreciate everyone, you know, listening, but yeah, if anyone has any questions on different offerings, stuff like that, you know, myself and my team, we're here, we're happy to help. The one caveat, too, I, meant to mention it right up front, but with these private placements, they're open to accredited investors.
Ryan Finch: And so accredited investors are, you know, million dollar net worth, not including your primary residence, or
Ryan Finch: Income of $200,000, gross income if you're single, $300,000 as a married couple, but just know that, that's one of the requirements, is for someone to be an accredited investor, and
Ryan Finch: Feel free to give us a call where we can talk you through it, you know, help you, kind of see if you are accredited. Sometimes people may not think they are, but when we walk through all the assets, stuff like that, they end up being accredited. But just know that that's one caveat to most of these private placements and Reg Ds, is they do require the investor to be an accredited investor to invest.
Jake Marchini: and…
Jake Marchini: And there we have it. Ryan, thank you very much for providing your insights today for us, and we'll look forward to having you again in a future webinar, perhaps.
Ryan Finch: Thank you, Jake, I really appreciate it.
Jake Marchini: Alright, thank you for coming, everyone. Have a good day.
Ryan Finch: See ya.