Coronavirus: Retirement Account Changes #690

This week’s radio show and video guest is Kaaren Hall alongside Bruce and Aaron Norris.  Kaaren is the CEO of uDirect IRA Services, and she’s also a board member at the Retirement Industry Trust Association. She’s here today to fill us in on what you can and can’t do with your retirement accounts at these interesting times. See below for full video and resources.   

Episode Highlights

• What do the latest numbers show, especially the amount who filed for unemployment?
• What does the Pandemic Unemployment Assistance involve, and when should we see that come into play?
• Will people get a break on property taxes?
• How does the CARES Act impact retirement accounts, including what you can and cannot do?
• Are there limits to what your CRD can be used for?
• Would the limit on the use of funds for CRDs also apply to 401Ks?
• What is the going interest rate published by the IRS?

Episode Notes

Aaron Norris: Hey, everybody, it is April 10th. I only say the timeframe because this morning I woke up and there more headlines than I could technically update today, but we’ll have to wait until next week. Everything’s just moving so quickly. Thanks for all the great feedback we’ve been getting about the stuff that we’ve been putting out. I’m probably taking at least three to four-hour webinars every week on a lot of the stuff that keeps moving. So just stick with us. But just realize this was recorded at 8:00 a.m. on Friday morning, so we have enough time to get it out for the weekend. So, of course, there’s probably going to be changes by the time you’re listening to this later on.

Update on the numbers. Last week, another 6 million people nationwide filed for unemployment. It is just screaming.

Bruce Norris: Just put that in perspective. The all-time record before that for a one week gain was, I think it was 630,000 or 680. This is almost nine times that in one week.

Aaron Norris: Not great. So if you’ve been paying attention, Gavin Newsom several weeks ago put out the eviction moratorium. I can’t honestly say I knew that there wasn’t a judicial council in California and what they did. But on the sixth, they expanded upon Newsome’s eviction and foreclosure moratorium. So basically, we just can’t do much until the state of emergency is lifted by the state of California. And that starts a 90-day countdown of when evictions can proceed. Now, the order specifically states that judicial foreclosures can’t proceed. I did talk to attorney and his opinion was that a standard foreclosure could proceed. The problem is, are you going to run into problems with sheriffs and courts being willing to do that with everybody on the stay at home order? It’s just messy. The Apartment Owners Association and Dennis Block did a presentation on the 7th. If you’re watching this on YouTube, you’ll see the link on the screen. I’ve created a direct link to an hour and a half session? And this link on the screen, bit.ly/evictionstop, takes you directly in the video where Dennis Block talks about what the Judiciary Council does and what it means for our industry. I highly recommend it. You’ve got the Apartment Owners Association and the California Apartment Association doing a lot of great stuff around this.

Bruce Norris: I just want to make a comment. When we talk about judicial foreclosures in California, they’re almost are none. So that’s an interesting statement.

Aaron Norris: I don’t know what that means, but I think it was the attorney’s opinion that we could proceed with the standard foreclosure. But will the courts and the sheriffs abide by and help us get through the process? The answer is probably no.

Bruce Norris: I think the spirit of Newsom would be to stop foreclosures. Not one percent of foreclosures.

Aaron Norris: Let’s see, the pandemic unemployment assistance. We should start seeing California announce this week that people should start seeing the aid come out. This expands the unemployment up to 39 weeks for those impacted by COVID-19. If you’ve got tenants that have been impacted by COVID-19, it would behoove you to check out the California Association of Realtor forms and document it, if nothing else, to also help your tenants just start to document the process for themselves. They’re going to be able to get an additional six hundred dollars per week. I don’t know if they’re going to go retroactive. I wasn’t able to get clear on that. But it goes all the way back to March twenty-ninth and goes all the way through July.

So they said that they’re going to start sending it out starting, I don’t know if it’s this week or next week, but you can find out more information at edd.ca.gov.

I’ve heard a lot of real estate investors have raised their hands for this. Today, April 10th, is when 1099 contractors are going to be able to apply. So when Matt and Amanda did the session for us last week, it was clear that we could apply on behalf of things like our 1099 subcontractors and things like that. That changed almost right away. So now is their time to apply for these. I have not heard of anybody who got the $10,000, to be honest with you. So good luck with that. I don’t know how that’s going, but today is the day.

Property taxes. There’s been some talk about whether everybody is going to get a break on property taxes. And the answer is no. Newsome released a press release yesterday praising the counties for being willing to work with everybody. But this is what the county said. The County Association said taking care of California is our top priority. And counties, cities and schools are burning through local reserves to do so. Any delay in payments beyond April 10th property tax deadline for individuals or businesses that can pay will tip local governments into insolvency at a time when residents need us most. Counties will use all existing authority to cancel penalties and other charges. Basically, you need to pay your taxes. I just think it’s interesting that they’re giving themselves an out for the same thing that they expect landlords to do. But that’s just me. So they’re not willing to take the same break they’ve been making us do.

Just a heads up on vacation rentals. I think other cities are taking the clue. You had a few more cities, Newport and Santa Cruz, from last week decide that they were not going to allow for vacation rentals that were not COVID- related. La Quinta in Riverside County had already banned vacation rentals. If you couldn’t prove that you were doing it for something COVID-related. For instance, somebody self quarantining or you’re housing a first responder, La Quinta just didn’t think that was enough, so they have their own overlays. So again, you really have to pay attention to local housing markets. Your local city and county really understand who’s in control of issuing what.

Airbnb did come out with a $250 million host relief fund. So if you are a host, you might want to check out some of the resources that they might have available.

When it comes to moratorium and evictions, just be careful to also check the local overlays. Just because Newsom did what he did and then the Judiciary Council came on top and did what they did doesn’t mean that you won’t have a city that extended it. So really be careful.

With that, we are really happy to have Karaen Hall with us today. We had some questions about retirement accounts. Kaaren is, of course, the CEO of uDirect IRA Services, and she’s also a board member at the Retirement Industry Trust Association. So she’s here today to fill us in on what you can and can’t do with your retirement accounts at these interesting times. Welcome, Kaaren.

Kaaren Hall: Good morning, Aaron. How are you?

Aaron Norris: Good.

Kaaren Hall: Wow, there’s been a lot of change. This has been the year of change for the IRA for sure, where we haven’t seen much since TIPRA back in 2010. It’s been about that long since we had this many changes. First off, we had the contribution limits rise, and that’s normal. We would expect that, and it happened in October/November. So now if you have a traditional or Roth, you can contribute six thousand if you’re under 50, seven thousand if you’re fifty plus. 

So that was one change, and then just boom, the floodgates opened and lots of changes. So one of them has to do with RMDs. This has to do with CARES Act. The required minimum distribution is waived for 2020. So if you already took a distribution for 2020 and you want to put it back, you can as long as it’s within 60 days, so that’s good. And what’s also great, you know, as it says on the slide here, is that it’s not just if you’re an account holder in your RMD phase, but if you ever received an inherited IRA and you’re the spouse or the beneficiary and they have that inherited IRA. Then you can also go ahead and not take RMD in 2020. The nice thing is it’s not like you don’t take it in 2020 so you have to take double in 2021. It’s not like that. It’s just you’re not taking it. So that’s great.

And there’s just so much more. They came up with this thing called CRD: Coronavirus Related Distributions. Now think about this. Retirement dollars are precious. It is really hard to build a retirement account when you’ve got these caps, these contribution limits. So, yeah, you can tap into your retirement account, but really ask yourself and ask your tax adviser if that really makes sense for you because you might want a first look and see if you have any more PTO or sick leave or vacation leave at your employer if you’re looking for extra cash.

What I’m saying is that you can take this CRD, but before you do, I just want to point this out. If you need money before you dip in your retirement account again, look and see if you’ve got any extra PTO at work. Do you qualify for unemployment? You’re calling it a PUA. I heard it called a PUC: Pandemic Unemployment Compensation. So you might be able to get money that way; or even if you have whole life insurance, maybe you can take a loan from the cash value of your life insurance before you tap into your retirement account. But that said, with this CRD that came out with the CARES Act, you can take out up to $100,000 from your retirement account. And so it applies to IRAs and in all plans, really, but they’re two different worlds, two different sets of rules. One is for IRAs. So if your I.R.A. takes a Coronavirus-related distribution, a CRD, then it comes out, say it’s in a traditional IRA, it comes out taxable. Now the penalty will be waived, but it’s gonna be taxable, and then you’re gonna have one to three years to split up that tax liability. So it gives you a break. 

If you take the money out of a 401K, well, then it is viewed as a hundred thousand dollar plan loan that you pay back to your 401K. So IRAs and 401Ks have just totally different sets of rules. Anyway, it’s the same thing with the CRD. If you take out the money from an IRA, and it could be taxable, you take the money out from a 401K, you got to pay it back at the regular IRS rate.

So to be eligible, there are all kinds of rules. But basically, you have to be diagnosed with this disease or a spouse or dependent has to be diagnosed with it. The one that pretty much everyone falls under is that in order to qualify for the CRD, you have to have experienced adverse financial consequences as a result of being quarantined, furloughed, maybe you got laid off, you have your work hours reduced because of the virus. Maybe you’re unable to work because you can’t get childcare. That’s possible. I know that’s happened with a lot of people. Or maybe as a business owner, you’re closing or reducing your hours, and that’s happened to a lot of people, or other factors that are determined by the IRS. So that’s how you qualify for one of these distributions. But again, before you take money out of your retirement account, it’s like borrowing from your future self. You’re using it now, but you’re definitely going to need it later. So really think about it. There are other ways you can find money; but unlike any other kind of exception to a withdrawal penalty, just remember that the CRD, when it comes from an IRA, the penalty is waived and you can report the amount of withdrawal over three years. And of course, every state is going to have different rules. So you’re gonna have to ask the state about whether it’s taxable state wise. 

Aaron Norris: Has there been any documentation suggestion on what people should have on file for this, or probably just the drop of income would suffice?

Kaaren Hall: It’s where you basically certify it yourself. Self-Certified. It will be between you and the IRS to determine whether or not you are qualified to do this, like if you take this and you get audited and then they’re going to say, “Hey, prove it.” The penalties are they could put you in jail if you lie to the IRS. So I would not lie to the IRS. But those are the criteria. And by the way, if anybody would like a copy of this, I’d be happy to email it.

Aaron Norris: What I’ll also do is I’ll put the show notes, the actual PowerPoint slide PDF in the show notes today so people can download this. What Matt and Amanda had been doing is if you get updates on this, I’ll update this PowerPoint and we’ll try to keep the PDF updated as much as possible on your show so people can reference it.

Kaaren Hall: Fantastic. That’s great. That’s great, because it is changing. It’s been about a week since we’ve had a change, but there are a lot of changes.

Before you tap into this money, consider the other resources again. And here they are. So other things you can do to find money before you steal from your future self and take the money out of your retirement account.

Now when it comes to 990Ts, an IRA files a tax form 990T, like you and I, when we file our income taxes, we file a 1040 as an individual. Well, the IRA files a 990T if it owes tax. Of course, the IRA would owe tax if there was UBIT, or unrelated business income tax, or UDFI, unrelated debt-financed income tax. So the 990T filing, just like the 1040, the deadline got pushed forward. So if your normal filing date would have been April 15th, you get to have that extended out until July 15th. However, there are some different entities that if the 990T would have been due in May, there’s no postponement. With IRAs, if you’re filing a 990T, it would be due April 15th. Now that’s pushed out to July 15th. So that’s good news. You got a little extension there.

Aaron Norris: Now, a lot of our real estate investors that have self-directed IRAs, they’ve got illiquid assets, and let’s say I have a rental in my Roth and my tenant stops paying. Is there any way, depending on the structure, if I have a business LLC inside the IRA or just the IRA itself, can I be eligible for any of the programs that the government has come out with with the SBA?

Kaaren Hall: It would be nice, but not for an IRA because you apply for it as the business. It’s not available to IRAs. It’s available to individuals.

Aaron Norris: I was trying to think about if you were to able to do that, what if some of it became forgivable and how was that treated? What if you got, you know, a $10 grand track from the EIDLE program and then, you know, just “Thanks for playing.”

Kaaren Hall: The way that would be weighed is did you get personal benefit? If something like that were to happen, the way it’s weighed was a personal benefit. Is it a prohibited transaction?

Aaron Norris: Is there anything that the Retirement Industry Trust Association has put out as far as guidelines or concerns of things going on in the accounts, things that they are advocating for at the federal level?

Kaaren Hall: You know, we’re having another webinar today, so we’ll learn if there’s any update. But last Friday, there was a webinar, and that’s where I got all this detail about the CARES Act and how it affects us. One of the questions that did come up as a result of that webinar was from Amanda Han, and she was asking, “Are there any limits to what your CRD could be used for?” And right now, there are no limits. They’ve said if you’re going to take out money from your IRA, you can use it for anything. That causes some concern. Usually there are limits, but right now, there aren’t any. So we’ll see. I’ll get an update today from the webinar.

Aaron Norris: OK. Yeah. And then for those who are VIP subscribers with us, you got an invite yesterday for our investor town hall where Kaaren is going to be part of that call. Matt and Amanda Han, we’ve got David Granzella from the Sacramento NorcalREIA up there. We’ve got Lisa Hoegler with LA South REIA. Christina Suter with Pasadena FIBI, and we’ve got SDCIA. Lenska’s going to join us from San Diego. And then we’ve got Derek Harms from the North Sandigo Real Estate Investors Association. We’re just trying to hop around and get a sense of what’s happening because a lot of this is happening at the local level. So I’m trying to think. Have you gotten any specific phone calls from real estate investors regarding their accounts and things that they were worried about at all?

Kaaren Hall: Not really. Some people move idle cash into the stock market. That makes sense. We’ve only had one withdrawal through this whole thing, like a CRD. Only one. And that’s great because I really think people need to retain their retirement savings and save it for later. But no, that’s really what we’ve seen.

Aaron Norris: Dad, any questions?

Bruce Norris: Kaaren, you’ve got a pile of people that have real estate assets inside of IRAs that could be run on the trust deeds. Are you getting any feedback of people not paying rent or not paying payments? I’m just curious.

Kaaren Hall: We’re not getting that kind of feedback because if they’re not, it’s usually between the account holder and their renter, and it’s not something they involve us in. But, we still see every day all the funds that come into the accounts, and it has diminished. I’ll say that we have fewer deposits coming in, so I think we have seen a slowing of that.

Bruce Norris: You know what’s interesting. This whole thing is just different than anything we’ve ever had before. So you wake up in the morning and you think about what you could do and then you go, “I can’t do that” like a movie or I’ll go watch a ballgame at night or whatever. And it’ll be very interesting to see what the path of return to normal looks like, how much of that will still be on your mind. And the other thing, too, is there’s just a little sense of, “Wow, I thought I had all the ducks in a row.” And then something like this happens and your unemployment goes up from less than 4 percent to over 10 or 11 percent over two weeks. 

Aaron Norris: Yeah, and depending on how we’re able to unwind this, it could reverse pretty quickly, I would think. Right now it’s just control and trying to figure out how to stop this and flatten the curve, and it seems to be working. 

Bruce Norris: Yeah. Absolutely. The other part is just looking at how many people are within 60 days of a major financial problem that there’s no cushion in a very high percentage of people’s lives and businesses.

Aaron Norris: Yeah, I think there’s going to be a concerted effort to get that cash out by the end of this month because I think May is going to be harder. Everybody’s been shut down now for a month, pretty much officially for most of California. I was reading this morning and late last night something else that came out about another couple trillion dollars and another kind of business program. We’ll update that next week when I can read it and see what it is. And we Crillon Imperatori in there.

Bruce Norris: It usually adds up to some pretty major money.

Aaron Norris: It seems like a decade ago we were making fun because we were talking about billions instead of millions. And now every decade it’s like a new step up.

Kaaren Hall: Even in the IRA world, it seems like when we look back to the recession, it was IRAs that helped pull people out of the recession. When banks weren’t lending, they could go to self-directed IRAs and get a loan. And there are still trillions of dollars in retirement accounts even though the values have dipped a bit. It’s a great source of lending; and if you’re looking for capital, that’s the self-directed IRA. Also, I think, too, that after things return to normal, that we’re going to see people decide that maybe the stock market isn’t the most stable place for my retirement account. Maybe I need to move into real estate and have that kind of an asset.

Aaron Norris: I had some interesting conversations about crowdfunding. Kaaren, do you have a lot of clients that invest in those crowdfunding platforms?

Kaaren Hall: Yeah, we do.

Aaron Norris: OK. I’m nervous about those. From what I understand, the Jobs Act was going to change to where it was going to be more flexible. And I’m wondering if, depending on how the next couple of months proceeds, if that’s going to reverse. I’m just afraid of some extra regulation because Wall Street got a little bit too crazy with the credit markets. It’s not just that they’re going to have problems. It’s going to be a reach through to the people holding the ultimate bag. So have you gotten any feedback about crowdfunding? I know they’re all so very different in how they’re structured.

Kaaren Hall: When crowdfunding came out, from the perspective of the Retirement Industry Trust Association, it just seemed ripe for fraud. I know that’s one of the things we’re always concerned about. So if there’s more regulation, I think it would be along the lines of whatever fraud comes out of this. We haven’t heard much about that. So maybe I’ll learn more today on the webinar that I’ll be on.

Aaron Norris: I know why it’s attractive to IRA accounts in particular. It’s because a lot of times it’s smaller amounts that you’re trying to get to work to have a decent rate of return. The Jobs Act really made that possible and crowdfunding was a beautiful platform. It’s just whether or not the crowdfunding platforms did a good job with the vetting process, if they did at all, or they were just the conduit of the investor being able to raise money from people. So it’ll be interesting to see. We’ve all had to create on the fly these mini loss mitigation departments working with people that are struggling. When people are talking about these micro amounts, and then you’ve got thousands of them, if things go wrong, how do these crowdfunding platforms manage that? It will be very interesting. Not easy.

Bruce Norris: I think their paperwork is perhaps different and in each case. I was going to be on a panel with one of them, and I read their document. If you were an investor in that particular crowdfunding platform, you didn’t own anything. It was like a loan to the startup company. Basically, it was unsecured and you had no ability to foreclose because you didn’t own the trust deed. You had rights to the cash flow and the cashflow stopped.

Aaron Norris: I talked to other crowdfunding guys who said it was in their Docs that after three years, if they can’t get the asset, it’s just Oh well. I’m like What?

Bruce Norris: So word for word. This was in their document that in the event of nonpayment, first of all, you cannot contact the owner because you don’t own anything. We may be too busy to pursue payments because we’re going to be busy creating new loans. Literally almost word for word that was in the document. 

Aaron Norris: I know the specific one you’re talking about. I think they really changed gears because the crowdfunding really morphed the first two years that it came out. There’s a lot of concern about the underwriting to Kaaren’s point. So that was a big conversation that they were just behaving as a conduit so investors didn’t have to deal with offerings on their own. They just had a platform that made it easy, and the technology was beautiful. It is way too easy to drop a lot of money. So we’ll see. I guess my biggest fear is that they decide to regulate our industry again. And for the main street guys who’ve had to follow the rules all along, it’s gonna be frustrating if we get penalized because some of our technology and Wall Street partners weren’t playing nice. So I really hope that doesn’t happen.

If people have questions that are on the line, please start sending them in. Trying to think if I’ve seen any others come up. I’m just very sad that people can’t end up getting PPP loans inside there. 

Kaaren Hall: You know, I think a lot of people that apply for PPP loans are going to be lucky to see the money. They’re having a fuss, is what I’m reading.

Aaron Norris: Yeah, I’ve only seen one person on Facebook tell us that they were able to secure one of those. I didn’t ask how much, but I haven’t seen a lot of action. I know the small banks are having a very difficult time getting through all the paperwork, and the governor made it sound like you just fill out a form and they’ll send you lots of money.

Kaaren Hall: In three days.

Aaron Norris: Yeah, that’s not how that’s going to work. You’re going to have to have backup. You’re going to have to get very organized. And if you haven’t started the process, just know that you need to go to the bank that you have a depository relationship with and start there. It’s going to be very difficult at this point to go to a new bank and raise your hand to get help like that. They’re very busy with their current customers.

Well, this is only a half-hour session today. It looks like I don’t have any questions coming in unless they come in just a few minutes.

You mentioned no limits on the use of funds for CRDs from IRAs. Would the same apply to 401Ks? For example, any reason you couldn’t do a one hundred thousand dollar CRD from a 401K and invest some or all of it in real estate?

Kaaren Hall: Yes, you could. I think if you’re going to take the money out of a 401K, it may as well self-direct as opposed to taking it out and having it be taxable to you. Just go ahead and self-direct it and then let the proceeds be tax-deferred. That would make more sense than to borrow the money and no tax on it.

But yes, you can take the money out and invest in anything that you like. And by the way, one thing I should mention is that if you’re not impacted by COVID-19, you can only take out the $50,000 max like before. The one hundred thousand dollars is only if you’ve been impacted and can prove that. But yeah, you can use it for anything, but it makes more sense to invest tax-free, tax-deferred in a self-directed IRA.

Aaron Norris: When you’re taking $100,000 out of a 401K, is that structured actually as a loan?

Kaaren Hall: It is. Yes, it’s a plan loan. Yes.

Aaron Norris: And what’s the going interest rate on that which people should be referencing?

Kaaren Hall: It changes by the day, but it’s on the IRS website. It’s the IRS published rate.

Bruce Norris: OK. Is it zero yet? Maybe it’s negative. How cool.

Kaaren Hall: IRAs are for investment purposes only. A plan loan is an investment really. It’s looked at as an investment. So you pay yourself back at a profit, and so you’re just basically, you know, investing in your own 401K in that case.

Aaron Norris: OK. Well, I don’t have any more questions. So we’ll keep this short and sweet this week because I know the one that we’ll have next week is going to be a number of hours. So any updates on this and we’ll tack it onto our show we’re taping Monday for VIP subscribers starting at 5:30. Members of the different organizations are the ones that are invited to participate live and that will give us all week to end up being able to put it out on YouTube and all our other sources. Kaaren, would you recommend any top webinars that you’ve seen this week for people to check out?

Kaaren Hall: No, but I want to check out the Dennis Block one you were talking about from the Apartment Owners Association. That one that I want to check out for sure, and again, where I’m getting my information for IRAs and what’s happening in the retirement venue is mostly coming from the Retirement Industry Trust Association. So that’s what I’m looking at.

Aaron Norris: I will continue to update our COVID-9 resource page for real estate investors, which includes some resources for tenants at the federal, state and local level. That’s at thenorrisgroup.com/resources, or it’s under the Free Resources tab. It’s the very first option when you do the dropdown menu. The California Association of Realtors is putting out quite a few webinars. They released new forms for working with tenants. If you’re a landlord, I would definitely check those out and stay on top of this. AOA and the California Apartment Association is also producing content. If you’re not a member and you’re doing a lot of landlord stuff, I highly recommend you get plugged in to do so. They are gonna be a lot better at keeping you up to date on the local stuff as well. Okay, everybody. Thanks so much. And we will see you next week.

Bruce Norris: Thank you Kaaren. Bye bye.

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

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