Self-directed IRA profit question...

9 Replies

We are going to be setting up a self-directed IRA sometime down the road. My understanding is that all of the profits from an investment you can contribute back into the IRA with no limit. My question is do you HAVE to deposit ALL of the profits back into the IRA or can you keep some of the profits as cash for other immediate uses like living expenses, etc.?

If your IRA owns an asset 100%, for example a piece of rental property, all of the income generated from that asset must go back to the IRA as a return on investment (just like any expenses related to that IRA-owned asset must come from the IRA. You can't pay for home repairs/maintenance costs with your own personal money nor do repairs yourself). If you take receipt of the money personally, instead of having it flow back to the IRA, that would be a prohibited transaction, and treated as a distribution from your IRA. You'll pay taxes on that money, as well as an early distribution penalty if you are under age 59 1/2.

If you split ownership of an asset with your IRA (Example: your IRA buys 50% of the property, you purchase the other 50% with personal cash as tenants-in-common), then your share of the income would flow back to you based on your percentage of ownership. It would still be taxable income, but would not be considered an IRA distribution.

You MUST have all income and expenses going to and from the IRA. Not doing so could cause the account to become distributed in full and you would owe taxes and penalties on the full balance.

Doreen and Matt are correct. Keep in mind that the funds can easily be distributed after they've been returned to the IRA initially. It's a matter of logistics to keep your paper trail accurate.

Which is a better strategy? Say for example I need $25k to close on and rehab a property. The net profit on the sale of the flip is $50k. Would I be better off putting $5k out of pocket and $20k from the IRA into the deal up front and then taking 20% or $10k as profit on the deal or just taking the entire $25k from the IRA and taking a disbursement of $10k from the IRA?

I'm just trying to get an idea as to how to best leverage the IRA for our future investing.

@Scott Nipp  

If you are buying this flip inside of a self-directed IRA, then you must only use your IRA funds (or get a loan from non-disqualified person) to pay for the entire rehab. The transaction must be arms length.

If you personally want to keep the profit then one alternative might be for you to use self-directed Solo 401k instead. Solo 401k comes with the Participant Loan feature allowing you to take personal loan for up to $50K or 50% of the account value and use that for any purpose, including funding the flip. In this case you keep all the profits and simply pay back the principal and interest back to the 401k. 

@Scott Nipp  you're talking apples and oranges here....

If you flip with your IRA you will be subject to UBTI (unrelated business taxable income) which basically means your IRA will pay taxes and at the trust rate which can be in the 35% plus range (just off the top of my head).

A SDIRA is organized and enjoys the benefits of being tax free/deferred for investments, flipping is a business income not investment. You can still flip in it, you just need to actually understand all the ramifications. 

I have partnered my IRA with disqualified parties (completely legal), it can be complex to say the least. You always run the risk of running afoul of a "prohibited transaction", you have to maintain % contribution into perpetuity.....

Again not to say you can't partner with your IRA, and I would probably do it again...just make sure the juice is worth the squeeze on it because it's a whole nother bag of worms to deal with.

@Scott Nipp  

Another note on partnering between yourself and the IRA. You would need to be able to justify that you could have pulled off the deal on your own without the IRA, using another strategy, otherwise it can be deemed self-dealing.

OK.  I think I'll leave this topic alone until it becomes more imperative that I actually dive into it.  Right now my brain hurts.

@Scott Nipp

If you are looking to invest your retirement funds in a business where you will be actively involved in the business, such as a real estate operating company and can thus draw a fair salary, then a ROBS 401k/PSP may be worth exploring. Also the ROBS 401k/PSP is not subject to UBIT.

See following link for more information on the the ROBS 401k/PSP.

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