How the Ultra-Wealthy Use SDIRAs to Build $10M+ (Tax-Free) Retirements | Ep. 29

This episode explains how sophisticated investors use self-directed IRAs, solo 401(k)s, Roth strategies, and other tax-advantaged accounts to access alternative investments and improve long-term after-tax compounding. Brian Spear speaks with Mat Sorensen, CEO of Directed IRA and author of The Self-Directed IRA Handbook, about why many investors misunderstand what retirement capital can actually do. Rather than viewing IRAs as limited to stocks, ETFs, mutual funds, and bonds, Mat explains how self-directed accounts can invest in real estate funds, rental properties, private lending, mineral rights, private companies, crypto, health savings accounts, and other private opportunities when structured correctly.

The core thesis is that retirement capital should be organized intentionally, almost like a personal family office. Mat emphasizes that investors should first evaluate the quality and risk-adjusted return of an investment, then optimize the tax structure around it. The conversation covers how tax deferral, Roth treatment, and compounding can improve outcomes, while also clarifying key risks such as UBIT, UDFI, leverage, prohibited structure mistakes, and asset-specific tax considerations. Mat also explains advanced strategies, including solo 401(k) contributions, mega backdoor Roth contributions, discounted Roth conversions for illiquid private fund interests, and using multiple account types together. Listeners can use this episode to think more strategically about where their capital sits, which investments belong in taxable versus tax-advantaged buckets, and how to avoid letting tax complexity prevent otherwise strong investment decisions.

Key Takeaways

• Self-directed IRAs allow investors to move beyond traditional brokerage options and place retirement capital into alternative assets such as real estate, private lending, mineral rights, private companies, and private funds.
• The investment opportunity should come first, and the tax structure should be optimized after that. A strong risk-adjusted return may still make sense even if some UDFI or UBIT applies.
• UDFI generally applies when a retirement account uses leverage, but Mat explains that many passive real estate investors either do not encounter it or may find the effective tax cost manageable relative to the total return.
• Solo 401(k)s can be powerful for self-employed investors because they may allow much larger annual contributions and can avoid UDFI on rental real estate when structured properly.
• Sophisticated investors often think like their own family office by organizing accounts, combining retirement buckets, using Roth strategies, and actively seeking or creating high-quality investment opportunities.

Key Topics Covered

• Self-directed IRA strategy
• SDIRA investing in real estate and alternative assets
• Tax-advantaged retirement account compounding
• Roth IRA and traditional IRA planning
• Solo 401(k) contributions
• Mega backdoor Roth strategy
• UBIT and UDFI tax exposure
• Leveraged real estate inside retirement accounts
• Discounted Roth conversions
• Lack of liquidity discounts
• Private lending in retirement accounts
• Mineral rights and oil and gas investing
• Health savings account investing
• Family office mindset for individual investors
• Risk-adjusted after-tax returns
• Great investments being found or created

Episode Chapters

00:00 Intro
Brian introduces Mat Sorensen and frames the episode around self-directed retirement strategy, alternative investments, and the rules-based decisions that sophisticated investors need to understand.

01:10 You’re Missing THE Best Investments
Mat explains why many investors fail to connect tax-advantaged retirement accounts with their best private investment opportunities, including real estate, startups, private lending, water rights, livestock, and even professional sports teams.

03:57 Stop Cutting Your Returns in Half
The conversation turns to after-tax returns, using private lending as an example of how a strong headline return can be materially reduced by ordinary income and state taxes when held in the wrong account.

07:00 When to Invest with an SDIRA
Mat explains how investors should evaluate which assets belong in retirement accounts versus taxable buckets, using oil and gas, mineral rights, tax credits, and risk-adjusted return as examples.

10:48 2 Sneaky Taxes (UDFI and UBIT)
Mat breaks down unrelated business income tax and unrelated debt-financed income, clarifying when they apply and why most passive real estate investors may not need to panic over them.

16:20 How to (Legally) Avoid UDFI
Mat outlines strategies that may reduce or avoid UDFI, including using a solo 401(k) for rental real estate and paying down debt before a sale when the economics make sense.

19:58 10X Your Contributions
The discussion moves into solo 401(k)s, larger contribution limits, spouse participation, Roth versus traditional treatment, and how the mega backdoor Roth can help investors contribute far more than a standard IRA limit.

24:36 30% Less on Roth Conversions?
Mat explains the discounted Roth conversion strategy for illiquid private fund interests, including how third-party valuation and lack of liquidity discounts may reduce the taxable conversion amount.

29:37 Become Your Own Family Office
Mat encourages investors to organize their accounts like a family office, combine multiple account types when appropriate, and recognize that knowledge and capital both compound over time.

33:33 Mat’s Sage Principle
Mat shares his core investing lesson: great investments are not usually sitting on a shelf being sold to everyone; they are found or created through relationships, insight, and active effort.

35:09 Work with Mat!
Mat explains Directed IRA’s focus, educational resources, self-directed retirement account expertise, weekly webinars, events, and support for investors who want to take more control of their retirement capital.

Full Transcript

[Transcript begins]

Mat Sorensen: Ninety-five percent of self-directed investors, they don’t need to worry about this. And most people that are investing passively, they just don’t run into this, particularly in real estate, because you’re getting rental income or capital gain income when you sell the asset. It’s already exempt. But there’s one layer of this UBIT tax called UDFI. Now, if you’re driving down the road right now, you might want to pull over. I do not want to be responsible for any accidents or you falling asleep here. Okay, put it in self-drive mode if you can. All right. UDFI. This is important, though. This is a chapter from my book, too, by the way.

Brian Spear: I am joined by Mat Sorensen. He’s the CEO of Directed IRA and one of the leading voices in self-directed retirement strategy. In fact, he actually wrote the book the industry uses to this day. It’s literally the textbook that the industry uses. So Mat helps investors understand how to take greater control of retirement capital through self-directed IRAs, through solo 401(k)s, Roth strategies, and alternative investments.

In today’s episode, it’s not just about what accounts are available. It’s really about how sophisticated investors think like their own family office, where the capital sits, what it can access, how it compounds, and how to avoid rules-based mistakes that can undo that advantage. So, Mat, welcome to the show, bud.

Mat Sorensen: Thanks so much, Brian. Happy to be here. And I’m happy to be talking about my favorite topic, self-directed IRAs. Retirement accounts comprise $50 trillion now. There’s $50 trillion in U.S. retirement accounts, and a lot of people just kind of set it and forget it. And it could be their greatest opportunity to grow and build wealth. So excited to be here talking about how to invest those accounts and the strategies and options people have sitting right in front of them. They just need to take advantage of it.

Brian Spear: Yeah, I couldn’t agree more, Mat. There’s a lot of misconceptions that are out there, right? A lot of money that’s locked up and trapped in traditional accounts and the like. But when most people think about self-directed IRAs, I would think that they often are thinking about maybe directing it the way that they would otherwise want and maybe being able to use an IRA account that can just buy real estate. But what do sophisticated investors still fundamentally misunderstand about what the structure can actually do for you?

Mat Sorensen: A lot of people who are still smart, that understand how they want to invest their money, are not connecting the two concepts. They’re not connecting like, oh my gosh, I have these retirement account dollars or the ability to contribute more of these tax-advantaged funds that will compound faster because I’m not paying the IRS. And if I can combine it with the best-performing asset out there, let’s combine the best of both worlds and we’ll get the greatest outcome.

So most tax-advantaged accounts, my money is going to compound faster. The returns go right back in, growing and building the account. There’s nothing going to the IRS or the state. They love that. That’s what Congress gave us with retirement accounts. And if it’s a Roth, it comes out tax-free.

But then how do I combine that with the greatest investment opportunity? And that’s been my problem with most people with a retirement account. When you have an IRA, let’s say Fidelity or TD Ameritrade or a broker-dealer, you can’t invest in the best investment. Your opportunity is not to use that account to invest in the best investment. You can use it to invest in the best investment they let you buy, which has to be a publicly traded stock, and that has gone from 8,000 publicly traded companies to four. So the list is getting smaller and smaller.

And so for most people, I think sophisticated investors, people who are doing well, want to invest in the best investment they can find, period. And that’s what a self-directed IRA does, whether that’s a startup, a real estate deal down the street. We’ve had clients invest in professional soccer teams in Mexico, livestock, water rights, the most weird things. But for them, that was the best investment they could find. And why would they not deploy their most tax-advantaged funds to do that?

Brian Spear: I agree. It’s connecting the dots like you’re talking about. I feel like it’s misplaced focus, right? If folks don’t truly understand or can’t connect the dots, it reminds me of misplaced focus. Guys that go to the grocery store and they’ll be coupon clipping for 25 cents or 50 cents, but they don’t think at all about trying to minimize their largest expense of their entire lives, which is the gigantic tax bill that they have on an annual basis and then throughout the course of their life. And when we’re talking about your retirement accounts, you’re talking about over many, many decades saving tens of thousands, hundreds of thousands, ultimately millions of dollars of tax efficiency over time.

Mat Sorensen: Let’s just give one other example on that, like the sophisticated investors. Because a lot of times I’ll run into people who are doing something smart, making money. They’ve already figured out what this is. And I’ll take a private lender example, a sophisticated private lender client. The guy had multimillions of private dollars that he lends out. And when he came across self-directed IRAs, he was at first like, eh, sounds complicated.

Now, he figured out the investment he liked. He was getting a 12% to 14% annual return, which is really great. Very consistent, mitigates his risk. He lends a secured position, doesn’t work with bad operators. But for him, he was like, you know what? At the end of the day, on my private lending, I’m paying income tax at a regular tax rate, 37%. I’m paying state tax, let’s say 5% in his example, so I’m paying 43%.

So when I make, let’s say you make a 10% return, you have to take a 43% haircut on that. You did not make 10%. Ten percent is not compounding on that money he’s making. He’s getting 57% of that 10%, so 5.7%. Then when he realized, oh my gosh, I could be private lending and there’s zero tax, every dollar gets to compound. And now I think of these clients that I’ve had for 20 years that have been doing this over a 10-, 20-year window, the size of their account is huge. So just one other example. It doesn’t have to be one specific investment. It could be strategy, but combining the right account with it.

Brian Spear: No doubt about it. One of the pillars that we have in our capital strategy is T, that stands for tax-efficient structure, because at the end of the day, it’s not about what you make. It’s about what you keep. Revenue is vanity. Profit is sanity. But even still, profit is an opinion. Cash flow is a fact. And the only thing that actually matters is after-tax cash-on-cash return. So whatever that headline number is that your broker sends you in terms of your rate of return, again, take it with a grain of salt. At the end of the day, what is the after-tax cash-on-cash return?

And if you put it in the most efficient tax structure possible, you can gross up the returns. And honestly, you can generate a better rate of return at a lower amount of risk that you’re taking. You can generate way better risk-adjusted returns over time. From that guy’s perspective of generating 12% to 13%, he could take less risk, maybe in a worse, quote-unquote, worse investment. But if he puts it in a better tax-efficient structure, the end result for him would be significantly better over long periods of time. So, yeah, of course, setting it up tax-efficiently is a necessity.

And of course, part of it is the deals, right? Part of it is the deals, part of it is the structure. But before we talk about the individual deals in and of itself, what types of investments do you feel would be optimal inside of the structure, right? For tax-deferred or tax-free versus taxable buckets, which investments, if you had to simplify it, should go into these individual buckets?

Mat Sorensen: Yeah, I think one example is oil and gas, where it depends on what type of oil and gas deal. We see some clients invest in oil and gas, and it’s had a run recently. The war on Iran has been good for the oil and gas industry. There is a lot of politics around it. I don’t know how long it will last, but they are making money right now.

There are kind of two ways an oil and gas deal is structured. One is more exploratory, where you might be going after an IDC credit, an intangible drilling cost. You get a massive tax credit incentive for that investment. But if I’m doing that with an IRA, I get no benefit for that. The deal with an IRA is you don’t pay tax, but you don’t get losses either. It’s kind of like this tax-neutral thing.

So in that oil and gas example, if someone is doing an oil and gas deal and it’s exploratory and there is an intangible drilling cost tax credit, use your personal dollars. On the other hand, if it’s a mineral rights deal where there is no more exploratory to it, it’s a producing well, the risk is lower, there is no tax credit to it, but the return is nice, that would be something we see a lot of IRAs deploy to because it’s royalty income. Royalty income, you’re not paying any tax on it. If you pick that up on your personal return, you are, but that royalty income comes in with zero tax into your IRA.

Now, let’s say, and I’m just using oil and gas here because it’s a clear two-lane scenario, that the exploratory drilling opportunity is insane and the return is, let’s say, possibly 30%. And I feel like the adjusted return, right, there’s always a risk. You have to be careful on just being like, well, it could be this. Well, okay, what’s the risk? Let’s say the return is really high on it, even though I don’t get the tax benefit. I’m okay with that.

I think some people will fixate a little too much on the tax side of it. They’ll say, well, I’m not going to do a real estate deal with an IRA that has debt because there is this tax called UDFI. So I’m just not going to do it. Really? That UDFI tax might shave 5% off of your total return at the end of the day, maybe 10% max as I’ve seen it in the real outcome of the tax bill on it.

If we’re talking about a 20% return versus a 22% return, that’s all we’re talking about here. Sometimes it’s marginal. It matters, but the overall return of the investment is more important. So you have to be a little nuanced about it to really make the best decisions on what to invest in with what bucket of funds. And I use my IRA to invest in real estate. I use my IRA to invest in private companies, in crypto, in private funds that are in the real estate space. I’ve owned real estate directly, private lending. And I’m first looking at what the investment is and the risk-adjusted return opportunity. That’s first. Then I layer in, is there a tax? What’s the tax play on this?

Brian Spear: Yeah, you never let the tax consequences wag the investment dog. You find a good deal, a durably wonderful business, something that you really want to invest in, and then you optimize for tax efficiency after the fact.

You brought up the idea of UDFI, UBIT tax, et cetera. So let’s go down that rabbit hole a little bit. A lot of guys that are allocating capital passively through their various retirement accounts might run into this if they’re investing in passive syndications or funds that actually use leverage along the way. And it’s an amorphous sort of situation where there’s some misinformation out there. I’m sure people are getting their information off Twitter and the like and don’t have full clarity.

Mat Sorensen: Or ChatGPT.

Brian Spear: There you go. Yeah, just trust ChatGPT without verification, right? So in any event, maybe you could unpack that if you’d be so kind, and then maybe provide a little bit of color associated with this. What structures might help resolve that? I believe there are some ways that you might, if you put the capital in the appropriate account, be able to skirt the UDFI and the UBIT entirely.

Mat Sorensen: Yeah. Let’s go through the options. So let’s first talk about what the heck it is. There’s a tax called UBIT. It’s called unrelated business income tax. The best way to understand why that tax exists is the IRS has said, hey, with your retirement accounts, you can go make investment income. As long as you make investment income, you don’t have to pay tax on the money going into your retirement account.

Investment income includes capital gain income, rental real estate income, interest income from lending or private debt funds, royalty income, oil and gas, intellectual property, dividend income, and investing in private companies that are a C-corp. Those are all things that are great. Receive that income. You don’t need to pay tax.

But if you receive business income, and this would be mostly applicable to investing in a company that doesn’t pay corporate tax or a real estate development, and it’s not investment income, it’s not capital gain, it’s not rental, it’s not interest, it’s more business income, it’s inventory that’s being sold, your IRA could get subject to this tax called UBIT. And that’s 37%.

Now, for 95% of self-directed investors, they don’t need to worry about this. And most people that are investing passively anyways, they just don’t run into this, particularly in real estate, because you’re getting rental income or capital gain income when you sell the asset. It’s already exempt.

But there’s one layer of this UBIT tax called UDFI. Now, if you’re driving down the road right now, you might want to pull over. I do not want to be responsible for any accidents or you falling asleep here. Okay, put it in self-drive mode if you can. UDFI. This is important, though. This is a chapter in my book, too, by the way.

So what UDFI said is, if you use your retirement account and let’s say you have $100,000 in your retirement account, but you want to buy an asset worth $200,000, we’ll let you do that. But the profits on the $100,000 of debt, that was not retirement account dollars. If you leverage purchasing power with a retirement account to buy more assets than you otherwise could, we tax the profits from the debt piece.

So let’s say you made $20,000 in that $200,000 investment. When you sell the asset, the IRS is like, well, half of that was from the debt. The other half was your retirement account dollars. So we’ll let $10,000 of that $20,000 go back to your retirement account. Don’t worry about it. There is no tax on that. But the other half of it was because of the debt you got, which was not retirement account dollars. So they tax that. This is called UDFI. It applies only when you leverage a retirement account’s investment.

Now, the rate when you sell an asset, which is generally when this tax applies, is cap gains rate. So 20% in that example of $10,000 would be $2,000. Now, I made a $20,000 return total, right? I only got taxed on the debt piece, and it was at a capital gains rate. So the effective rate there is only 10%. It’s better than what I would do in my personal scenario.

And by the way, you can use all depreciation and other expenses to offset that gain. Even if you were carrying forward depreciation because you couldn’t use it or didn’t get it year to year, that can offset that and reduce that. So that’s how it works on, let’s say, real estate.

Now, if I’m in a fund, it’s the same thing. If I’ve got $100,000 in the fund and the fund is 50% leveraged on an asset, that means 50% of the gain is subject to this UDFI tax, and we’ll get that applied. Usually, again, you see it at the sale of the asset.

Now, as you mentioned, there are some ways around it, but that’s how that tax gets applied. For me and for a lot of our clients, even really sophisticated smart ones making a lot of money compounding, growing their accounts with IRAs, they pay it. They’re like, but Mat, these are the best deals I have and the best investments I have. Even if 10% of that total return, as I gave in that example, is going to the IRS in this tax, it’s still better than any other bucket of money I have in investing and is still compounding and growing in a tax-advantaged account for the future. So it’s not, don’t invest because of it. It’s just know it’s there. It can eat into your return. Usually it will never be more than a 20% tax, though.

Brian Spear: Yeah, better than a sharp stick in the eye, right? Better than a sharp stick in the eye and allows you to grab the wheel again, right? As opposed to outsourcing your financial future to some financial advisor that really doesn’t care about your family, you can grab the wheel, actually drive the investments, choose the investments that make the most sense in your circle of competence that you actually know, like, trust, all the myriad of things, right? Whether it’s buying soccer teams in Mexico or whatever it is for you and your family, you can actually control your own destiny in that regard.

For those that are on the fringe, buddy, you’ve mentioned a handful of ways you might be able to skirt it, get around it in its entirety. We’ve had some guys choose to maybe move the structure in which they’re holding the money, right, as opposed to self-directed IRAs, moving it into another structure to literally get rid of the UDFI in its entirety. How would somebody go about doing that?

Mat Sorensen: Okay, let me hit that one. I want to make one last point because this is important, and I think you’ll like this one. Let’s take this tax angle, too. You could invest in government bonds, and the interest on that, you don’t pay any tax on it. Why do most smart investors never do that? Because the return sucks. Just because I get the return that I don’t have to pay tax on doesn’t mean I’m excited to do it. The return sucks on those. Government bonds pay terrible rates of return. So why am I going to go buy municipal bonds? Because I don’t have to pay federal income tax on it? Great. It’s a 4% return. What am I doing?

So if I can get a 15% return and pay 2% to the IRS and have an overall 13% return, I’m better off doing that. That’s why I think the math matters. What am I going to keep, as you mentioned earlier, after-tax return?

Now, there are some ways around it. The first is using a solo 401(k). If you’re a self-employed person, you’ve got a main hustle or side hustle with no employees, there’s this 401(k) plan that the IRS allows you to do called a solo 401(k). We have thousands of them for our clients that we’ve set up over the years. One of the things that’s unique about that is employer-sponsored plans, like a solo 401(k), are exempt from UDFI on rental real estate, whether it’s in a fund or whether this is directly owned by your solo 401(k). So that’s one good exception and way around it.

The other one is if you’re a long-term investor and you’re in an asset where they’re paying down the debt over time. Let’s say they start the asset and you buy it yourself, or you’re in a fund, it doesn’t matter, it’s the same. Let’s say it’s 60% leveraged at the time of acquisition. But by the time they sell it, it’s 0% debt. They’ve paid the debt off. And if you hold an asset with 0% debt for 12 months before sale, there’s no UDFI to calculate at the time of sale.

So I’ve had a lot of sophisticated clients focus on paying down the debt or even bringing in temporary equity to pay off debt, hold it for 12 months, and then sell. Sometimes you can engineer that if this tax is going to be significant enough. Usually it would be significant if you’re getting a great return. The tax goes up if the return is better, of course. And there are some other ways to navigate it. Those are two common ones: use a solo 401(k) if you can, not everyone can because they’re not self-employed, or two, if you have control of the asset, pay down the debt before selling. It doesn’t always make sense. Sometimes the economics just don’t make sense in the timing. But if that makes sense for you, hold it 12 months with no debt, no UDFI on the sale.

Brian Spear: I feel like that last one is ninja-level advanced tax strategy, honestly, that you would ultimately find in family offices, guys that do this for a living that are ultimately trying to have the small edges compound on the fringes, right, where they have the luxury of paying acute attention to detail in this regard. I hadn’t even heard of that one, so kudos. Love every bit of that. That’s beautiful.

But I would say for the majority, I have seen the solo 401(k) one actually hack the system, get around the UDFI. In fact, full disclosure, I have leveraged the solo 401(k) platform with you directly at Directed IRA. Kudos. It’s helped my wife. It’s helped myself along the way. So kudos. Love every bit of that.

For folks that want to take that strategy, give a little bit of color to them in terms of how they would be able to do it. And then ultimately, maybe the biggest benefit of all, the amount of money that you could actually jam into that style of account. At the end of the day, we’re trying to find as much capital as we possibly can to put into a tax-advantaged bucket on an annual basis. So walk through what the mega backdoor strategy would be to get as much capital into those accounts as you possibly can.

Mat Sorensen: Yeah, so in a solo 401(k), you can put up to $72,000 a year into it right now. Most people are familiar with a 401(k), right? You have a 401(k) at a job and you put your money in and maybe the company does a match. So you’ve got some employee contributions and you’ve got some employer contributions. In a solo 401(k), you do the same thing.

The IRS is like, we know you’re self-employed and you’re basically paying yourself, but in terms of getting money into this thing, you’re using 401(k) rules. So you’re going to maximize the 401(k) rules and make the most generous match possible under the law, which is how we’ve designed our own solo 401(k) plan that’s pre-approved with the IRS.

Under that, basically it means you can put $72,000 a year per person into the solo 401(k). So if you’ve got a spouse, they also need to be working in the business, but they could be putting in $72,000. You could have $144,000 between the two of you going in every year into the 401(k). A lot of people hear an IRA and they’re like, great, I put $7,500 in, Mat. I’ve been self-employed my whole life. I don’t have a 401(k) from a prior employer. I want to do this self-directing. I want to use Roth accounts or whatever. The perfect solution for that person is do the solo K.

Basically, $144,000 between a married couple can go in. Now, when you use a solo K, you get to choose: are these dollars traditional dollars where I’m taking a $72,000 per person deduction to put the money in, which you might want to do if you’re trying to save taxes now, or am I putting that $72,000 in as Roth dollars? The IRS lets you do either. You get to pick. You could even break it up between the two. I tend to be a Roth guy. Short-term pain, pay the taxes. Long-term gain, growing and coming out totally tax-free later. So you can do Roth dollars, too.

Now, you mentioned the mega backdoor Roth. The mega backdoor Roth is pretty dang simple in a solo 401(k), because as long as you made $72,000 in the solo K, you might need to pay yourself about $80,000 from your business, but you can basically drop every penny of that into a solo 401(k) by doing regular employee Roth contributions and what are called after-tax contributions we convert to Roth.

Bottom line, I could bore you guys out of your mind by going into detail, but bottom line, you could get in $72,000 Roth per person. But it also is a cool strategy even if you’re not self-employed. There’s still this mega backdoor Roth option that could get you to a Roth IRA and drop in a lot more money. I’m happy to get into that, but that’s another notch of sophisticated high-income earners. But your W-2, what do I do? You can still do the mega backdoor Roth in your employer 401(k) using an after-tax contribution strategy. Sixty-eight percent now of 401(k) plans in America allow for an after-tax contribution, which you can roll out directly to a Roth IRA. So there are also options for you. I don’t want to leave you W-2 employees out of the mix here.

Brian Spear: Yeah. No, the takeaway here in the headline is there are ways in which you can allocate 10x what you had otherwise anticipated just through a traditional account, right? Folks that are familiar with self-directed IRAs think they’re capped at $7,500. You can literally 10x the amount of money you can jam into a tax-advantaged account. And with your spouse, again, $140,000 every year. There are multiple ways you could do it. So if you need more education, feel free to reach out to Mat directly. He’s got a bevy of educational stuff out there in the marketplace through his YouTube channel, as well as just reach out to Directed IRA specifically because they honestly are best in class at making that happen for you.

Once you get the money in there and you go ahead and allocate some stuff, try to get more advanced tax strategies on the docket for folks to benefit from over time. We’ll get a little teaser here, maybe not get super granular, but just a little color in terms of the discounted Roth conversion strategy.

When folks actually go out, now you’ve got a bunch of money into a tax-advantaged account, let’s say pre-tax, you have the luxury of getting even more sophisticated and saving a little bit more so that you’re not sending huge chunks of capital to Uncle Sam, whether on the front end or the back end. What are some additional ways you can create some arbitrage and some margin using the discounted Roth conversion strategy?

Mat Sorensen: Yeah. So if you’re someone that has traditional IRA funds or traditional 401(k) funds and you start self-directing, but you really want to be in the Roth party, you really want to have Roth dollars growing and coming out tax-free, you feel like this investment or the next 10 investments you’re going to make over the next 20 years are going to perform well, and you’re like, well, I want this to come all out tax-free in retirement. I don’t want to be paying the IRS, drawing out this huge nest egg I finally built up. So let me take some pain now and pay tax now and convert to Roth.

Generally, let’s say you have a $100,000 investment or $100,000 in your account and you want to convert that to Roth from traditional dollars. The IRS is like, you can do it. Cool. There’s no income restriction on it. There used to be, but that’s been removed the last 10 years. Anybody can do a Roth conversion now. But the IRS says that $100,000 value, you’re going to get a 1099-R from your IRA custodian. It’s going to go on your tax return. That’s $100,000 of income. You’re in a 37% max tax bracket plus maybe 5% or 10% state. You’re paying 42%, 47% tax on this to convert over to Roth dollars.

Now, there is a discounting strategy, as you mentioned. It only works in a few scenarios. One is if you’re in a traditional IRA. Let’s say you open a self-directed IRA. It’s traditional because you have a traditional IRA over at TD Ameritrade or an old employer 401(k). You roll it to a self-directed IRA. It starts as a traditional IRA, but you want to get to Roth. Let’s say you invested that $100,000 into a private fund. Well, when you do a Roth conversion of something that’s already invested, that’s an asset, the IRS says the conversion amount is the fair market value of that asset.

When you’re invested in the stock market, we have daily trading of that asset. Every minute we know what that stock price is or that ETF price is. If you’re sitting in cash, obviously we know what the cash value is. It’s apparent. But when you’re in a private fund, it’s like, well, what is that worth? Is it worth what I paid for? Has it gone up or down? And the IRS is like, well, you can get a third-party valuation.

Now, a third party can value that asset, and many sophisticated clients will do this. When a third party evaluates it, they’re able to take something called a lack of liquidity discount on it and say that asset was worth $100,000, and you may have paid $100,000 for it, and it might still be worth $100,000. But they’re going to say, because this isn’t publicly traded, it’s not cash, it’s not something immediately worth $100,000, you can discount it up to 30%. That’s on average. Some people go a little more aggressive, some less. Let’s say on average, 30%. So now when I go convert that, I’m only converting it at a value of $70,000. Only $70,000 is hitting my tax return as a taxable amount.

So that’s that Roth discounting strategy. It’s a little more pioneering. I will say, make sure you’re using professionals on that. But that strategy of discounting illiquid assets is all over in the tax code. It’s been done for decades in estates and trusts. And so this is that same methodology and concept from those tax rules into retirement accounts. We have seen lots of clients do it, and we process them quite a bit. But you’ve got to be traditional funds wanting to convert to Roth and then in a fund.

You can’t be invested in your own real estate deal and your IRA owns a duplex, and you’re like, well, I want to convert it and it’s illiquid. I mean, it’s real estate, but it’s not illiquid because you have the ability to sell it when you want. So you just have to go get a broker to tell me what that’s worth or an appraiser to tell me what it’s worth, and I can’t discount that. But when you’re in a private fund with a bunch of other people where you’re not in control, now the IRS and the tax code is like, we let you discount that value down.

Brian Spear: Yeah, definitely an advanced strategy, but one that’s well-heeled on the books. Like you mentioned, many, many tax case studies done on this topic because family offices and the like have been passing along businesses generation after generation at discounts to the heirs for many, many moons. Again, well-documented IRS case law on this one. So please use the right consultants and the like, but nevertheless, it’s a good one. Another arrow in the quiver, right? Another arrow in the quiver for you to use at some point in the future.

Well, Mat, you’ve been adding a ton of value over here, buddy. Very much appreciated. What about additional bonus stuff, bonus tools, a few lesser-known tools that you see a lot of sophisticated investors use that maybe they should at least be aware of in the marketplace? What do you see guys using today?

Mat Sorensen: Yeah, I think the first thing is maybe the ability to partner with multiple accounts. Sometimes we see clients, it’s like, hey, I’ve got an IRA. My spouse has an IRA. Maybe we could even use a health savings account. That’s one of our fastest-growing account types, health savings accounts. People are socking money away in these things. They get a tax deduction, no income restriction, and you can invest that and self-direct a health savings account. The money comes out tax-free for your qualified medical, which is your greatest expense in retirement, medical. You can use it to pay Medicare premiums even. So we know that bucket is going to be used later in retirement. So I love health savings accounts and comboing up other retirement accounts.

What I will say just as a level set for everyone, though, is we’ve all been brainwashed into thinking that our retirement account is meant for ETFs, mutual funds, and stocks. Get organized, right? We talk about what the wealthy are doing and what the whole purpose of the family office is. The purpose of the family office is 100% focus on growing and building the wealth and protecting it and getting a team and people engaged for that.

You can be captain of your own ship, of your own family office. I don’t care how many zeros are behind it. This could be $100,000, a million, 10 million, 100 million, billion dollars. It doesn’t matter. But that same focus of how is my money being invested and taking control of it is really the mindset you’ve got to get.

And the payoff on day one is low. Let’s be honest. If I start focusing on my money and I’ve got $100,000 right now, my payoff for my time is not high. But you’re going to learn a ton. You’re going to be involved. In 10 years, when that $100,000 is a million, that payoff is pretty dang big. And what I’ve seen with my clients, I had three clients at my Alt Asset Summit last year. One of them has an account over $100 million, and two of them are in the tens of millions, around between $25 and $50 million. All of them had Roth accounts, by the way, growing and coming out tax-free.

Every one of them did not start this until they were 50. Now they’re all in their 60s, but they basically had a 10- to 15-year window between them where they went from zero, literally zero, to these massive eight- and nine-figure retirement accounts. But that first year, it might feel like, oh, this is a lot of work to get organized with my money and investing. How is this working? But it starts snowballing, accumulating, compounding. And now all of a sudden you’re sitting on, wow, I have all this money that has grown. And the knowledge and stuff you’ve learned, the value now of your time and being involved, and maybe bringing in professionals to help you, becomes so much greater.

So maybe it’s a mindset thing. I think some people get discouraged. Well, I can’t move the needle much with 10 grand or 100 grand. We all started at zero. It’s okay.

Brian Spear: I couldn’t agree more, Mat. It’s absolutely beautiful, bud. You’ve got to start somewhere, and those numbers do compound quick. Like you said, the experience compounds as well. Not only does the money compound over time, but the knowledge compounds as well. You learn so much by doing. We’re all about controlling your own destiny here, grabbing the wheel, controlling your own destiny. Nobody is going to care more about your family than yourself along the way, and trying to keep as much hard-earned money in your back pocket.

One final question for you, buddy, the way that we always like to end these episodes. If somebody could only remember one sage investing lesson from your life experience, everything that you’ve been through, what would that be?

Mat Sorensen: I think the best piece of advice and just something I realized from my successful clients and even my own investments that have been good, bad, and ugly is great investments are not sold or on the shelf. Great investments are created or found.

Every really, really good investment out there, you are not going to have someone selling it to you. It’s not a ticker you’re going to type in on a computer to go buy or sell. The greatest investments are stuff you’re going to bump into. You’re going to find. You’re going to get a friend doing the thing and you get a referral. You’re going to look into it. It’s not something staring you in the face, begging you to invest.

If it is, the value of that is already priced in. Everyone else has already invested in it, or the person selling it to you would have put all of their money into it. So how do I find these other opportunities? And this is why the self-directed accounts, why we’ve seen clients have massive success in it. The largest Roth IRA out there, Peter Thiel, of $6 billion, he found that investment. People are creating these investments. They’re finding these opportunities where their investment dollars are highly valuable and they can get a greater return. So I would just say great investments are found or created.

Brian Spear: Yeah, create your own luck. Create your own luck. Absolutely beautiful. Love every bit of it.

Well, Mat, give us a little bit of color about yourself as well as Directed IRA. What differentiates the platform? What differentiates Directed IRA? And then ultimately, how can people reach out if they’re interested to learn more about you?

Mat Sorensen: Yeah, I mean, we’re simply the best there ever was. I shouldn’t go too far with the Talladega Nights quote there, but we really believe that. We’ve strived to be for self-directed investors, built by self-directed investors.

I’ve been an attorney in the self-directed IRA space for 20-plus years now, represented a lot of successful clients, seen what they’ve done, and gone down the rabbit hole on every question of what you can and can’t do. So as you mentioned earlier, I wrote the industry-leading book, The Self-Directed IRA Handbook. It’s now out in its third edition, which is the top release right now in real estate investing and retirement planning categories. It’s the number two overall bestselling book right now in the real estate category. Brandon Turner’s real estate investing is the only book better than it right now.

But we just come with a greater, higher level of knowledge of what this is and a passion for it. We’re not just people that saw a business opportunity of self-directed IRAs and were like, this is interesting. I self-direct my own retirement account. My board does, my co-founder does, many of our employees do. We’re industry experts in the space.

We’ve become the employer of choice in the industry, the company growing the fastest, four-time Inc. 5000 winner. We’ve attracted a lot of great talent in the industry that I get the pleasure of working with. So that’s a little bragging, I guess, probably. Got a little ambitious on Directed IRA. But we’re here. We do a webinar every week. We have annual events. We have resources galore.

The first thing when anyone needs to self-direct is you’re doing something different. You’re not just typing in a target date fund or an index fund to go buy. So you’ve got to learn some stuff. I always tell people this is not like rocket science. It’s like a board game. You just need to learn the rules and how to move the pieces, and we can get you there. Once you’ve done it once or twice, just like the board game, it’s the same thing over and over. It’s just different than what you’ve been doing before.

So we help with that education gap. I also have a law firm. It’s been 65-plus employees, helping clients across the country, business and tax lawyers. If you need specific tax advice, everyone doesn’t need that, I’m just saying, if you need to get down to the details or your CPA is asking 100 questions you don’t have answers for, we’ve got that for you too.

So happy to help anyone if they want to take control of their retirement, start self-directing, or upgrade the people that they’re working with. I’d be happy to help you as we’ve worked with many people from Sunrise, Brian, and others. We’d be honored to help you as well.

Brian Spear: Love every bit of it, bud. And you should feel able to toot your own horn a little bit. I’ll toot the horn for anybody. I’ve had an unbelievable experience with you. And if people want to reach out, look, he’s not hard to find. Google him up. He’s got an unbelievably successful YouTube channel, tons of unbelievable education completely for free, where you can learn exorbitant amounts for yourself and your family. I guarantee you’ll have a couple of golden nuggets by virtue of perusing some of the things that he’s put out over time. I will just attest to the fact that Directed IRA has been phenomenal for myself and my family along the way as well.

I appreciate everything that you’ve done for us along the way, Mat. He’s not paying me to say that, by the way. But it’s been absolutely phenomenal working with you and look forward to working with you for many, many moons to come. So with that, we’ll get the heck out of here for today, guys. Until next time, you be great.

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