Self-Directed IRA Investors

24 Replies

Hello everyone! I’m new to REI and have heard that partnering with Self-Directed IRA Investors is a good solution for raising funds. Thoughts? What’s the best way to find Self-Directed IRA Investors? Thank you in advance for the feedback.

@Jason R. ,

you can find them here on the forum (there are many discussions on the topic with multitude of participants). You can also go to local real estate investment meetups and connect with investors there. 

@Jason R. , @Dmitriy Fomichenko is spot on as to some ways to find them. 

I am taking a slightly different approach. I and my 2 partners already invest using SDIRAs and SOLO401Ks for buy and hold rentals. We have essentially 'used up' our funds in those accounts for buying about 10 units. 

So now we are seeking 'private money partners' to go 50-50 on more rentals. Some of those individuals are interested in using either current Traditional IRAs and converting them to 'Self Directed' IRAs or SOLO401ks, and a few we are talking to have recently left jobs or retired and have sizable 401Ks still sitting there and needing to do something with them. We are here to help :-)

How do we find them? Friends, family, neighbors, co-workers, former customers (my 'day job' is construction) who I do work for at thier 2nd, 3rd, or 4th homes on the lakes in our area that are 400K and up. Basically think of 'who might have funds to invest' (this can be in a IRA or just in 'cash/stocks' as far as I am concerned).

One thing that helps us is that we have an excellent track record of almost 30 years in our community in our construction business and in our rental business, so there is already a certain level of trust there. 

The 'model' we are working on is that they will put up the down payment, and we would do ALL the work of finding, rehabbing, finding and placing tenants and all ongoing PM and the like. Essentially they would have a completely passive investment and we would be making a return with no money out of our pockets, but by using our know;edge and time.

A side note; We use @Dmitriy Fomichenko for our accounts. I would *highly* recommenced him or one of the other providers that contribute here often. When I contacted them to pick a provider, they ALL gave much more personalized attention than the 'big players' I reached out to. 

Dan Dietz

@Jason R.

SD IRA is an account held by custodian allowing alternative investment options. Typically custodian charge you per transaction and per asset you hold in your IRA. They are holding your funds and you are to go through the custodian for every investment/transaction you make with your IRA. Anyone can set it up.

truly self-directed 401k on the other hand is not for everyone. This vehicle designed for those who are self-employed or own a small business with earned income and no full time employees other than the owner and his/her spouse. If you are eligible however, this is a superior options because it does not require a custodian (that means no transaction or asset-based fees) so it is very cost effective, and you control your funds with checkbook without going through a middle man. Some of the other advantages is has are: exempt from UBIT tax on leveraged real estate, ability to take a personal loan from it up to $50K for any reason (tax and penalties free!) and large contribution limit up to $61,000 per year. You can learn more about it in this discussion:

Hope this helps!

@Jason R.

@Dmitriy Fomichenko has provided a summary answer.  I suspect it was quicker than usual, as he only touched the surface. (and it looks to have been pretty late when he was posting too)

The key difference between an IRA and a 401(k) is the nature of the underlying retirement plan.

IRA's are Individual Retirement Arrangements governed under IRC code section 408. Pretty much anyone with earned income or pre-existing retirement savings can establish an IRA. The plans are relatively simple, but also pretty limited when it comes to new tax-sheltered contributions. There are a variety of IRA types with different contribution rules and tax treatment, such as Traditional/Contributory, Roth, SEP and SIMPLE. The latter two allow for slightly higher contributions based from a linked employer. Traditional and Roth IRA plans are limited to contributions of $5500 per year or $6500 for those age 50 and older.

A 401(k) is a true employer sponsored retirement plan, and must be established under the umbrella of a for profit enterprise as a benefit for employees of the company.  Contribution limits are much higher in such plans, potentially as much as $61K for those age 50 and older - contingent on earned income from the business.  A Solo 401(k) is an implementation of the 401(k) format in an owner-only business where there are no non-owner employees.  Because the business owner is only managing their own savings and not taking responsibility for the savings of others, the administration of the Solo 401(k) is greatly simplified.

For those who truly qualify for the Solo 401(k), it is a great plan format for building tax-sheltered savings: high contribution limits, the potential for Roth savings in the plan, a participant loan feature, and exemption from tax on debt-financed real estate investments are all very nice features.

For those who do not qualify for the Solo 401(k), IRA based plans provide great potential and flexibility as well. There are two means that an IRA may be self-directed. Specialty custodians hold accounts and serve as processors - as Dmitriy explained. That can be limiting for investments that are time sensitive in nature or involve a lot of transactions.

An IRA may have the same type of checkbook control as the Solo 401(k), which can me much more efficient and powerful. This is accomplished by taking an IRA with a self-directed IRA custodian and having it make one investment into a specialized LLC. You can then act as the manager of the LLC and control all transactions yourself without the intermediary delays, paperwork and fees.

The bottom line is that both IRA and 401(k) plans may be self-directed, and provide the flexibility to invest more broadly and be diversified. The potential to invest in what you know and invest locally is appealing to many investors.

@Jason R.

Following are the similarities and differences between the solo 401k and the self-directed IRA.

The Self-Directed IRA and Solo 401k Similarities

  • Both were created by congress for individuals to save for retirement;
  • Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;
  • Both allow for Roth contributions;
  • Both are subject to prohibited transaction rules;
  • Both are subject to federal taxes at time of distribution;
  • Both allow for checkbook control for placing alternative investments;
  • Both may be invested in annuities;
  • Both are protected from creditors;
  • Both allow for nondeductible contributions; and
  • Both are prohibited from investing in assets listed under I.R.C. 408(m)

The Self-Directed IRA and Solo 401k Differences

  • In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
  • To open a self-directed IRA, self-employment income is not required;
  • In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC
  • must be utilized;
  • The solo 401k allows for checkbook control from the onset;
  • The solo 401k allows for personal loan known as a solo 401k loan;
  • It is prohibited to borrow from your IRA;
  • The Solo 401k may be invested in life insurance;
  • The self-directed IRA may not be invested in life insurance;
  • The solo 401k allow for high contribution amounts (for 2018, the solo 401k contribution limit is $55,000, whereas the self-directed IRA contribution limit is $5,500);

@Jason Ryerson

The Self-Directed IRA and Solo 401k Differences CONTINUED

  • The solo 401k business owner can serve as trustee of the solo 401k;
  • The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
  • When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
  • Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
  • When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
  • Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
  • Pre-tax IRA contributions on reported on line 32 of Form 1040;
  • Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
  • Roth solo 401k funds are subject to RMDs;
  • A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
  • Roth IRA funds are not subject to requirement minimum distributions (RMDs);
  • The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
  • The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
  • At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
  • At termination, the self-directed IRA is only required to file a form 1099-R.

@Jason R.

While both the SD IRA and Solo 401k can get your retirement money into real estate, the Solo 401k is generally the top choice if you're eligible.

Compared to an IRA, Solo 401k contributions limits are roughly ten times higher. There is no custodial requirement for the 401k, so you don't need the additional expense and administration of an LLC to have checkbook control. You can take participant loans from the plan, and there is a built in-Roth component. A spouse can also participate in the same plan. There are additional tax benefits compared to an IRA (UDFI applies to IRAs on leveraged real estate), and there is generally greater privacy. Solo 401k plans are often quicker to setup and cost less money over time especially compared to most IRA LLCs. That said, the SD IRA is the way to go if you're not eligible for a Solo 401k. Eligibility requires that you are self-employed or own a business with no full-time non-owner employees.

@Dmitriy Fomichenko Hi Dmitriy, I've heard you on a few podcasts and seen you on here alot.  I just met with my cpa and mentioned the self directed ira, as I want to use it to invest in real estate products.

He was questioning the fact that once the money is in the SDIRA, and you write a check to say a flipper as a hard money loan for 50k, and that 50k turns into 55k in 6 months, are you able to put that whole amount back? He thinks that once you take that money out of the SDIRA, it's outside of the account, and therefore you wouldn't be able to just put that money back in. You'd only be able to put in $5500 because that's what's allowed as a contribution every year, and the 50k in this example would be outside the IRA.

Hopefully that makes sense and the point I'm trying to make is clear.  What's your take on this from a CPA's point of view?  I just want to make sure this is 100% legal from a cpa's point of view.


Greg Junge

@Greg Junge

It sounds like your CPA is not familiar with self-directed IRAs and 401ks. It seems he was assuming you would have to take a distribution to invest into alternative assets. With a self-directed IRA or Solo 401k, the retirement account make the investment directly and the investment returns go right back to the account tax-deferred (or tax-free for Roth funds). As a realtor, you are likely eligible for a Solo 401k with many benefits over a self-directed IRA:

  • Compared to an IRA, Solo 401k contributions limits are roughly ten times higher.
  • 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 :)

@Greg Junge

You would not be taking the money out of the IRA, IRA would be making the investment. All income from the investment the IRA owns belongs to the IRA. Think of it this way:

You buy $50,000 worth of stock of ABC company in your IRA. 6 months later you sold it for $55,000. All of this would belong to the IRA. The same concept here.

@Greg Junge

Self-Directed IRAs & 401(k)s - and Checkbook IRAs/401(k)s - while used by countless investors, are unfamiliar to most CPAs. While many CPAs have heard of such accounts - that's the extent of their knowledge. The "good" CPAs whose clients encounter this either (a) get educated or (b) acknowledge that it's not their area of expertise. Unfortunately, some CPAs, provide ill-advised guidance to their clients.

  • An IRA's investment gains do not have any impact on allowed contributions. Contribution limits apply to "new money" going into the IRA from your personal funds. Internal growth of IRA funds are not contributions.
  • There seems to be some ambiguity regarding who the investment owner is: would it be you or your IRA?
    • If done in your name, you'd have your IRA distributed with associated income tax and penalties.
    • If titled in the name of your IRA, the full $55k must be returned to your IRA. Not doing make cause your IRA to be deemed distributed (tax and penalties) at that point as an IRA prohibited transaction.
  • Private lending, outlined in your post,  is an excellent investment choice for an SDIRA. 
  • If you do qualify for a Checkbook 401k, it is the preferred vehicle from a tax, investment, financial planning, and cost perspective.

Thanks @Bernard Reisz , @George Blower and @Dmitriy Fomichenko !

One last question for you all. If I have 75k in a roth SDIRA, I can invest that entire amount at any time right? It doesn't have to be seasoned any time period? I was told once that I can only invest what I contributed, and not what was made by the IRA.

So if I contributed 50k, and that 50k made 25k, I was told that I can only invest that initial 50k.  But that doesn't sound right to me... Any help would be appreciated!

@Greg Junge

You are confusing investing with distributing.

With a Roth IRA, the amount you directly contribute has had taxes paid. In your example, the initial $50K. You can withdraw that contributed basis at any time without taxes or penalties.

Prior to age 59 1/2, you may not distribute from your IRA any of the earnings. To do so would incur a penalty for early distribution. So, anything above $50K held within the account in your example.

If, rather than directly contribute on a Roth basis to the IRA, you performed a conversion into the Roth from a tax-deferred IRA or 401(k), there can be some additional concerns around 5 year seasoning periods that are a bit too much to get into here quickly.

When you invest with the Roth IRA, funds are not leaving the IRA or being distributed. The IRA is exchanging cash value for whatever the investment may be. So, on Monday the IRA holds $75K of cash and on Tuesday the IRA holds $65K worth of real estate and $10K of cash (or whatever the case may be).

Of course while there is no IRS restriction against investing the whole IRA, you would not want to do that when investing in real estate. You would always want to have some reasonable amount of cash reserves in the IRA to cover any unexpected expenses related to the IRA owned real estate.

@Greg Junge

The tax treatment of Roth IRA distributions depends on whether the distribution is considered qualified or nonqualified. If a Roth IRA distribution is qualified, all distributed assets are tax-free. If a distribution is nonqualified, some of the assets (generally the earnings) may be subject to regular income tax and a 10 percent early distribution penalty tax.

Tax laws require Roth IRA assets to be distributed in the following order: regular contributions, conversions and retirement plan rollovers, and earnings (IRC Sec. 408A(d)(4) and Treas. Reg. 1.408A-6).

Here is a good chart to follow:

@George Blower and @Brian Eastman . Thanks for the help fellas. Brian, funny you mention the conversion. About 3 years ago I converted some monies from a traditional IRA to my Roth and paid the taxes of course. Are you saying that amount has a 5 year waiting period for me to invest it?