moving IRA into LLC without penalty to flip

[Carl Crain]

Interested in using my IRA to fund a new LLC that would flip houses and put the proceeds back into the IRA. Then due it again. Any guidance?

[Brian Eastman]

@Carl Crain

There are certainly a few options.

If your goal is to use IRA capital to get involved in flipping opportunities while maximizing the returns to the IRA, you would do this through a self-directed IRA or Solo 401k.

If the IRA is the flipper (i.e. you direct the activities but hire out all the work, and the IRA has a direct equity stake in the profits from the flip), then there is a tax known as UBIT that applies. This tax applied when any tax-exempt entity engages in a trade or business on a regular or repeated basis (and is therefore competing with tax-paying businesses). The tax is intended to level the playing field for tax-paying businesses and pre-dates IRA plans by several decades. That said, you simply do the math and determine if the after-tax gains your IRA receives from these deals is better than anything else you can do with your IRA. If you are doing the right flips, it can be.

An alternative option within the tax-sheltered IRA/401k realm is not to have the IRA be the flipper and have exposure to UBIT, but rather to lend hard-money to other flippers. Interest (and points on a loan) are passive income not subject to UBIT. So perhaps your IRA lends to a contractor flipping houses and charges 2 points and 12-15% interest depending on the risk, LTV and what your market will bear.

There is another route, which is the Rollover as Business Startup (ROBS plan). In this structure, the IRA funds are used to capitalize a business in which you can be an active player and draw a salary. There are no taxes or penalties for using the retirement funds, but the business will need to be structured a a C-Corp and will pay corporate taxes in addition to income taxes you will pay on compensation you take from the business. If the goal is for you to setup a real estate development company for yourself, this is an option. While you can use this tool to build the retirement plan (which will be a shareholder of the corporation), this really more about capitalizing the business and less about tax-sheltered gains for the retirement plan.

Bottom line is you should get on the horn with a couple of experts in this field who can discuss what your real situation and goals are and make a recommendation.  SDIRA plans come with a lot of options.