Cheapest Way to Set Up Self Directed IRA
Investor · Denver, PA · Member since 2015 · 193 posts · 55 votes
Hi All,
I currently have a little over $6,000 in a 401k from one company, and a Roth IRA from a second company. I no longer work for either company, and would like to move that money into a self-directed IRA and invest it in P2P loans. I'm pretty much clueless on how to accomplish this though, and have a few questions I'd appreciate your input on.
1. What kind of setup fees would I be looking at for creating a self-directed IRA? Would it be worth it for only $6,000?
2. Are there any annual management fees associated with most self-directed IRAs? If so how much would I be looking at paying for that?
3. Is there a better alternative besides a self-directed IRA to do what I want to do with the money? Early withdrawal would cost me about 20% I believe so I don't really want to do that.
4. If I set up a self-directed IRA account, who would you recommend I contact to set it up?
Thanks in advance for any advice you can give.
@Tim Porsche, if you don't qualify for a Solo 401K (or don't have a ton of cash to put into it) I think you're best bet is to do a Self-directed Roth IRA LLC with checkbook control. There are plenty of SDIRA advisors that can set this up for you, @Dmitriy Fomichenko being one of them. The upfront cost is worth it ($1500 - $2500 setup fee) because you'll burn through fees transacting with the major SDIRA custodians. Just read a few forum posts on the SDIRA's from BP members....and most are complaining about either the fees or the headache of dealing with an unresponsive third-party to handle your transactions. The counter argument is that if the custodian is handling all of your transactions you're less likely to get into hot water with self-dealing, which is actually easy to avoid if you understand the basic rules.
I use Kingdom Trust as my custodian and pay $100 flat fee annually. Because my SDIRA has its own single-member LLC, which I manage....I essentially operate out of a business checking account (where the bulk of my funds reside). This saves me lots of money. For instance if I want to participate in a tax auction, I transfer the money to the county Treasurer through my business checking account. I actually just did this recently and bought some cheap ($1000) houses, then had a locksmith open the doors and re-key the locks....I paid him using a debit card from my business checking account (credit cards are not allowed).
Because you're starting out small (as I did too), I think it's even more necessary to go the SDIRA LLC route....using my previous example, if I want to liquidate this $1000 house for a profit down the road, I can transact it myself with a quitclaim deed and deposit the check into my IRA's LLC business checking account. Or if I rent it out, I'll collect the tenant's payments into this account and pay out all the expenses as well. Have a look at the fees from other custodians and start imagining all the transactions that will pile up: snow and lawn care, regular maintenance calls, accepting and returning security deposits, etc....
Also, don't be deterred with $6K...you can always start it and add $5500 to it later this year. Maybe @Kris Haskins can share some of his success stories of how he started with $2K !!
Good luck!
I strongly suggest you look at a self-directed solo 401(k). They are much more flexible than a self-directed IRA, especially in regards to real estate. You don't need a custodian and you can be your own trustee with a solo 401k. Go to mysolo401k.net they have lots of good info also call Vern JV associates you can go401kadm.com web site to get his number, as I can't post numbers on the forum he's really good, you can tell him I recommended you give him a call. About 500 to set up 200 a year to keep plan docs compliant.
Hope this helps good luck
While Solo 401k compared to a self-directed IRA would typically be a better choice - it is not for everyone. 401k is an employer sponsored plan and designed for small business owners who do not have any full-time employees working for them (except spouse) or self-employed individuals.
While Solo 401k can accept rollover from most qualified retirement plan, Roth IRA can not be rolled over into a 401k. @Tim Porsche you say "Roth IRA from a second company", what do you mean? An IRA is individual account and not associated with the employer. Did you mean Roth 401k?
In most cases $6,000 is not adequate amount of money to self-direct, but if you are in fact self-employed and qualify for a Solo 401k - it offers the ability to make large contributions, up to $53,000 per year. In this case you can grow it pretty quickly if your business is profitable.
@Tim, my first question for you is what kind of investment(s) would you pursue in an SD IRA, and what kind of returns would you expect? The reason I ask is b/c $6,000 isn't enough for the majority of real estate investment opportunities, although you could quickly multiply your investment by wholesaling in your IRA. (check w/ a professional for compliance w/ IRS guidelines).
1) setup fees are minimal, but maint., acquisition/disposition fees, per asset fees, etc. can add up quickly. I don't think it would be worth if for $6000 until/unless you've identified how your're going to invest it.
2) yes, go to Quest IRA and Equity Trust for 2 examples, review their fee schedules
3) I'd just open an IRA at TD Ameritrade and trade the market until you've decided how you're going to invest the $6K in non-public deals.
4) I use and like Quest IRA. Others swear by Equity Trust. Those are the 2 names that come most readily to mind.
BTW, I respectfully disagree with @Cameron Skinner's advise. I have a Solo 401K, and love it, but your fees are going to burn a substantial amount of your capital, leaving you a lot less to invest. Remember, it's not how much you make that matters, it's how much you keep after fees and taxes!
Hey dmitry, Why do you say in most cases $6,000 is not enough? I was instructed to open a self-directed Roth IRA about 10 years ago and I only had $2,000. Praise God I am able to lend as well as buy houses outright with my IRA today because of all of the wholesaling I did over the years inside of it. Oh I use equity trust but I'm not sending g out a recommendation.
@Chris Soignier is absolutely correct you have to be self employed to take advantage of a solo 401k but if your already investing a good tax professional can help you set up and properly structure your investment as a business to take advantage of the solo 401k
Hope this helps good luck
Open a SDIRA if you are planning to add to the $6,000. I used @Brian Eastman, he's here on BP. He knows his stuff, has people to help you with questions after the sale and has helped me out with info on several occasions over the past 5 years or so.
To me, the only drawback is it can be tough to find non-recourse loans on an SDIRA. Ask Brian about that, I think he's got some lenders lined up if you need them.
@Tim Porsche, if you don't qualify for a Solo 401K (or don't have a ton of cash to put into it) I think you're best bet is to do a Self-directed Roth IRA LLC with checkbook control. There are plenty of SDIRA advisors that can set this up for you, @Dmitriy Fomichenko being one of them. The upfront cost is worth it ($1500 - $2500 setup fee) because you'll burn through fees transacting with the major SDIRA custodians. Just read a few forum posts on the SDIRA's from BP members....and most are complaining about either the fees or the headache of dealing with an unresponsive third-party to handle your transactions. The counter argument is that if the custodian is handling all of your transactions you're less likely to get into hot water with self-dealing, which is actually easy to avoid if you understand the basic rules.
I use Kingdom Trust as my custodian and pay $100 flat fee annually. Because my SDIRA has its own single-member LLC, which I manage....I essentially operate out of a business checking account (where the bulk of my funds reside). This saves me lots of money. For instance if I want to participate in a tax auction, I transfer the money to the county Treasurer through my business checking account. I actually just did this recently and bought some cheap ($1000) houses, then had a locksmith open the doors and re-key the locks....I paid him using a debit card from my business checking account (credit cards are not allowed).
Because you're starting out small (as I did too), I think it's even more necessary to go the SDIRA LLC route....using my previous example, if I want to liquidate this $1000 house for a profit down the road, I can transact it myself with a quitclaim deed and deposit the check into my IRA's LLC business checking account. Or if I rent it out, I'll collect the tenant's payments into this account and pay out all the expenses as well. Have a look at the fees from other custodians and start imagining all the transactions that will pile up: snow and lawn care, regular maintenance calls, accepting and returning security deposits, etc....
Also, don't be deterred with $6K...you can always start it and add $5500 to it later this year. Maybe @Kris Haskins can share some of his success stories of how he started with $2K !!
Good luck!
Good info @marc maxey. I had a mentor explain to me how Sdria's work. I set it up back in 2006 and simply did wholesales and co invested with myself and my IRA wholesaling as well. Putting in a percentage of every deal that I did. I only did one contribution at the beginning and have never done another contribution in 10 years. Also set up one for my wife as well as one for my kids and have been wholesaling and co-invest with them as well.... I guess if I had a secret it would be doing the co-investing. In the past I used to call it partnering with my IRA but I have learned that term is incorrect.
Hey dmitry, Why do you say in most cases $6,000 is not enough? I was instructed to open a self-directed Roth IRA about 10 years ago and I only had $2,000. Praise God I am able to lend as well as buy houses outright with my IRA today because of all of the wholesaling I did over the years inside of it. Oh I use equity trust but I'm not sending g out a recommendation.
While it is possible to start self-directed IRA with $6,000 - for most investors this would not be practical. Few years ago I setup Checkbook IRA for a client who started with $3,000, he was investing in tax liens and grew his account that way.
Wholesaling is an active business, if you run an active business inside of your retirement account - all of the gains and profits from this activity would be subject to UBIT (Unrelated Business Income Tax), are you aware of this Kris?
Good info @marc maxey. I had a mentor explain to me how Sdria's work. I set it up back in 2006 and simply did wholesales and co invested with myself and my IRA wholesaling as well. Putting in a percentage of every deal that I did. I only did one contribution at the beginning and have never done another contribution in 10 years. Also set up one for my wife as well as one for my kids and have been wholesaling and co-invest with them as well.... I guess if I had a secret it would be doing the co-investing. In the past I used to call it partnering with my IRA but I have learned that term is incorrect.
Remember that you are considered a 'disqualified person' to your IRA. And while it is sometimes possible to partner with a disqualified person, in other circumstances if that is the only way your IRA can invest by partnering with yourself (in other words IRA is unable to make this investment on it's own), this is known as "enabling" and is a prohibited transaction. Many investors and so-called "IRA mentors" are not aware of this which leads to a prohibited transaction. Can't emphasize enough the importance of working with a knowledgeable professional who can take the time to understand your particular situation and provide you with the proper guidance.
I don't have any advice on what you should open but whatever you do please make sure you ask them what the tax implications for whatever you are doing will be before you do it. I moved money from an old work 401k to a SDIRA and it was only after the fact that I realized that I would have to pay the taxes out of pocket when at first i assumed they were going to deduct it from the amount being rolled over.
@Marc M.Thanks for the replies everyone, lots of good advice there. Since the setup and maintenance fees can be fairly expensive for a self directed ira or 401k, and I am not self employed, would I be better off just rolling the money over into my new employer's 401k plan and be done with it? Or alternatively, maybe as much as I would hate to do it, I would be better off just taking the early withdrawal fee and then being able to invest it however I want? I'd much prefer to invest the money how I want, instead of what my company's 401k plan is set up for, but at the same time I don't want to get hit with a bunch of fees.
I would not recommend moving the funds into a new employer 401k, your options will be very limited if you did so. Instead, I would suggest just move it into regular IRA (say with Vanguard) and grow it by contributing the max for 2015 (if you haven't done so yet) and max for the next couple years. Then you will have $25K+ to work with and it would make much more sense at that time to self-direct it.
If you can wait until Jan 1st of 2017, and you have the $$$ to do it, you can have an additional $15K to add to it and then open it. Here is how, based on you not having made 2015 contribution... Put in $5K anytime before April 15th, 2016, and make that your 2015 contribution. Put another $5K in anytime this year, and make that your 2016 contribution. Finally, put $5K in on January 1st, 2017, and make that your 2017 contribution. Presto, $15K in contributions in 366 days !!!
Follow-Up... I used Equity Trust for ages, but went to checkbook IRA, which Equity Trust won't do, so I moved mine to Advanta. Fees are minimal since the account only holds one investment, the LLC created for the checkbook IRA...
If you want to self-direct your funds and are concern about fees, then reach out to IRA Services Trust Company as their annual fee is generally under $145 per year.
@Tim Porsche, if you don't qualify for a Solo 401K (or don't have a ton of cash to put into it) I think you're best bet is to do a Self-directed Roth IRA LLC with checkbook control. There are plenty of SDIRA advisors that can set this up for you, @Dmitriy Fomichenko being one of them. The upfront cost is worth it ($1500 - $2500 setup fee) because you'll burn through fees transacting with the major SDIRA custodians. Just read a few forum posts on the SDIRA's from BP members....and most are complaining about either the fees or the headache of dealing with an unresponsive third-party to handle your transactions. The counter argument is that if the custodian is handling all of your transactions you're less likely to get into hot water with self-dealing, which is actually easy to avoid if you understand the basic rules.
I use Kingdom Trust as my custodian and pay $100 flat fee annually. Because my SDIRA has its own single-member LLC, which I manage....I essentially operate out of a business checking account (where the bulk of my funds reside). This saves me lots of money. For instance if I want to participate in a tax auction, I transfer the money to the county Treasurer through my business checking account. I actually just did this recently and bought some cheap ($1000) houses, then had a locksmith open the doors and re-key the locks....I paid him using a debit card from my business checking account (credit cards are not allowed).
Because you're starting out small (as I did too), I think it's even more necessary to go the SDIRA LLC route....using my previous example, if I want to liquidate this $1000 house for a profit down the road, I can transact it myself with a quitclaim deed and deposit the check into my IRA's LLC business checking account. Or if I rent it out, I'll collect the tenant's payments into this account and pay out all the expenses as well. Have a look at the fees from other custodians and start imagining all the transactions that will pile up: snow and lawn care, regular maintenance calls, accepting and returning security deposits, etc....
Also, don't be deterred with $6K...you can always start it and add $5500 to it later this year. Maybe @Kris Haskins can share some of his success stories of how he started with $2K !!
Good luck!
Great article Marc. I had contacted as my custodian and I found that I have to pay $100 flat fee annually. That is very affordable and safe oppose to keeping my hard earned retirement money (401-K) with unknown custodial company. I am in Forex Spot trading and very successful in making money constantly . So I would like to trade my Rollover IRA via my Self-directed IRA LLC with checkbook account, assuming that I don't have to pay tax on my Forex gain.
I need to open a Self-directed IRA LLC(Rollover IRA Not Roth) with checkbook control with . In order to do that I need to form an LLC in my state, Virginia. I ran many S corporations in my career so forming an LLC is not difficult for me, but writing an LLC Operating Agreement for Forex Spot trading using my IRA fund is not something that I am familiar with.
1) The limited liability company documentation and its operating agreement must have been prepared by a facilitator whose standard form documents have been reviewed by an attorney or prepared by an attorney and have been reviewed by Kingdom Trust’s Compliance Officer.
2) The operating agreement must contain language sufficient to address IRA-related issues concerning prohibited transactions (26 USC 4975), the plan asset rules, the allowance of subsequent or additional capital contributions and unrelated business income tax (including language that ensures that the manager of the LLC will prepare and file all necessary tax forms with the appropriate federal, state and local taxing authorities).
Where can I found a lawyer who could help me in writing an operating agreement that address IRA-related issues concerning prohibited transactions (26 USC 4975)?
Thanks.
@Johny Kuppama: (I am not an attorney and do not work for one): Try Frank Bridges at Heritage Design Law: http://www.heritagedesignlaw.com/
Thanks Rajeev. I will contact Frank Bridges at Heritage Design Law. There are companies charge around $1500 for forming a Check Book IRA with King Trust as Custodian.
I am trying save some money on this process. I am trying to cut the middleman company which does this job.
@Johny Kuppama, Kingdom Trust will still want to see an operating agreement for your LLC. You could easily file the articles of organization for an LLC in your state and get an EIN from the IRS but unless you're an attorney, drafting your own operating agreement that will float is more difficult. I'd imagine there are attorneys out there who could provide you with an off-the-shelf agreement for an SDIRA but after a few hours of fee you're close to $1500 anyway. I wouldn't be deterred by the upfront cost...think of it as a one-time insurance policy.
Excluding checkbook IRAs, you'll find that most SDIRA providers charge a set-up free between $25-50 on average. Annual fees will generally begin at $100-$200/year depending on what is being offered. Some providers even offer a flat fee per investment, regardless of value. Good luck!
Thanks Marc, What I am trying to save is drafting a operating agreement for my IRA
LLC. I know it is a one time fee and an insurance. I will shop around and see whether I could find a good lawyer who could do it at a fee that I could afford.
Kingdom Trust is the best Custodian company in the industry at a very low annual fee of $100.
Thanks Loren. I had a chance to visit your website and watch your
video "To Checkbook IRA or LLC Investing". You covered all the complexity around "Checkbook IRA or LLC Investing".
I wish somebody could help me to draft a operating agreement for my
IRA LLC for a Forex trading entity. I don't plan to take any gain out of my
"Self Directed IRA LLC". I will leave all the gain that I receive in the LLC. It is going to be own by me only(Single Owner LLC), one day when I am almost at age 65 or 67(retirement age) , move all the funds from LLC to Kingdom Trust IRA and start withdrawing money as Traditional IRA disbursements. That won't trigger UBIT or UDFI taxes. Currently I am trading my IRA account fund in stocks, all my gains and dividends stays in my IRA account. I don't receive any tax statements for trading stocks. So why trading from a "Self Directed IRA LLC" account can trigger UBIT or UDFI taxes? In both I am the one trading(managing the fund: Am I personally providing service to my IRA fund??
Loren, in your video you stated that "personally providing service" to my LLC is prohibited. I am confused. If I buy a house from IRA LLC and live there or my children live there is prohibited because I am getting personal benefit from it.
Welcome fellow Pennsylvanian.
since you are not self employed a Solo 401 K is not permitted. I concur that the retirement funds from the old employers should not be put into the new employers 401k. You should set up a self directed IRA and rollover the previous funds there. If the funds are already Roth designated, keep them as such. If some are Roth and some are non-Roth that designations should remain. however you may wish to convert non-Roth funds to Roth to eliminate future taxes, but that will cause a present tax bill. you need to run the numbers and decide whether to pay the taxes now or in the future.