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!
Glad you had a chance to watch the video. I hope you took away some good information.
The IRS (IRC Sec. 4975) states that you cannot provide goods or services to your retirement plan. This can mean different things in different investment classes. This has not been clearly defined in the case of checkbook IRAs.
Any attorney can help you with drafting an operating agreement for an IRA LLC. On the topic of Forex, be sure to do your due diligence. Forex accounts commonly require personal guarantees and are not non-recourse. Also be aware that using an IRA and an IRA LLC will be subject to the same rules. An IRA LLC does not help you gain exemptions from UDFI or UBTI.
I'm currently working on a new blog post for BiggerPockets about the pros/cons of holding real estate in and out of an IRA. Look for it in the coming weeks.
@Tim Porsche If your P2P involves lendingclub or prosper, they pay your IRA fees at certain investment amounts. I opened a prosper account for my wife with the minimum investment to avoid fees and use that free SDIRA account (with Equity Trust) for non-prosper investments. The amount of time it takes to get funds deposited into the SDIRA and directed out to the investment is insanely long but the tax benefits are nice. Having the prosper account is also a nice vehicle for reinvesting the SDIRA earnings from non-prosper investments. Otherwise, the funds sit idle, which reduces your return.
@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!
Hi Chris Soignier,
I don't recommend Quest IRA. I recently tried to work out a real estate deal and Quest IRA screwed it up big time. Each of their employees give you a different scenario. Finally, a week later when it was the day of the closing, they requested different documents and all went to hell. As I asked their help, they had been recording my conversations. Then, the Executive Vice President gave me a call and said that he listened to my conversations (no privacy) and was very rude. He said, that I was the rude one and should be treating his employees with care. Then, he told me that he fired my Roth IRA and that he will close my account.
Initially, I had moved from American IRA because a friend of mine told me that Quest charges less fees. That was not true, I was charged $500 for this small real estate transaction. My friend said that Quest does it for $125k. That turns to be only the transaction fee. Turned out to me they were just as bad as American IRA. However, at least American IRA were nice to talk to. I had the CEO call me and was trying to keep me. My investment was only $3000k, but people understand that no matter what and how small a customer is, a customer is a customer. On the backend, The Quest IRA Executive does not know that I was very close to recommending my sister which has 3 Million dollars. Now, all my friends and I will post also on Armando's Group which I am part of (about 6000 to 10000) users not to deal with Quest IRA.
The transaction ended up to be not funded so, I lost the real estate deal because of this and that was about a 35k profit because I had my personal money into it as well. At any rate, they nevertheless charged me to reverse the wire transfer. They, however, will not charge for closing my account and my sister which is closing because of my mistreatment.
This Quest IRA, was very rude except for a couple of employees that were nice.
I am still in search for a decent IRA custodian with less or no fees.
So I am moving money from a 401 K into an investment account to purchase investment properties. I need advise; my initial thought was a self directed IRA However after reading this I am more confused. I like to keep more of my money not less. I am only looking to purchase between 2 to 5 rentals over the next couple years.
Welcome to BiggerPockets and congratulations on your first forum post!
If you move money from a 401k into your personal account - this would be considered distribution, which is taxable event (plus penalties if you pull the funds prior to normal retirement age), you'll keep less of your money, probably not a good option for you.
Another option would be to setup a self-directed IRA and purchase investment properties inside of your retirement account. The rollover from 401k to an IRA will not be taxable event - you will keep all of your money available or investing. It is your account - you can transfer as much or as little money as you wish/need for investments.
With custodial self-directed IRA you would have to go through the custodian for all investments and investment-related transaction. This might be inconvenient for 5 rental properties so you may want to consider Checkbook IRA as an alternative. And if you are self-employed or own a small business without full time employees there is an even better alternative - truly self-directed Solo 401k plan, it does not require a custodian, offers contribution limits 10X higher than an IRA, exempt from UBIT tax on leveraged real estate and more!
If you have self-employment activity, a Solo 401k will likely be the less expensive and more powerful solution. Compared to an IRA, Solo 401k contributions limits are about ten times and there is no custodial requirement for the 401k. You can take participant loans from the plan, you don't need the additional expense and administration of an LLC to have checkbook control, and there is a built in-Roth component. A spouse can also participate in the same plan, there are additional tax benefits compared to an IRA when investing into real estate using leverage, and there is generally greater privacy. Solo 401ks are often quicker to setup and cost less money over time especially compared to most IRA LLCs.