Self directed IRA for lending and rentals

9 Replies

The more I learn, the less I like my conventional IRA invested in stocks. Am I correct in my thinking that I could transfer into a self directed IRA and use those funds for lending and accrue that interest tax differed into the IRA? As well as invest in rentals and accrue that rental income the same way?

@Jason Spicer , that is 100% correct. There are rules to follow but it is absolutely doable.

@Jason Spicer

You are correct in that assumption. There are many types of retirement accounts that can be self-directed. A solo 401(k) is for a sole proprietor, but offered many advantages. Types of IRA accounts that can be self-directed are, Traditional IRA, Roth IRA, SEP IRA, SIMPLE IRA, HSA, ESA- Coverdell, Inherited IRA's.

Are you familiar with the prohibited persons IRS rules? A prohibited person is you, any business you own 50% or more of and any linear family members (Parents, grandparents, children, spouse) You could not rent or purchase the real estate to/from a prohibited person. These people also can not work on the property, doing tasks such as: cleaning, painting, roofing or anything that can be considered "sweat equity". 

Definitely something I'll be looking Into

@Jason Spicer

Absolutely, your IRA is not limited to investing in what Wall St sells. It has always been possible to diversify your retirement savings into alternative assets such as real estate, private notes, privately held stock and the like - but takes a different kind of service to accomplish that.

One of the first things you will want to identify as you read and learn here on BP (lots of good info on the topic) is determine the best type of service for your needs.

A self-directed IRA custodian (typically a trust company) can hold an account and process investments into a broader array of assets. In this model, the custodian/administrator holds the funds and you will instruct them to take action on behalf of your IRA, so they sign every document, cut every check, receive every deposit, etc. This works well for more singular and static investments, but will become inefficient the more interaction or time-sensitivity there is with your portfolio.

There are also two plans that provide what is referred to as checkbook control.

A Checkbook IRA is offered by specialty firms that will start with a custodian held IRA as above, but then create a special purpose LLC to be the sole investment the IRA itself makes. The IRA owns the LLC and you can act as the non-owner manager of the LLC. You then use the LLC to conduct all investment activities and only need the IRA account for reporting and future IRA layer transactions like contributions/distributions to the account. The LLC will have a business checking account at the bank of your choosing that you have signing authority for. This eliminates the processing delay and per-transaction fees common to most custodians.

Similarly, a Solo 401(k) accomplishes the same level of direct control.  These plans are only available to investors who qualify as having some type of for-profit self-employment activity with no full time employees.

As I mentioned above, there is a lot of good info here on BP and several providers who are active on the forums.  Do some reading and make some calls.  You will pretty quickly determine if this approach is right for you and what kind of service will best fit your needs.  Regardless of the route you choose, you want to be sure the firm you work with can provide you with the education you need to operate successfully.

@Jason Spicer

Yes, a self-directed account is certainly something to look into if you are becoming more dissatisfied with your conventional IRA. If you are self-employed, the Solo 401k may be the better option for you compared to a self-directed IRA. Compared to an IRA, Solo 401k contributions limits are roughly 10 times higher and there is no custodial requirement for the 401k. You can take participant loans from the plan and don't need the additional expense and administration of an LLC to have checkbook control. There is also a built in-Roth component among other benefits. If you do not have any self-employment activity, a self-directed IRA can be a huge step up from what you have now.

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Account Closed

I think insurance on a property is a good idea regardless of what type of account the asset is held in.

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