Investor · Union, NJ · Member since 2014 · 23 posts · 8 votes
Hello BP Community,
I have in a Self-Directed IRA. I'm ready to pull the trigger on purchasing my 1st multi-family property. My question is, when I buy my property and its cash flowing monthly, how do I reap the financial benefits of my earnings considering I can't touch the funds until I retire? What strategy can I put in place to improve my quality of living shortly thereafter I earn a handsome NOI or cash on cash return without having to pay capital gains on pulling my money out?
Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
10y
Whenever I see a post or hear a statement starting with something like "the easy fix is" to get around a pesky law or regulation I know I do not want to even come close to doing business with the poster. There is a world of investments out there that are legal, ethical, and can be done easily within a self directed IRA without bringing any untoward consequences. Why do some wish to get clever and circumvent the rules? The "easy fix" is to learn the rather simple rules and comply with them for every investment you make within your SD IRA (or Solo 401k). To do otherwise invites an investigation by the IRS (costly and time consuming), the loss of approximately 1/2 of the IRA (when taxes and penalties are considered--this does not include any legal and accounting fees you may incur), and the removal of any funds that may remain from the IRA. Why would anyone risk such dire consequences when there are so many alternatives that are completely within the rules?
I agree with your assessment of 401k funds and the lack of control that most have with those 401k assets. Truly self-directed IRAs and 401ks can be a great solution to that.
That is an excellent observation on the interest rate of your first home purchase. It really puts things into perspective- everything is relative.
Congrats on your IRA investing so far. The Solo 401k is a similar structure to the IRA LLC in that both can give checkbook control of your retirement funds and allow for investment into alternative assets such as real estate. One key difference is that the Solo 401k requires that you have self-employment activity and no full time employees of your own in order to be eligible. If you are eligible, you'll enjoy a number of benefits over an IRA. I won't go into all of those now as I don't want to hijack the thread, but I thought I'd touch on it since you mentioned this being new information for you.
Investor · Charlestown, NH · Member since 2016 · 48 posts · 15 votes
10y
Thanks Justin for your input. If I am understanding this right a solo 401k is allowed to invest 53,000.00 per year. It must come from self employment income.
For 2016, a participant may contribute up to $53,000 per year to a Solo 401k. If you're 50 years of age or older, that number climbs to $59,000 per year including catch-up contributions. Yes, these contributions must be sourced from self-employment earnings.
There is no limit on how much you can actually invest once the account is funded with rollovers, contributions, or a combination of both. Also note that transfers and rollovers of existing retirement funds into the Solo 401k do not count toward your contribution limit.
Investor · Edmond, OK · Member since 2014 · 42 posts · 11 votes
10y
I currently own a duplex in my SDIRA and also use the IRA to fund other investors deals, so the IRA grows tax free with no benefits now. I always look for other SDIRA investors to fund my real estate purchases now, so that way I use those private funds just like a mortgage. The SDIRA owner gets growth, that they want, a lien on my property securing the IRA funds, and I get a tax write off for the mortgage on the property while making rental income now.
If anyone is looking to learn about lien positions on a properties at a loan value of no more than 70% ARV, give me a shout and I help educate you at least on how we do it. Good luck.
Investor · PA · Member since 2014 · 11 posts · 4 votes
10y
Hi Justin,
Yes, you are correct, my mistake about the IRA funds. If the funds were part of a solo 401K then those funds could invest with the investor, correct???
No, the Solo 401k would have the same restrictions against transacting with a disqualified person. The difference between the Solo 401k and the IRA that you may be thinking of is that the 401k would allow for the participant to borrow up to $50k from the plan and those funds could be used for investment until they are paid back to the plan.
Investor · PA · Member since 2014 · 11 posts · 4 votes
10y
What do you think about a newly formed IRA/LLC and a new investment asset so long as the IRA is not enabling the the disqualified person.Meaning the IRA owner could make the investment without the help of the IRA. Both would be taking proportionate risk and burden of the investment, when they are investing at the same time and when they both are receiving ownership with the rights to profit and loss based on their specific dollars invested?
It sounds like you might be describing a scenario in which an IRA accountholder partners with his or her IRA and is diligent in ensuring no prohibited transactions occur. Although this may be possible, my thoughts are that it would be safer, more simple, and leave both parties with more flexibility if each (the IRA and the IRA accountholder) pursued their own investments separately. This should be feasible if each could have made the investment on their own. Every situation can have its own unique factors that may sway the best approach in one direction or another, but that's my general opinion in the situation you outlined.
Investor · PA · Member since 2014 · 11 posts · 4 votes
10y
Hi Justin
I agree, the simpler the better. I always recommend to clients that they seek out professional advise with any and all investments with retirement funds. Self directed IRA/401K's are great, but professional advise is essential!!
Investor · PA · Member since 2014 · 11 posts · 4 votes
10y
Hi Justin,
I'm sorry, please forgive me. I didn't make myself clear in the above post.
In the above post you state a solo 401K is restricted against transacting with a disqualified person. I believe the Solo 401k rules permit you to combine personal funds–and is referred to as Tenancy-in-common Ownership–with your Solo 401k in making the purchase.
Tenancy-in-Common Ownership: allows you to buy real estate with personal funds and Solo 401k funds. Each will own a specific percentage of the property. As a result, the income and expenses associated with the investment will be proportionally shared based on the ownership percentage. This type of arrangement also permits you to invest your Solo 401k with family members such as your spouse or siblings. Again, the key is to adequately reflect each investor’s percentage of ownership on the paperwork and that the expenses and income are proportionally shared by each party to the transaction.
I think I understood what you meant regarding partnering. My opinion is still that although this may be possible, it would be safer, more simple, and leave both parties with more flexibility if each the (Solo 401k and 401k participant or other disqualified persons) pursued their own investments separately. The reason is that a lot of people will overlook some aspects of an investment that could be a prohibited transaction. Even if one were diligent in ensuring that no PT occurred as a result of the initial investment, rule violations could occur with subsequent exchanges related to the asset. In any event, avoiding those exchanges leaves one with fewer options regarding that investment than he or she would otherwise have if the PT rules did not apply to the investors. These are just some things to consider before jumping in. I'm not saying it can't be done.