Self Directed IRA
Rental Property Investor · Longmeadow, MA · Member since 2015 · 17 posts · 6 votes
Hello Bigger Pockets,
I have a significant amount of capital in a retirement account and not enough capital in the bank to purchase my next investment property. Does anyone have experience with a self-directed IRA in Massachusetts? I have been researching and it seems odd that the firms that offer these products are not "big players" or "well known" firms (none that I have heard of at least). Any advice, pro's and cons, or personal experience is welcome. I enjoy investing in real estate rather than the stock market because I know that I hold a tangible asset with less risk, I don't want to increase my investment risk by moving money into a self-directed IRA with a firm that I have never heard of.
One can in many cases roll IRA funds into a 401k. Not all 401k providers will allow for this, but a Solo 401k certainly would.
A SDIRA or Solo 401k is absolutely not pointless. The tax situation is different relative to real estate investing with non-qualified funds, indeed. But, as @James Pignataro indicated he already has significant IRA capital. Comparing investing that IRA in the stock market vs real estate is the question being asked. I think you would agree that someone who understands real estate investing can do a lot better growing that tax sheltered retirement savings investing in what they know.
There are great opportunities with a self directed IRA and many providers you can work with. There is a lot of good information on BP in the blogs and forums that would get you started on your research. There are two different business models: having a custodian (they have the word "Trust" in their name) hold the account and process all transactions, or working with a legal or advisory company that will have a custodial IRA at the back end invest into a LLC that you can manage and control under the umbrella of the IRA. Depending on your strategy and goals, either can work but it will become clear pretty quickly as you do your research which model will work better for your needs. Generally speaking the IRA LLC (or a similar Solo 401k program) will work better for higher transaction activity and tight timelines.
Be sure to speak with several providers. You'll figure out who knows what they are doing and who is just marketing plans.
And yes, as has been pointed out, this is a niche service. The big firms control 97% of IRA money and focus on wall street only. Non-traditional asset investing requires special staff training and knowledge, and the big firms choose not to run a special division to handle this. Self directed investing has been available since the 1970's when IRA's were created, but have generally been the domain of smaller, specialty service providers. The nice thing is that since you are not dealing with the huge firms, you can actually get some really friendly, personalized service. Refreshing, no?
Best of luck as you continue your research.
Self Directed IRA custodians are a specialty niche. you won't find this service on either wall street, big mutual fund companies, banks or stock brokers. Those big 4 which dominate the financial markets are not in the SDIRA market. It requires a different type of service than provided by the big 4.
There are several well known IRA custodians including Equity Trust, Entrust Cama, Quest, Kingdom Trust and others. When you look at any of these or other SDIRA custodians, look at their fee schedules, services provided and experiences of other customers.
James,
You won't have heard of most of them unless you have been specifically researching Self Directed IRAs. The big institutions, for the most part, don't work in the self directed space, it is a world unto itself.
The 800# gorilla in the self directed space is Equity Trust, but in my opinion, they have the worst customer service on the planet. I have two accounts there, and work with other investors who keep funds there. They talk a great game, but they don't produce. Some have said it is improving, but that has not yet been my experience. I also have an IRA at udirectira.com where I have been happy, however, it is a checkbook IRA so requires little customer service from the company.
Once your account has assets, moving from one custodian to another is a nightmare because the assets are titled "Blah blah trust company, custodian fbo Yourname IRA"
There are several ways to choose:
1. Do a search here on BP, the topic has been discussed many times and recommendations and warning have been posted ad nauseum.
2. Go to local events and ask around. At Black Diamond, we have at least 2 IRA companies who attend regularly, talk to them.
3. There are investment advisors who work specifically in the Self Directed space, and they usually work with more than one company, I can refer you to one of them if you PM me.
We don't put the name of the owner on the title, more like
Blank blank Trust, custodian for benefit of IRA account number 999999
That way the ownership is not on the public record but the uniqueness of the ownership is in the account number not the person's name. Its just another way to be anonymous.
I would think it would be easier to get a line if credit secured by your IRA instead. Much less hassle, then you could take individual mortgages out on the properties being purchased.
Wel, yes, I am aware of that, @David Krulac and thank you for pointing it out for James' benefit, however, the issue that I was referring to is that it is titled in the Trust Company name, and if you move the account, you have a very cumbersome process to retitle the assets. Whether the fbo is the account name or account number, doesn't change the problem.
It would be nice, wouldn't it, @Michael Saberniak ? But mortgage companies won't use your SDIRA as security because they can't seize it. And the IRS won't allow you to personally benefit from your SDIRA.
agreed!
I'm not positive but I don't think that you can use an IRS as collateral for a line of credit. And if you borrow a mortgage on a property owned by an IRA, it has to be non-recourse also.
As with anything, it's best that you do your homework before starting anything new...this is no different. You will want to consult with an Attorney first that knows and understands IRA/LLCs. Then interview Custodians which your Attorney can assist you with too. Then understand what you can and can't do with that special account. Finally, have a great accountant that also understands that form of LLC and usually has some relationship or knowledge of the Attorney that set the entity up for you as well as the Custodian's reporting requirements. The key to this is good flow and continuity between all of your strategic partners.
The process looks something like this (NOTE: I am NOT an Attorney, Custodian or CPA and this is NOT meant to give you any legal or financial advice in any matter and consultations with appropriate Professionals ARE REQUIRED!)
1) Locate and Interview A Custodian that you are comfortable with. Self Direct your IRA and be sure to advice the Custodian that you plan of forming an IRA/LLC..this way they can set you up appropriately and allow you to purchase the LLC with ease once your Attorney has it set up.
2) Form an IRA/LLC - this requires an Attorney who is familiar with this formation as it is no-where near a normal LLC - also your IRA must be Self Directed before the LLC can be formed.
NOTE: Steps 1 and 2 may want to be done together...consult with both professionals first, put a plan together and then use them to execute the plan.
3) Sell the LLC to the IRA and open a checking account - this now gives you full control of the funds and you don't need to go through the Custodian for anything during a transaction...the Custodian will keep your records so a few times a year you will have to report to them what the LLC is doing so make sure your records are "tight"
4) Use the IRA/LLC Checking Account responsibly and be sure to avoid Prohibited Transactions
5) Work with an accountant/CPA to be sure that you are paying the lowest UBIT possible which does require excellent book keeping
6) You then are the Manager of the IRA and can execute all related transfer documents regarding the asset for your IRA...keep in mind that you can not ever pay yourself or other disqualified individuals out of that account.
AGAIN...I STRESS... this is a great strategy to deploy BUT you MUST know what you are doing, what is going on, how you can use this powerful strategy and when in doubt..ASK FIRST not after the fact./
(DISCLOSURE: I am NOT an Attorney, Custodian or CPA and this is NOT meant to give you any legal or financial advice in any matter and consultations with appropriate Professionals ARE REQUIRED FIRST!)
What I meant was skip the SDIRA entirely.
@David Krulac
I have heard of using a 401K as collateral so I assumed that an IRA would be the same. after a quick google search it seams I am wrong. Though it might be an option to roll over some funds from an IRA into an employer sponsored 401k and then borrow against them in the case of needing (unsecured) collateral.
Also I was not recommending holding the title in an IRA as that seems a bit pointless with the normal tax advantages of real estate.
While it is possible to "Leverage" your IRA to acquire Real Estate, this does take a Non-Recourse Mortgage and I have not seen anyone issue a LOC because their is no asset to secure the money to.
You can, however, Leverage your IRA and get a Non Recourse Mortgage at usually 50-60%LTV for any type of residential, income producing farm land and commercial building assets (usually not vacant land though).
This is another way to increase your IRA's Acquisition Power instead of paying all cash for the asset. Keep in mind there are special taxes involved in a Leveraged Transaction such as UBIT/UDFI that you should be aware of but there are also strategies that can be deployed to offset that tax base...speak with a GOOD Attorney/CPA to assist you with that info.
(DISCLOSURE: I am NOT an Attorney, Banker or CPA and this is NOT meant to give you any legal or financial advice in any matter and consultations with appropriate Professionals ARE REQUIRED FIRST!)
My understanding is that you can not roll an IRA into a 401K, but can roll a 401K into an IRA. The logic is that a 401K has to be employer sponsored and that the funds have to have a formula relationship to earning from that company sponsor. Even a Solo 401K can not have IRA funds rolled into it.
I disagree that a SDIRA is "pointless". With a Roth SDIRA, which effectively can be opened by any one without income restrictions, all income like rents, and all capital gains such as from selling real estate would be TAX FREE for your life time and your beneficiary's lifetime.
One can in many cases roll IRA funds into a 401k. Not all 401k providers will allow for this, but a Solo 401k certainly would.
A SDIRA or Solo 401k is absolutely not pointless. The tax situation is different relative to real estate investing with non-qualified funds, indeed. But, as @James Pignataro indicated he already has significant IRA capital. Comparing investing that IRA in the stock market vs real estate is the question being asked. I think you would agree that someone who understands real estate investing can do a lot better growing that tax sheltered retirement savings investing in what they know.
There are great opportunities with a self directed IRA and many providers you can work with. There is a lot of good information on BP in the blogs and forums that would get you started on your research. There are two different business models: having a custodian (they have the word "Trust" in their name) hold the account and process all transactions, or working with a legal or advisory company that will have a custodial IRA at the back end invest into a LLC that you can manage and control under the umbrella of the IRA. Depending on your strategy and goals, either can work but it will become clear pretty quickly as you do your research which model will work better for your needs. Generally speaking the IRA LLC (or a similar Solo 401k program) will work better for higher transaction activity and tight timelines.
Be sure to speak with several providers. You'll figure out who knows what they are doing and who is just marketing plans.
And yes, as has been pointed out, this is a niche service. The big firms control 97% of IRA money and focus on wall street only. Non-traditional asset investing requires special staff training and knowledge, and the big firms choose not to run a special division to handle this. Self directed investing has been available since the 1970's when IRA's were created, but have generally been the domain of smaller, specialty service providers. The nice thing is that since you are not dealing with the huge firms, you can actually get some really friendly, personalized service. Refreshing, no?
Best of luck as you continue your research.
I ask that same question of the largest SDIRA custodian in the country and was told you can't go IRA to 401K even a Solo.
You can roll a tax deferred IRA into a 401k. You cannot roll a Roth IRA into a 401k, even if the 401k has a roth component. Perhaps that is the issue.
Here is the IRS rollover chart:
http://www.irs.gov/pub/irs-tege/rollover_chart.pdf
I ask that same question of the largest SDIRA custodian in the country and was told you can't go IRA to 401K even a Solo.
David, if you are referring to the 'custodial' Solo 401k - this could be the case. With truly self-directed Solo 401k however you can roll IRA directly into Solo 401k.
Thanks to all that have responded so far, awesome information. Once the IRA/401K has been setup and becomes the sole member of the LLC, are the mortgage requirements for down payment rules subject to commercial lending due to the fact property will be purchased through a Company and not an individual? I am looking to run numbers and want to make sure my down payment percentages are accurate, I believe in Mass it is 20% (individual purchasing) 25% (commercial lending) for a down payment. Also are you aware of any other potential commercial versus personal lending differences that can effect ROI such as higher interest rates etc. that will come into play through an LLC?
For a SDIRA all lending must be NON-recourse. Check with your bank on whether they will even do NON-recourse, and what there down requirements are. Many institutional lenders won't do NON-recourse, and if they do may have significant higher down payment requirements.
Please explain the difference, thanks.
The leading IRA non-recourse lenders are:
First Western Federal Savings
North American Savings Bank
They will want 35-40% down and have rates in the 4.75%-6.25% range depending on terms.
The use of leverage in an IRA incurs a tax known as UDFI. It is generally a small bite and you will still receive the benefit of leveraging non-IRA dollars to grow your IRA, but certainly something you need to be aware of in your calculations. A Solo 401k is not subject to this tax, so if you are self employed without any full time employees, this would be the best plan to research.
James,
You won't have heard of most of them unless you have been specifically researching Self Directed IRAs. The big institutions, for the most part, don't work in the self directed space, it is a world unto itself.
The 800# gorilla in the self directed space is Equity Trust, but in my opinion, they have the worst customer service on the planet. I have two accounts there, and work with other investors who keep funds there. They talk a great game, but they don't produce. Some have said it is improving, but that has not yet been my experience. I also have an IRA at udirectira.com where I have been happy, however, it is a checkbook IRA so requires little customer service from the company.
Once your account has assets, moving from one custodian to another is a nightmare because the assets are titled "Blah blah trust company, custodian fbo Yourname IRA"
There are several ways to choose:
1. Do a search here on BP, the topic has been discussed many times and recommendations and warning have been posted ad nauseum.
2. Go to local events and ask around. At Black Diamond, we have at least 2 IRA companies who attend regularly, talk to them.
3. There are investment advisors who work specifically in the Self Directed space, and they usually work with more than one company, I can refer you to one of them if you PM me.
Thanks
contact Jim Hitt American IRA Ashville North Carolina. Google him.
This guy knows his stuff. You will have a hard time beating his price and service.
Tell him sent you.
Please explain the difference, thanks.
David, I just wrote a Blog Post explaining the difference, here is the link:
Hi James,
I have used Entrust And have had no issues. It worked out for me to get my first flip off the ground. There are many drawbacks when using a SD-IRA such as not using family to do any work or you doing the work. Really understand 'disqualified' persons. I wouldn't use my SD-IRA again for a flip, but I would for a buy and hold property.
Good luck!
@James Pignataro Once you have funded your SD-IRA account the custodian will need to review the purchasing documents to ensure they are properly titled. The IRA is the purchaser similar to an individual, no additional or separate rules apply for say a down payment. Your IRA must have first lien on the property.