Can a Self Directed IRA buy properties?

Question

Hello all, I am posing this question to the BP community for anybody with Self Directed IRA experience in hopes that you can share some insight into how you were successful.

I have a decent amount of money socked away in a 401k from my previous job, that is just sitting there. I can not invest in it cause I do not work for the company anymore, instead I would love to roll it over into a self directed IRA and then use it to buy properties. I have been listening to BP podcasts, talking to people at REI meet ups but I still feel unsure. I have spoken to a rep at this company: https://ndtco.com/    and he assured me that I would be able to buy a property once I completed the rollover of funds so long as I created an LLC and paid my annual fee of $335.

Has anyone done business with this company?

Any information, tips, strategies that you can share is helpful as this is my life savings and I want to take the leap but not before doing my due diligence. Thanks in advance, looking forward to your comments.

Justin Windham · Answer

@Petya Toncheva

Yes, you can absolutely invest retirement funds into real estate with a self-directed IRA or Solo 401k. The Solo 401k is typically the preferred structure for those who are self-employed or own a business without employees. The company you mentioned is one option for self-directed accounts, but there are several others who post regularly to these forums who could also help. In case you are eligible for the Solo 401k, here are some of the benefits it would offer compared to a self-directed IRA:

• Solo 401k contributions limits are roughly ten times higher than IRA limits
• There is no custodial requirement for the 401k
• You don't need the additional expense and administration of an LLC to have checkbook control
• There is a built in-Roth component whereas IRAs are either traditional or Roth, not both
• A spouse can also participate in the same Solo 401k plan
• The Solo 401k has additional tax benefits over an IRA when investing into real estate using leverage
• The penalties for prohibited transactions are less severe, though it's best not to utilize this benefit :)

Chris Wilson · Answer

Hey Petya, I worked as a stock broker and almost became a financial advisor but stopped because the companies that I worked for didn't want me to practice real estate. The thing that is concerning to me is that if you are under the age of 59 1/2 you will be penalized for taking the funds out too early. Also, it will depend on what type of IRA that you rollover into if you have to pay taxes on the distributions or not. Typically, you can pull from your IRA early for a first time home buyer and avoid the penalty if you are younger than 59 1/2.

Long story short could you do it, yes you could. But there could be consequences for doing so. The best thing you could do is to sit down and talk with your Tax Advisor or CPA to see how you can make that particular strategy work without loosing your money to taxes or penalties.

I'm not a tax professional or a lawyer, so be sure to speak with a license professional for the final say!

Petya Toncheva · Answer

@Brian Eastman thank you for your insight on this. Very helpful.

Brian Eastman · Answer

@Petya Toncheva

Please disregard the post from @Chris Wilson.  He is not familiar with a self-directed IRA.

A self-directed IRA is still a tax sheltered retirement savings vehicle, just with the capacity to invest more diversely than just the stock market.  Such plans have different architecture to facilitate non-traded assets like real estate, stock of privately held companies, etc., all of which an IRA can invest in per IRS rules.

The key to understand is that the IRA is the investor, not you personally.  You invest your IRA in real estate because you believe you can better protect and grow the IRA with real estate than other investments.

The structure you have been introduced to is a "checkbook IRA", where the IRA owns an LLC that you can control.  You are going to be much better off with that type of tool for real estate investing.

You would also benefit from working with a firm that specializes in the legal and advisory side of the process, which is something an IRA custodian such as the firm you mention cannot do directly.  They will hold the IRA that holds the LLC, but they cannot providing meaningful support around your use of the LLC by rule.  They will just ship you off to someone to slap together some LLC documents and not provide future assistance.  I know because we get calls all the time from folks who setup a plan that way and need help.