My husband's father has funds in his retirement account that he'd love to invest in our REI business. He's willing to move his current IRA into an SD account so to have checkbook capacity, however, we found that since we are his children that he is unable to lend/co-invest with us(disqualified persons). The only other solution we thought of was him borrowing from his retirement accounts and allowing us to use his funds at whatever rate he is charged. But that limits us as he is capped in how much he can borrow.
Are there any loopholes that anyone knows of for getting around the disqualified persons rule? Perhaps use of LLCs, S/C-corps, Land Trusts? I've recently heard of ROBS... but do not fully understand how and if that might work for us. Would love any feedback from more knowledgeable sources! Thank you!
There are no loopholes. As lineal family, you are poision to your father in-law's IRA.
No entity structure will mask any transaction between his retirement plan and you, and any such transaction would void his IRA.
The ROBS program would allow him to create his own retirement-funded real estate development company or participate in such a company with you, but he would have to be actively engaged in the business and this option is not suited for passive investing - just things like new home development or flipping for immediate sale.
There are no loopholes. As lineal family, you are poision to your father in-law's IRA.
No entity structure will mask any transaction between his retirement plan and you, and any such transaction would void his IRA.
The ROBS program would allow him to create his own retirement-funded real estate development company or participate in such a company with you, but he would have to be actively engaged in the business and this option is not suited for passive investing - just things like new home development or flipping for immediate sale.
There are no loopholes. As lineal family, you are poision to your father in-law's IRA.
No entity structure will mask any transaction between his retirement plan and you, and any such transaction would void his IRA.
The ROBS program would allow him to create his own retirement-funded real estate development company or participate in such a company with you, but he would have to be actively engaged in the business and this option is not suited for passive investing - just things like new home development or flipping for immediate sale.
Hi @Brian Eastman, I know this post is very old but i am in a somewhat similar scenario. Hoping you can shed some led. Through my research a disqualified person can be lent to if, "Additionally, any corporation, partnership, trust, or estate in which disqualified persons have a 50 percent or greater interest is not allowed to transact with your IRA." they have <50% interest in the company. Hypothetically couldnt my father loan through his IRA to my partnership LLC if it is a 49/51 split between my partner and i? Interest would obviously be paid on the loan and it would be secured with a lien and all payments and repayments would be made back to the ira.
@Brian Eastman thank you for this feedback. So if we used the ROBS program, what are the definitions/minimum requirement for him to be considered "actively engaged?" If we hire a GC and my husband is our realtor, isn't flipping mostly hands-off for us all as it is?
The ROBS plan is very different from a self-directed IRA. it allows you to use existing retirement funds to capitalize an active business in which you are directly engaged.
The business needs to be a C Corp and the retirement plan holder needs to be an active and salaried employee of the corporation with at least 1,000 hours of service per year. They can then roll funds into the corporation retirement plan, which then purchases shares of the parent corporation. This is all without taxes or penalties. The corporation will operate in the taxable world.
The enterprise needs to be an active business concern, which in real estate means development activities such as construction and flipping. This is not designed for passive asset holdings such as rentals or lending.
This pathway would only make sense if your father in-law wants to put >$100K into an active business flipping homes at a volume of at least 3+ per year. That business could hire you and your husband as well.
Looking for loopholes with self-directed IRA will lead to a prohibited transaction. Making transaction *appear* to be OK doesn't make it OK. Using "straw person" in between does not eliminate the fact that disqualified person is involved in the transaction. There are no loopholes, you must follow the rules.
@Dmitriy Fomichenko thank you for sharing this information with me! I'm only trying to that which is permissible within the rule structure, of course. I should have clarified that I did not mean those which break any rules.
@Brian Eastman Yes what you said is precisely our situation. He has money in retirement accounts ( >100k) that he'd like to allow us to use for flipping homes throughout the year. I'd say it is most probable that we do in fact exceed a volume of 3 this year... especially if we have a way to access his retirement funds
Our approach doesn't need to really be related to the SD retirement accounts. I just didn't realize there were other options of how he could use those retirement funds without penalty and without limit (ie borrowing from those accounts).
How do we get started in utilizing the ROBS program?
While you and your husband can certainly be involved in a ROBS funded real estate development company, your father in law could not just let you use the money and run the business. He would have to personally be actively involved in the business and receive a salary in order for his retirement funds to be able to capitalize that business.
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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@Michael Conte There is risk in oversimplifying an interpretation of the tax code.
If you have management control, the next line in IRC Section 4975 may snag you.
(H) an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G); or
It is best to speak with a qualified tax attorney about the specifics of your situation.