Self-Directed IRA question

15 Replies

Ok, I have read a lot of posts on this subject and I am still unclear on what you can and can't do. But, it appears that I may not be able to do what I was hoping to do...

Here is the scenario: I have recently "retired" from my job but I am not really retired (age 56), I still need to make a significant income. I have a 403b and a pension fund payout that I will be able to roll over into something (what?). The amount here is enough that if I somehow had access to it I would be able to purchase SFHs to flip that are at our areas median price range of about $350k. I would need most of the profit from these flips for living expenses but could "share" the profits with the fund. My overall strategy is to concentrate on one larger deal at a time and not on smaller deals.

So is there anyway to use these funds for this purpose or do I need to find another solution?

Dennis

@Dennis Hertzler

If you wish to derive income from flipping real estate, a self directed IRA will not be the right vehicle. The self dealing prohibitions and UBIT tax implications of engaging in a business (flipping) vs passive investments (renting, lending) would negate the benefit.

A Rollover as Business Startup program would potentially be a good option for you.  This is a combination of a C Corporation, Profit Sharing Plan and Employee Stock Option Purchase that allows you to use that tax-sheltered retirement savings to capitalize a business in which you can be directly involved and draw a salary.  

There are no taxes or penalties for using the retirement funds in this manner.  The business itself (your real estate development company) would operate in the taxable world however.

There are a few threads here on BP that touch on the topic, but not anything I have seen that really has much meat to it, unfortunately.  You will be best off speaking first with a plan provider to learn about the concept and then with your tax/legal advisors to ensure it is the right strategy for your situation.

Thanks for the info @Brian Eastman , that is pretty much what I expected. I had seen some mention of some kind of business program but not enough to spark my interest. You have now done that for me so I will do some investigation. Any tips for finding a local resource that knows something about it even if they don't set it up for me? I see your company handles this type of setup but I want to make sure any CPA I deal with understands it also.

Thanks again!

@Dennis Hertzler

Here is some more information on how the ROBS 401k works.

  • A new C-corporation is established.
  • Corporation sponsors a new 401k/PSP.
  • The IRA funds are transferred to a new brokerage account opened for the 401k/PSP.
  • The new franchise corporation issues stock shares to the 401k/PSP for the benefit of the franchisee.
  • The franchisee must be an employee of the franchise business and he or she may take a reasonable salary.
  • The franchisee’s family members may be employees of the franchise business and receive reasonable compensation for their services.
  • To the extent that the corporation generates profits and elects to distribute those profits to the owners of the business, the percentage of the profits associated with the shares held in the 401k/PSP will flow back to the 401k/PSP brokerage account.

Most 403Bs can be rolled over into a Self Directed IRA but you should check with the administrator of the fund to ensure yours can be moved/rolled. Once in the SDIRA you can certainly use it to do flips as well as income real estate investments. In either case the income and expenses would go through the SDIRA and net income is tax deferred. Any money you take out of the SDIRA for living expenses would be considered a distribution and is then taxable. There is an additional penalty for early distribution until you are 59.5 though. A CPA can better explain the tax implications but you SDIRAs are used like this all the time.

The conflicting opinions about flipping houses are both correct. You CAN flip houses in a SDIRA. But you CAN'T do activity that rises to the level of a "trade or business". Of course the IRS doesn't provide any useful rules to define what that means, like "up to 3 flips per year". But clearly if you're doing 50 flips a year you're no longer a passive retirement account, but if you do only 1 or 2 flips a year along with other more passive investments, you're probably ok.

@Dennis Hertzler

 There are many things to address on this. 

First you have to ask yourself if you really want to use all your retirement funds to do flips. If you are an expert in this, then you will have a better idea what is reasonable in regards to risks. In general since you are close to retirement you don't want to take too much risk that you cannot recover from. just some friendly advice.

Second, you can do flips with your IRA. If you want to rollover your 403b and other 401k plans you may have into an IRA you could do this. However "sharing profits" is another matter. You can take distributions from your IRA anytime you want, but depending on your age you may have to pay penalties. There are some exceptions to this where you may not.

Third, there really isn't enough info in this question to provide the best advice. There are a number of ways to skin this cat.

Lastly, If you are going to embark on the process of trying to generate income for your retirement doing flips, you may want to consult a licensed attorney, CPA or financial advisor who can walk you through this. 

Another good option, if you do decide to convert to a self-directed IRA, is to be a hard money lender -- that is to lend out your money to real estate investors, secured by property, at 8 to 15 percent interest.

I agree with Nate as that is another option. Also you can invest in first trust deeds which is kind of a way to do crowd funding with a hard money lender. They are typically short term and your name is on the deed through the trust deed company.

Originally posted by @Nate T. :

The conflicting opinions about flipping houses are both correct. You CAN flip houses in a SDIRA. But you CAN'T do activity that rises to the level of a "trade or business". Of course the IRS doesn't provide any useful rules to define what that means, like "up to 3 flips per year". But clearly if you're doing 50 flips a year you're no longer a passive retirement account, but if you do only 1 or 2 flips a year along with other more passive investments, you're probably ok.

Nate, some may argue that if you are doing couple flips per year, year after year, you are may not going to be OK as far as the UBIT tax. Flipping is an active business and income in an IRA from active business would be subject to Unrelated Business Income Tax.

Advice to readers: if you decide flip houses in your ret. account seek help of knowledgeable CPA or tax attorney. 

Dmitriy Fomichenko, Broker
(949) 228-9393

@Dmitriy Fomichenko

So then would being a Hard Money lender also be considered a business since you are actively looking for investors and charging points?

Originally posted by @Mark Nolan :

@Dennis Hertzler

Here is some more information on how the ROBS 401k works.

  • A new C-corporation is established.
  • Corporation sponsors a new 401k/PSP.
  • The IRA funds are transferred to a new brokerage account opened for the 401k/PSP.
  • The new franchise corporation issues stock shares to the 401k/PSP for the benefit of the franchisee.
  • The franchisee must be an employee of the franchise business and he or she may take a reasonable salary.
  • The franchisee’s family members may be employees of the franchise business and receive reasonable compensation for their services.
  • To the extent that the corporation generates profits and elects to distribute those profits to the owners of the business, the percentage of the profits associated with the shares held in the 401k/PSP will flow back to the 401k/PSP brokerage account.

 So in this example above, the C-corp becomes capitalized by exchanging the funds in the 401k/PSP for shares issued? 

Thanks for clarifying!

Clinton

@Clinton Holmes

The 401k purchases private shares of stock. For example, instead of the 401k investing in publicly trade shares of stock such as Netflix stock, the 401k purchases private shares in the 401k participant's C-corporation. 

Originally posted by @Dennis Hertzler :

 I would need most of the profit from these flips for living expenses but could "share" the profits with the fund. 

 Dennis, I have heard of cases where SD-IRAs were used for the purposes you desire.  Since I am not a CPA or Attorney, I would recommend you talk to @Dan Cordoba.  http://www.myrealestateira.com/  If what you want is possible, he will know how to legally structure it.  Good luck sir!

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