SOLO IRA's

16 Replies

I'm doing research on self-directed IRA's and just read in a blog that an investor can use funds in a SOLO IRA to purchase investment real estate just like one can in a self-directed IRA but WITHOUT the fees. Is this true and if so, can anyone recommend the best companies that offer this product, please?

@Lydia Simeon  

I investigated the use of SDIRA's pretty extensively over the past couple of months.

From what I found out, unless you have a substantial amount of money available in your IRA, the math does not pan out very well in your favor.

If you private message me, I will refer you to reputable company/contact point that I spoke with. They were referred to me by another reputable BP community member.

I have not moved forward in leveraging this, but in my research what I discovered was that my IRA vendor will allow me borrow against my IRA up to 70% of what I have saved at 5.2% interest. This is paid back to my IRA including the interest earned and is directly debited from my paycheck.

If option #2 makes sense, it is just a matter of calling your IRA vendor and having the discussion with them. Make sure your verify that there are no restrictions on what the money can be used for.

Side note: I assume that taking money from your IRA does reduce the monies in your asset column. If you plan on using a conventional loan, this will reduce the non-liquid monies you have as collateral to support the loan. I am not a financial planner, and this is not legal advice, but it makes sense.

@Lydia Simeon  

you are probably referring to Solo 401k, not Solo IRA, correct?

With this option you can eliminate custodian, transaction and asset-based fees and can have checkbook control over your retirement account. However, not everyone can use it unlike an IRA. In order to qualify for Solo 401k you need to show self-employment income or have a small business without full time employees.

I explain this option in details in this blog post:

http://www.biggerpockets.com/blogs/2810/blog_posts...

Originally posted by @Chris Stromdahl :

@Lydia Simeon  

... in my research what I discovered was that my IRA vendor will allow me borrow against my IRA up to 70% of what I have saved at 5.2% interest. This is paid back to my IRA including the interest earned and is directly debited from my paycheck.

Chris, would you mind sharing more about the option you explained above. You are either getting wrong information or not describing it correctly... IRAs do not offer borrowing option, you can't touch those funds until you reach retirement age, otherwise you will be taxed and penalized. There are exceptions such as using IRA funds for the first time home purchase, but that is not what you are talking about here.

I'd like to piggy-back onto Lydia's question. I have been struggling to find a clear and concise synopsis of whether or not to create a solo-401k or self-directed IRA for myself from which to invest in real estate. What specifically is the difference between the two? Pros? Cons? Etc. Can anyone point me towards a info source, book, article or website providing instruction/clarification on both? Most web searches for solo 401k come back with self-directed IRA sites.

@Dmitriy Fomichenko I was wondering what is your take on this?

I just did some research on Single Member IRA LLCs and according to the CPA Association's and the IRS's websites:

If you PROPERLY set up a single member LLC Owned by your Self directed IRA, with an upfront cost of about a $1000-$2000, You can just take your LLC documents to your local bank and open an account for the LLC and you have the check book controll to purchase properties. Your will not have any custodian or other fees at all just you need to make sure your CPA files the yearly form to the IRS (not tax return because this LLC will pay no taxes but to inform the IRS of your IRA activities balances etc)

It seems like this is the way to go anyone who want to invest their IRA funds into real estate? Did I miss anything?

@Rick D.

The decision on which plan is right for you will be best answered by speaking with a professional in the field (or more than one), as well as your tax advisor. There are a lot of variables that go into this determination such as employment status, age, amount and type of capital to invest initially, investment goals, etc.

There are a handful of well qualified advisory firms that offer both self directed IRA LLC and Solo 401k programs and can objectively help you determine which is the better platform for your situation.

@Lydia Simeon I think what you are looking for maybe it is called the "CheckBook IRA LLC" Please see my post above this. I will be interested in what Dmitriy the expert think of this. I am not an expert just did some research and i had found out you don't really need any company for you to set this up, you just need a great local attorney who understands IRA issues in your state to draw up the paper to set up an LLC owned by your Self Directed IRA. After that you will have a checkbook in an FDIC insured place (no worries of extra fees or, that a custodian skips town with your money)

@Val Csontos  

You are not entirely on target with your summary of the scenario. In an IRA LLC, the format is as follows:

1) Establish and maintain a self directed IRA account with a registered IRA custodian
2) Have that IRA document the IRA's ownership of the special purpose LLC

There are no transaction fees when you invest.  This is all done through the LLC entity and does not require 3rd party involvement

There is an ongoing relationship with the IRA custodian and minimal annual account fees as a result.

The IRA custodian does the annual filing of form 5498 with the IRS. This is not something that can be done independently by a CPA.

There may also be state registration fees or taxes for the LLC entity.

IRA custodians do not establish the LLC entity as they are prohibited by rule from providing legal services (they are a reporting layer for the IRA).

Find a reputable firm that can educate you on the process, implement the structure and provide you with guidance along the way as you invest.

This is a great way to diversify your retirement savings into real estate.

@Brian Eastman Thanks for your pro input! That is exactly what we needed! Now according the the CPA association website the "IRA LLC" if it is set up as a single member LLC it will not pay any taxes. Does that sound right?

@Val Csontos  

Generally speaking, an IRA LLC will not be subject to taxation.

Some states have franchise taxes that may apply, but these will generally be independent of income and in a fixed dollar range from about $175 - $800.

Some activities of an IRA (whether or not in a LLC) can incur trust taxes for the IRA itself, including:

The use of leverage creates exposure to Unrelated Debt Financed Income taxation (UDFI).  While this complicates things somewhat, you are still going to see a higher cash-on-cash return from the use of leverage than an all-cash purchase.

Engaging in a trade or business on a regular or repeated basis incurs Unrelated Business Taxable Income (UBTI). This would be things like flipping or wholesaling in the real estate realm. Passive investments such as rental income, notes interest, etc are not taxed in this manner. With the right deals - the bottom line ROI for your IRA may be significantly better even after exposure to UBTI than with other investments - so you pay the taxes and make your IRA fatter and move on.

@Dmitriy Fomichenko  

With regards to the use of borrowing against your IRA:

I am 100% sure borrowing against my IRA through my current IRA vendor is an option without penalty.

What I am not 100% sure about is whether it can be used for investment property or, if it can be used for investment property, whether it would be in the investor's best interest to use it in that manner. 

As I said, it is something I have investigated to a point that I know it may be an option for me and that I will verify once I get to that point in my business plan. Others who are looking to use these monies for real estate investment purposes should make the same phone calls I did and get up to date information specific to their situation.

A self directed IRA/checkbook IRA is not something that interests me, but this may be.

@Chris Stromdahl  

An IRA absolutely does not provide a means for you to borrow from the plan personally. This is a feature commonly available with 401k plans. Perhaps you have a 401k and are calling it an IRA (very commonly done).

You can use a 401k loan to invest in real estate.  It is really two entirely separate things.  A) You personally borrow from the 401k and have to pay that back with interest.  B) You use the borrowed funds which are now essentially personal capital to invest.  

This is not "investing in real estate with your IRA or 401K", but rather investing personally in real estate with funds borrowed from your 401k. The tax consequences are entirely different and have been covered in many forums on BP.

@Chris Stromdahl  

There is no such thing as loan against IRA - it does not exist! Again, you are either being misinformed or misunderstood what your "IRA vendor" is telling you.

I hear sometimes people referring to "60-days rollover" as means of using their IRA money for investing. Under these rules account holder is allowed to take a distribution for his/her IRA, once a year, and as long as they deposit those funds into another qualified plan within 60 days - it is not taxable event. However, the intent of this is something totally different and using those funds for real estate investing with hopes of getting the funds back into an IRA within 60 days is VERY risky. I would highly discourage anyone from doing so. But again, I don't think you are referring to that.

401k plans have loan provisions and allow you to take the loan out, however it is limited to 50% of the account balance (not 70%) or $50,000, whichever is less.  

Chris, when it comes to retirement accounts, the rules are set by the IRS, not by some 'IRA vendor'. So the information that you are referring to is incorrect. I suggest you ask the person giving you this information for some reference to official IRS rules.

Originally posted by @Rick D. :

I'd like to piggy-back onto Lydia's question. I have been struggling to find a clear and concise synopsis of whether or not to create a solo-401k or self-directed IRA for myself from which to invest in real estate. What specifically is the difference between the two? Pros? Cons? Etc. Can anyone point me towards a info source, book, article or website providing instruction/clarification on both? Most web searches for solo 401k come back with self-directed IRA sites.

Rick, this subject has been discussed at length here on BP forum. So instead of searching the web, I suggest you search this site specifically. Type the following in the search browser and you will get results specific only to this site instead of entire world wide web: 

site:biggerpockets.com solo 401k

Hope this helps.

@Val Csontos  

Brian gave you pretty good answers already so just to summarize I'd like to add that Checkbook IRA does not eliminate the custodian, but it will eliminate most of the custodian fees and most importantly will give you the checkbook control over your retirement assets.

Also, some custodians are more friendly when it comes to IRA LLC then others. So it is very important to pick the right company to work with, this will affect your ongoing fees as well.

Since LLC is considered to be a pass-thru entity and if the member of the LLC is an IRA, three will not be any taxes due unless it engages in unrelated business activity. Also, most states will have some annual cost, some call it 'franchise tax', which is really the cost of doing business in that state.

There is no federal tax returns, but some states will require to file state tax returns.