SDIRA with My Father's Retirement Account

10 Replies

Hey Everyone,

Situation: I am 25 year-old living in Rochester, NY with a Bachelors in Finance. Licensed RE Agent (although I do not do many deals) Work full-time (25k salary). One of my father's retirement account from Kodak (Savings and Investment Plan) consists of $20k. He has very little financial knowledge and wants me to take the money and invest it for him and naturally i have chosen real estate. Keep in my mind I have never invested in real estate, only research for 3 years. 

My Plan:

1. Open a Self-Directed IRA

2. Establish an LLC

3. Transfer the 20k from my fathers retirement to his Checkbook SDIRA

4. Use the money to invest in fix n flips or buy and hold properties. 


1. I'm assuming the LLC, SDIRA, and Bank account have to be in his name. How do I get access to the funds without breaking IRS rules.

2. With the Checkbook IRA, how does this affect my ability to receive loans from credit union or banks.

3. Can I partner up with someone and split costs to buy and rehab? If so, how does this affect my tax situation when I sell the property for a profit since my partner is paying tax and I am not?

4. I've read about a SOLO 401k however, i am pretty sure we would not qualify. I do not actively work any deals as a RE agent and we both have full-time jobs.

5. Managing the property? I can't manage the property because I am a disqualified person (his son), correct?

*Most of my research has been done on BP, Dimitri's site Sensefinancial, and also a bit of Kaaren's 

*Bottom line is...What is the best route for me to take? I want to take my dads retirement fund of 20k and invest in real estate. 

Thanks in advance for feedback

@Chuck VanDyne  

Clearly you have done phase 1 of your research. The thing to do now is speak with a professional who can go over in detail the specifics of your situation.

This is your father's IRA and will be in his name. Unless he is self employed, there is no option for the Solo 401k.

If you establish a checkbook IRA LLC, you can also be named as a co-manager of the LLC to help him invest. As a disqualified party, you will be pretty limited, and can really only offer guidance, networking and administrative help. You cannot benefit from the IRA - such as by receiving a commission on a real estate transaction for his plan. You are also prohibited from adding value to his plan through the provision of goods or services.

Either you or your father could handle the administrative acts of property management such as signing leases, paying the bills and receiving the income (all via the LLC, of course). You cannot perform maintenance or otherwise add value as indicated above.

With $20K in the account you would not be able to obtain commercial non-recourse loans from a bank. You could borrow from private lenders.  This introduces UDFI taxation on the profits associated with the borrowed funds.

Your father's IRA could JV with other investors on a property, which might be the best option.

Chuck, I agree with Brian that you need to discuss specifics of your personal situation with the expert instead of trying to get the guidance on the forum. 

With the limited amount your father has in his IRA and also given the fact that you don't have any real estate investment experience it would be best for you to consider looking at some other alternatives such as investing in real estate notes. This is really passive and will not require experience except doing your due diligence on the borrower and underlying property which will be the security for your loan.

Investing in notes requires very minimal involvement of the investor so this way you probably will not need the checkbook control - keep your set up cost down. You can alway add that later once the account grows. Just find a custodian with reasonable fees and that might work well for you (I'll be glad to give you a recommendation). 

Also, keep in mind that income from flipping inside of your IRA (or IRA LLC) will most likely be subject to UBIT - this is the tax that is assessed when you engage in active business within your retirement account. 

@Brian Eastman : I can't benefit off RE commissions. That's good to know. Thanks Brian. Also, I like the idea of JV with other real estate investors on deals. Ill ask a specialist how to do that, step by step. I appreciate the feedback.

@Dmitriy Fomichenko : Thanks for the feedback. Very helpful. Ill look into the real estate notes. How do I go about finding real estate notes that are locally? I have never done any research on notes or really even thought about it. Also, Ill PM you for a recommendation. 

@Chuck VanDyne I assume you're familiar with FFREIA (local Rochester reia.) Self-Directed IRA's are a common topic at the Alternative Real Estate Investing Strategies Meetings...

Equity Trust does presentations annually, and two of the chair members are actively using their SDIRA locally.

I think you'd be able to get great value by speaking with them about how and what they're doing!

@Chuck VanDyne you cannot personally benefit in any way from any transaction your father's IRA does. Not just commissions. When I set up my IRA LLC the attorney I worked with advised me to not even have my IRA buy properties close to properties I personally owned.

Is this your father's entire nest egg?  If so my advice would be 1) put it in bank CDs paying their mediocre interest rates, and 2) figure out how to help him accumulate more savings.  With very limited savings return OF capital take precedence over return ON capital.

I'm not sure what is costs to set up IRA-LLCs now. When I did it, it cost about $3000 to set it up using Guidant Financial.

This is NOT his entire retirement account for he has much more in another account. This particular account was from when he worked at Kodak and he pretty much neglected it. $3000 to create an IRA LLC! I though the custodian would take care of that for a fee of around $300-500 I guess I'll find out when I hear from the specialists.

I wasn't planning on taking a portion of the profit. I really just wanted to gain the experience and relationships with people. This way I will can find other investors once I was experienced in REI.

I figure with a track record of successful investing whether it be fix n flips or buy and hold others will be more willing to fund my projects. 

@Chuck VanDyne  

you can expect to pay in the range of $1,000-2,000 for the establishment of IRA LLC.

But like I said earlier you probably don't need 'checkbook control' if you decide to invest in something passive and especially with such small amount in his IRA. The annual cost of maintaining self-directed IRA with custodian will range from about $200 and up depending on the company, size of the account and investment activity in your account.

In case of your dad's situation if you were to invest in just one real estate note you can keep the annual cost under $200. 

An IRA LLC may not be necessary. There are custodians who will do true SDIRAs without having to do an IRA LLC. For that matter, most folks who do this do not set up an IRA LLC. An IRA LLC requires that you, the account holder, fully understand and follow the rules. A custodian will monitor your investments and help you make sure you comply. I'm currently using IRAServices for this. They hold my IRA LLC and an investment in a mini-storage for me. They are one of the less expensive custodians. But I still pay them about $250 a year in fees for those two investments. If you're getting a 10% return on the $20K, that's a 12% hit on your returns. This makes more sense if you have a larger pot of money so the fees are a smaller percentage.

The downside is that these custodians are slow.  I used to use Sterling Trust Company who became Equity Trust then became Sterling Trust again.  I never did understand exactly what happened there.  My frustration was it took a couple of weeks to fund a deal.  At the time, that was a problem.  And there were fees for every transaction.  Since then I've moved away from making direct loans to putting the money in a pool and I no longer deal with individual transaction.

It looks like setting up an IRA LLC will not be smart at this point. Thanks for the tip. Jon, I was referred to IRASERVICES and hope they work out for me too.

Thanks again for all your input. 

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