Self Directed IRA or Take Loan from pre-taxed Retirement?

9 Replies

We have 2 options now that we're selling our home and cashing out enough money to pay our daugher's college fund. We have a 403B account in my wife's dad's name that is over $300K that is only drawing 3.5% interest. So we are moving it to either his existing retirement account (that is already taxed so borrowing funds from that won't penalize us) or to a self directed IRA.

Is it better to move the money to his existing retirement account and let the additional $300K grow at 6 - 7% (which is what they can achieve) where we could then borrow the other pre-taxed $600K at anytime to purchase real estate for flipping OR move the $300K to a self directed IRA account.

Self Directed IRA would require setting up an LLC for it $1,495 plus a $45 per quarter management fee and we would not be drawing any interest off of it but would then be able to self direct investing the money in real estate and at closing the funds (profit) would be written to the LLC and deposited back in the fund account to prevent taxing.

We could then take money out as needed (taxed) under his name (without penalty) and only pay ordinary income tax on his tax form. This could grow the money faster than 6% and the fund management company is on board with us doing it either way although they don't provide the self directed IRA account and we'd have to go elsewhere to get.

Any thoughts?

Originally posted by @Rodney Marcantel :

We have 2 options now that we're selling our home and cashing out enough money to pay our daugher's college fund. We have a 403B account in my wife's dad's name that is over $300K that is only drawing 3.5% interest. So we are moving it to either his existing retirement account (that is already taxed so borrowing funds from that won't penalize us) or to a self directed IRA.

Is it better to move the money to his existing retirement account and let the additional $300K grow at 6 - 7% (which is what they can achieve) where we could then borrow the other pre-taxed $600K at anytime to purchase real estate for flipping OR move the $300K to a self directed IRA account.

Self Directed IRA would require setting up an LLC for it $1,495 plus a $45 per quarter management fee and we would not be drawing any interest off of it but would then be able to self direct investing the money in real estate and at closing the funds (profit) would be written to the LLC and deposited back in the fund account to prevent taxing.

We could then take money out as needed (taxed) under his name (without penalty) and only pay ordinary income tax on his tax form. This could grow the money faster than 6% and the fund management company is on board with us doing it either way although they don't provide the self directed IRA account and we'd have to go elsewhere to get.

Any thoughts?

 Hey Rodney,

I'm not really sure how you would be able to borrow against a retirement account, even if your father in law has mostly roth retirement assets, there are no loans allowed on most accounts, and distributing the money means he would not be able to get it back into his tax sheltered retirement accounts other than via contributions. 

If you don't think you will be starting the RE investing/flipping for some time, it would probably be better to park that money in an account that grows those funds, even a little, and then roll them over to a self directed IRA when you need to. I can tell you that a self directed IRA is not the place for idle cash, it is essentially earning checking account interest (Full disclosure I work for a self-directed IRA custodian).

If you think you will be starting the REI activity soon, then a self-directed IRA LLC is a great option, although if the formation company your working with is charging a quarterly management fee, I would do a little more research on other options as that seems a little odd. In most cases the manager of the LLC would be the investor, because that's the only way for them to control the LLC. I can't imagine they would be charging you for managing the LLC as an entity, as it is disregarded, and doesn't require any tax reporting.

In any case you should consult with a knowledgeable professional before opening an account or forming an LLC, doing a little extra work now can keep you from a TON of extra work and headaches later.

Adam

Thanks @Adam Hershman. I am aware of the limitations. We are starting our RE business very soon and as I'm in agreement that the management fee of $45 per quarter seems overkill, I don't agree that we can't borrow the other funds that have been taxed already and not subject to taxes if used but the interest earned off of it is. We've already discussed with the portfolio manager on this. He's going to let us know what payback schedule and cost (interest if any) is required if borrowed.

I suspect the the Self Directed IRA will be a better deal if the borrowed funds from the other account doesn't impact interest earned from it since we will be paying back on a payment schedule.

@Rodney Marcantel

I'm on the same page as @Adam Hershman with the question about how you get tax-deferred 403b money into an account that can be borrowed from in the manner you indicate.

It is typical with a checkbook IRA LLC to have quarterly fees through the IRA custodian that holds the LLC interest and does annual reporting.

I would differ with Adam on the point about idle cash. In a custodian held account, that can be an issue, but within an IRA LLC you can open a stock trading account or keep idle cash deployed in a variety of ways beyond sitting in cash in a checking account. It generally does not make sense to move existing assets to cash for purposes of a transfer, only to re-invest back into the market, however, so evaluating the details of how/when you fund a structure would be a good topic to consider as you look into this.

Flipping with IRA money can be very profitable, but does generate taxes within the IRA known as UBTI. Definitely something you want to research. And keep in mind that with an IRA, you can "have houses flipped" with IRA money, but you cannot "be the flipper". There is no sweat equity when it comes to IRA money. While you and your wife can help her father invest his capital, you are disqualified parties to his IRA and cannot benefit from or inject value into the IRA through your own efforts.

Medium safeguard rgb stackedBrian Eastman, Safeguard Advisors | [email protected] | 855‑997‑2298 | http://www.ira123.com

@Rodney Marcantel

Just to clarify, like @Brian Eastman said, the custodian will charge you a fee for the IRA account that invests in the LLC, If this is the $45 per quarter management fee you're talking about is the fee from the custodian then it sounds about right. The custodian I work for charges $175 annually for IRA LLC accounts, so $45 quarterly would be on par with what we charge. One thing to double check is make sure those fees don't change based on account value which can make that fee skyrocket if you start growing funds in the account.

If on the other hand the LLC formation company is requiring a fee to maintain the LLC, I would maybe look at other options since that is a fairly uncommon practice, in my opinion.

Adam

You @Rodney Marcantel , you can borrow money from most 403b plans if alllowed and most employers and plans do provide that as an option. Generally, you can borrow up to 50% of the value and can take up to 10 years to repay if you are using the funds for a primary residence. Certainly, you can invest your funds however you want. You can do a tax free-transfer to another 403b plan to suit your investment objectives of 6-7% or better depending on your risk tolerance.

This is much less complicated and you can own the property outside of your retirement plan and use the proceeds or income to repay the loan back to the 403B.

I don't claim to have a lot of experience in this area yet, however the law firm I work with (as their client) provides a good bit of free education in this area. Rodney, these links may be helpful if you need some more education/insight into the topics of leveraging your IRA funds and avoiding UBIT/UDFI taxes:

Buying Real Estate With an IRA and a Non-Recourse Loan

Self Directed IRA & 401K Prohibited Transaction/Disqualified Person Diagram

I hope this is useful information.

@Adam Hershman the fee is a custodian fee.

@Andre Davis the 403B account has very limited abilities to do much. In fact when I login to the account, there are no options but to view the account balance or call them. So it's very limited and besides the low interest rate, is why we want to move it.

@Caleb Asbridge thanks for the info. I'll look into it more as I'm still researching and why I posted this thread to begin with.

@Rodney Marcantel as I mentioned you can move it to another 403B provider, the key is to not lose the 403B status by doing a tax free transfer to another provider. It can be invested in a mutual fund like annuity featuring bonds or stocks, with loan provisions. 

Be sure to check with the current provider for the ability to move to a more aggressive fund where it stands, so that you don't have to worry about new surrender penalties.  

Staying flexible and keeping it simple will work to your advantage.

@AndreDavis,

You're correct on that so that's why I'm weighing my options on what to do with the money, Self Directed IRA against the $300K or take a loan out for flipping on the other funds (about $600K that's already been taxed).

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