Self directed IRA's

10 Replies

@Tom Sheehan

With any IRA, whether self-directed or otherwise, there is no mandate surrounding the deployment of the capital in the account. You can sit in cash for as long as you like. As long as the funds stay in the IRA account, they have the tax sheltered status the IRS affords to an IRA.

Tom,

I agree with Brian although most SDIRA companies will assess a fee based on the amount you have with them. Because of this it would be advisable to set goals and strive to start the process of acquiring properties for income and/or capital appreciation to offset these fees. Consider tax liens and deeds, rental buy and holds or fix and flips. Just my .02. Good luck!

Dan, 

I want to thank you very much for your input. Also very relevant and helpful.

Of the SDIRA companies researched to date, it seems that Cama Plan has the fee schedule that is the most flexile to our needs.

But, as you outlined, setting our goals is what will determine our best option. We are looking at fix and flips as a source of income and opportunity to find and acquire buy and hold rentals. So, at this point, I guess we need to defer to any BP members on the same direction as us as to their SDIRA preferences.

Believe me, any pertinent input is graciously appreciated.

@Tom Sheehan

When you say you are looking at flips for a source of income, do you mean growing the IRA or personally spendable funds? All returns from IRA investments must accrue to the IRA. If you are over age 59 1/2, you can tax taxable distributions from the IRA, however.

Flipping properties, if done on a regular or repeated basis, is something that has a tax liability even inside of an IRA. UBIT is intended to level the playing field when tax-exempt entities like retirement plans are competing with taxpaying businesses - as opposed to generating income from passive investments such as rental property, interest, dividends, etc. This is something you will want to be sure to research.

Flipping is also an activity where holding an account with a trust company serving as a custodian can become problematic. They hold the checkbook and every expense payment will require paperwork, processing delays and fees. You should definitely evaluate a checkbook IRA LLC or - if you qualify - a Solo 401k. Those plans put the checkbook in your hands which provides a much more efficient structure for highly interactive and time-sensitive investments such as flipping.

Brian, 

Again, your input was very helpful and informative. We are now researching the differences between the IRA LLC and the Solo 401K. I qualify for the Solo 401K and it appears that its advantages are better suited to our goals. I am preparing the information to present to our C.P.A., hopefully this week.

Once again, thank you.

@Tom Sheehan

It's true, the advantages of the Solo 401k over an IRA LLC are numerous. A couple items to check off your list while evaluating this however are:

1. Ensure you have earned income from self-employment and not just passive income.

2. If your existing IRA is a Roth IRA, it cannot be transferred to the Solo 401k.

Other than that, you'll likely be very happy with a Solo 401k for your self directed investing.

    @Tom Sheehan

    Here are some of the differences between the IRA and the solo 401k plan:

    • In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
    • To open a self-directed IRA, self-employment income is not required;
    • In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (self-directed IRA LLC) must be utilized;
    • The solo 401k allows for checkbook control outside the LLC;
    • The solo 401k allows for personal loan known as a solo 401k loan. 
    • If you borrow from your own IRA, it will be deemed a taxable distribution;
    • Unlike an IRA, a Solo 401k can invest in life insurance;
    • The solo 401k allow for high contribution amounts (for 2015; the solo 401k contribution limit is $53,000, whereas the self-directed IRA contribution limit is $5,500);
    • The solo 401k business owner can serve as trustee of his or her solo 401k;
    • The self-directed IRA participant/owner may not serve as trustee or custodian of his or her IRA; instead, a trust company or bank institution is required;
    • Unlike an IRA, generally when distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
    • Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
    • When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian, generally by May of the year following the rollover/transfer.
    • Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
    • Pre-tax IRA contributions on reported on line 32 of Form 1040;
    • Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
    • Roth solo 401k funds are subject to RMDs;
    • A Roth 401k may be transferred to a Roth IRA--from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth 401k RMD requirement;
    • Roth IRA funds are not subject to requirement minimum distributions (RMDs);
    • The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
    • The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
    • At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
    • At termination, the self-directed IRA is only required to file a form 1099-R.

    Mark,

    You have given me a lot of points to consider and I thank you very much for that.

    I have been speaking with my accountant and with my circumstances I will be moving to a Solo 491K.

    Thanks again.