Self Directed IRA Question, can you pay yourself?

Question

I am looking at moving some of my Roth money into a SDIRA to buy a SFR for rental purposes.  I understand that I cannot pay myself sweat equity, but was wondering if I could be paid for other items:

• Commissions if I am the purchasing agent
• Monthly fee for property management
• others?

I've searched several threads to see if this was addressed somewhere, apologies if this question has already been answered.

Jon Holdman · Answer

No.  Your IRA cannot pay you for any services performed for the IRA.   Further, you cannot contribute your services to the IRA as that is considered a contribution.  I was advised by an attorney that managing a property owned by an IRA is acceptable.  Others here disagree.  But any actual money changing hands between you and the IRA is clear.  That's a prohibited transaction.

J Scott · Answer

The ERISA attorney that I used to use (when I was buying/selling from my SDIRA), disagreed with this.  In his opinion, the mere act of representing ourselves in the transaction was personally providing a material benefit to the IRA, which is prohibited.

Now, that said, he was an attorney, so it's possible he was just being overly conservative to help avoid any issues...

J Scott · Answer

I'm not a tax profession or an ERISA specialist, but in general, the answer is no.  You cannot personally benefit from the investments made by your IRA and your IRA cannot benefit from you.

Loren Whitney · Answer

I can appreciate a conservative legal opinion, so thanks for sharing J. I'll still have to disagree as a matter of opinion.

There is no material benefit to be had or expense spared as it relates to the IRA's real estate purchase contract. The seller of the property pays for the commission structure either way and so the IRA is not saving money by avoiding to pay for services. The IRA holder is also forfeiting any compensation to avoid self-dealing. In Colorado, a real estate contract can techinically be completed by anyone, not just a licensed professional. In a FSBO transaction, the IRA holder would most likely represent themselves on behalf of the IRA (licensed or not). As far as the contract is concerned, the important factors are:

1. Making sure that the contract is titled to the IRA, 401k, etc.

2. Requesting that an approved signer as custodian/trustee for the IRA/401k sign on the contract, not the IRA holder.

3. Earnest Money is not paid by a disqualified person.

Just because the IRA holder has a license to practice real estate, it doesn't restrict them from using their knowledge to write contracts for an investment. The same example applies to someone lending money on real estate if they choose to draft their own note terms. In my opinion, this very concept is what makes self-directing retirement funds more appealing to those with knowledge on a particular topic/investment. One just needs to be careful that the rules are followed to the T. There are many very similar scenarios that would fall into the prohibited category.

Duane Angell · Answer

@ Everyone; Agreed...

Also keep in mind is not only monetary contributions.

You are in fact prohibited from providing any services that would be considered a contribution towards your IRA.

Such as; painting the property yourself, buying a $1.20 light bulb yourself, purchasing a property from yourself/family member, renting the home to your sister or even paying your brother to mow the lawn with IRA/personal funds.

Any prohibited transactions could result in your entire IRA to fall out of tax exempt status. At that point the IRS would consider the full amount as a cash disbursement and you would owe tax and early withdraw penalties.

Also keep in mind and cash contributions you make need to be through your “IRA” account and not the “LLC” you set up under the IRA.

You can always do some of the work yourself or funnel a few extra funds into your IRA account (exceeding the 5K); at least until you’re pissed off “now” x-wife or family member turns you in to the IRS for some preposterous reason.

Dmitriy Fomichenko · Answer

Now regarding whether or not you can personally manage property owned by your retirement account:

The answer is going to be vague as there are no clear cut guidelines when dealing with prohibited transactions. I have seen different views on this issue. Certainly if the individual is paid for his services this is clearly a prohibited transaction. Even if he is not paid — there is a concern that the individual is receiving indirect compensation because he is performing services that would otherwise have to be paid for. On the other hand, it can be argued if he is just performing minimal services — collection of rent, etc. — this should not raise to the level of a prohibited transaction. Unfortunately, you will not know this until the IRS/DOL walk in the door and try to find a problem. It depends on how conservative you wish to be but if you decide to manage the property — you should not receive any compensation for your services as a manager.

Dmitriy Fomichenko · Answer

I agree with the above comments.  Randy, you are considered 'disqualified person' to your IRA and therefore prohibited from providing any services to your plan, even if you are not being paid for it.  For example: if you are a license real estate agent you can act as an agent for a transaction involved property for your IRA.

Randy Moog · Answer

Thanks all.  Appreciate the feedback.

Self Directed IRA Question, can you pay yourself?

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