Self Directed IRA Help

9 Replies

I am considering moving my 401K to a Self Directed IRA to gain flexibility for real estate investing. What self directing company should I use? This community has a wealth of information. I need your help on best company to go with and why.

@Andre Sam

As a plan provider, I cannot make a specific recommendation as to a company to work with per BP guidelines.

What I can help you do, however, is refine your question.

Self-directed IRA's come in several formats offered by different types of companies. The type of self-directed IRA that will best suit your situation and goals will drive the process of identifying the right firm to work with.

A self-directed IRA custodian is a processing entity. Think E*Trade or Fidelity with different paperwork. All IRA based plans are required to have a custodian to administer and report on the account. What makes a self-directed IRA custodian different is that they are not purely connected to the public exchanges and limited to investing in stocks, bonds and funds, but rather have the staff training and paperwork to document the IRA's investment in the more individualized transactions that occur when investing in real estate, notes and other non-traditional assets. Such custodians will hold funds, sign documents, issue expenses and receive income on behalf of your IRA and act as your processing layer. This works OK for relatively static and simple investments like a private placement or crowdfund, but can become rather cumbersome and expensive with a more time sensitive and transaction intensive asset such as a rental property. You also need to be aware that custodians are passive in nature and simply process transactions at your direction. They do not provide meaningful oversight or guidance with respect to tax code compliance.

A checkbook IRA LLC is an enhancement on the above structure that is generally more time and cost efficient for investors with a more diverse portfolio. It starts with a self-directed IRA held by a custodian, but the IRA simply makes one investment into a specially designed LLC entity. The IRA owns the LLC, but you can be the non-owner manager of the LLC and have signing authority. This allows you to directly manage transactions via the LLC and eliminates the paperwork, processing delays and per-transaction fees of the custodian. These plans typically cost a bit more to establish due to the legal work, but in most cases will save you considerably over the long term. With a quality provider, such plans also come bundled with meaningful consulting guidance to help you get the most out of the program while staying inside the IRS guidelines.

A similar checkbook program is a Solo 401(k). Such plans are available to those who have some form of self-employment and no full time employees. As an owner-only business retirement plan, the Solo 401(k) has higher contribution limits, allowing you to build your savings on the front end as well as providing investment flexibility. The Solo 401(k) also has the advantage of being more favorable for real estate investments using debt-financing such as a mortgage - as the 401(k) is exempted from a small tax called UDFI that an IRA would pay on the percentage of income derived from the borrowed money.

So, as you continue your research and get feedback here on BP, think about what type of program will best suit your needs and be sure to ask questions along that line. Get on the phone and speak with a few of the providers that are active here on BP. You will pretty quickly be able to tell who is just selling something and who can become a valuable member of your team.

@Brian Eastman

Great insight Brian! Thank you so very much. I will continue to refine my questions as I work to build my portfolio with my first multi family purchase. I want to have the flexibility of tapping into my rollover IRA quickly for down payment options.

Any other suggestions on creative financing to gain money for down payments?


Big disclaimer as I am not an expert at this subject. Trust @Brian Eastman as he has already given you a professional opinion. A couple of questions for you:

-Is your 401K from a previous employer, meaning you no longer work for the company? I don't believe that you can transfer your current 401K over to a SDIRA?

-Are you aware of “self-dealing” and what you can and cannot do? This can be limiting to an Active RE investor.

-Be aware of UDFI if you use leverage (which you should want to).

I have actually been considering rolling my SDIRA into a Roth Solo 401K. This requires a single-owner business but has many advantages IMO. You can still use those funds for RE and there are less restrictions than with a SDIRA. You can even take a loan up to $50K from the 401K, which gets paid back to your account with interest. You can also make annual contributions up to almost $60K because you are contributing both as an employee and employer. This same setup is also available for a spouse.

I still have some homework to do but this is what I am considering. Again, trust the experts but I wanted to give you my two cents.

-Todd Harris

@Todd Harris

Thank you for your insight, it is greatly appreciated. Correct, I no longer work for that employer and wanted to shift funds around to give me access to capital for real estate investing. I will look into a Roth Solo 401K as well.I want to explore all options to leverage as much financial flexibility as possible. I agree @Brian Eastman gave some sound advice. 

@Ned Carey

A partnership can sponsor a Solo 401(k).  

The term Solo 401(k) is an effective marketing tool, but a more appropriate name would be "owner only" 401(k).  So long as the plan is only for business owners and does not provide benefits for non-owner employees, the Solo version is available.  The advantage of the Solo 401(k) is simplicity of administration since you are not managing other people's retirement savings.

That said, it can be messy to have partners in a Solo 401(k), just like all things involving partners are more complicated.  You really both need to be very much on the same page with your goals.   You can manage your respective plan accounts separately, but employer contributions need to be done in the same percentages.

@Andre Sam

While a Solo 401(k) is a great program, it is not always better for every investor. The internet and especially BP foster the idea that you MUST have the Solo 401(k) if you can find a way to qualify. That is not at all true. It is shiny object syndrome. IRA based solutions have a certain simplicity and permanency that can be advantageous for some investors, even if they may qualify for a Solo 401(k). Always take the time to speak with a professional and see which is the best plan for your specific situation and needs.

And both IRA and 401(k) plans when self directed are 100% about diversification of plan investments. These are not tools for you to utilize for your own purposes. You cannot use an IRA or 401k to make a down payment on a property you want to own personally, as an example. The plan needs to have sufficient capital to purchase and operate a property (including potentially with non-recourse financing), and all income from the investment is returned to the plan in a tax-sheltered manner.