Self Directed IRA My Mind Is Spinning

6 Replies

Hey BP,

So I'm looking into how to lend on deals and fund my own deals with my IRA. Currently my IRA is under JP Morgan. I called them and asked the naive question of how can I fund real estate investments using my IRA. I quickly learned that all SDIRA's are not created equal when they told me that my type of SDIRA can only invest in JP Morgan Funds from their platform. They directed me to another division of JP Morgan and after that phone call I quickly realized that JP Morgan was not the solution I was looking for. After about 30 mins worth of Google research I learned that I needed a IRA Custodian to begin this journey. I called the first google number I could find and started asking questions.

I was able to digest some of the information but I felt like some of the answers were a little rushed.  Does anyone here extensive experience with this? I'm still unclear how I can use the money, the best way to set it, etc.

I appreciate any and all feedback.

@Mel Hayes

Self-directed IRA's come in several formats offered by different types of companies. The type of self-directed IRA that will best suit your situation and goals will drive the process of identifying the right firm to work with.

A self-directed IRA custodian is a processing entity. Think E*Trade or Fidelity with different paperwork. All IRA based plans are required to have a custodian to administer and report on the account. What makes a self-directed IRA custodian different is that they are not purely connected to the public exchanges and limited to investing in stocks, bonds and funds, but rather have the staff training and paperwork to document the IRA's investment in the more individualized transactions that occur when investing in real estate, notes and other non-traditional assets. Such custodians will hold funds, sign documents, issue expenses and receive income on behalf of your IRA and act as your processing layer. This works OK for relatively static and simple investments like a private placement or crowdfund, but can become rather cumbersome and expensive with a more time sensitive and transaction intensive asset such as a rental property. You also need to be aware that custodians are passive in nature and simply process transactions at your direction. They do not provide meaningful oversight or guidance with respect to tax code compliance.

A checkbook IRA LLC is an enhancement on the above structure that is generally more time and cost efficient for investors with a more diverse portfolio. It starts with a self-directed IRA held by a custodian, but the IRA simply makes one investment into a specially designed LLC entity. The IRA owns the LLC, but you can be the non-owner manager of the LLC and have signing authority. This allows you to directly manage transactions via the LLC and eliminates the paperwork, processing delays and per-transaction fees of the custodian. These plans typically cost a bit more to establish due to the legal work, but in most cases will save you considerably over the long term. With a quality provider, such plans also come bundled with meaningful consulting guidance to help you get the most out of the program while staying inside the IRS guidelines.

A similar checkbook program is a Solo 401(k). Such plans are available to those who have some form of self-employment and no full time employees. As an owner-only business retirement plan, the Solo 401(k) has higher contribution limits, allowing you to build your savings on the front end as well as providing investment flexibility. The Solo 401(k) also has the advantage of being more favorable for real estate investments using debt-financing such as a mortgage - as the 401(k) is exempted from a small tax called UDFI that an IRA would pay on the percentage of income derived from the borrowed money.

So, as you continue your research and get feedback here on BP, think about what type of program will best suit your needs and be sure to ask questions along that line. Get on the phone and speak with a few of the providers that are active here on BP. You will pretty quickly be able to tell who is just selling something and who can become a valuable member of your team.

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Zev in a previous answer hit the nail on the head. There are at least a half-dozen great quality providers we're very active here and specializes in accounts for sdira and solo 401k. The particular on I also does a lot of lending out of his personal sdira account I

I use both sdira as well as a solo 401k, as do three of my partners. In our case it was where most of our assets were tied up oh, so it made sense to figure out how to real estate. There is lots of good information here on BiggerPockets if you dig around and several good podcasts that cover it also.

I personally learned a lot from a couple of the podcasts that cover the topic a lot, along with Mark Kohler on YouTube who is a lawyer, accountant, in plan provider who invests with his own retirement accounts also
Thank you Daniel.

Originally posted by @Daniel Dietz:
Zev in a previous answer hit the nail on the head. There are at least a half-dozen great quality providers we're very active here and specializes in accounts for sdira and solo 401k. The particular on I also does a lot of lending out of his personal sdira account I

I use both sdira as well as a solo 401k, as do three of my partners. In our case it was where most of our assets were tied up oh, so it made sense to figure out how to real estate. There is lots of good information here on BiggerPockets if you dig around and several good podcasts that cover it also.

I personally learned a lot from a couple of the podcasts that cover the topic a lot, along with Mark Kohler on YouTube who is a lawyer, accountant, in plan provider who invests with his own retirement accounts also

Hi @Mel Hayes

You need to set up a self-directed IRA with checkbook control.
I use Sean with American IRA. He sets them up for a lot of my clients.
Quest IRA also does it bet not everyone is created equal.

Some IRA administrators, like to keep control of your funds and "administer" them. This is how they make their money on fees. There are pros and cons to an "administered" IRA/401k.

If you are strictly lending, I would get the unadministered account. American IRA does these.

My clients do this all the time.
The flippers in the system pay them 12% and 3.75 Points.

This is the cleanest way I have seen it done.

Best Regards