What to do in the first couple years of a new self directed IRA?

18 Replies

Just opened my first SD-IRA for REI, deposited 2017's $5500, and converted to Roth. Plan to do this again in 2018. It'll be maybe a few more years until I have enough in there to buy a turnkey rental (our primary REI strategy). Meantime I'll continue to invest with my personal or LLC's account.

I'm wondering what people do with their SD-IRA in the first couple years rather than just let the money sit there uninvested. Should I buy stocks and get some sort of return, maybe act as a small-time hard money lender? ($5500-11000 isn't exactly a ton of money for that right?) I'm basically just looking for ideas.

Thanks!

@Chris Koch

I would question establishing a self-directed plan for starting from scratch. As you note, there are not a lot of alternative asset investments one can do with a year or two of contributions. Crowdfunding is probably the best option. A lot of folks use a conventional brokerage IRA to accumulate some savings and then switch to a SDIRA once they have some gas in the tank, so to speak.

Brian Eastman

@Brian Eastman   that's a fair point.  The money was otherwise just sitting in a savings account with a minuscule return, so it doesn't hurt too bad, but in retrospect it might have been a better choice to make it a brokerage account first.  Now that it's converted, can the SD-Roth be moved into a brokerage style account and just pick up a Vanguard fund for a while?  (I'm with ETC if that matters.)

I have lent out the small amount I had to a developer, as private money or invested in various crowdfunding sites.

Steve Racicot

    @Chris Koch

    ETC will kill you on termination fees.  Check with them to see what it will take to get the account deployed into conventional things like funds.  They have some avenues that are a bit clunky, but that work.

    The alternative would be to say "lesson learned" and bite the bullet and close the account and send it somewhere like Vanguard or TD Ameritrade for now, then setup a SDIRA with a better custodian in the future once you are ready to start investing.  ETC is probably the most expensive / least customer friendly firm in the industry (with the biggest marketing budget).

    Brian Eastman

    @Chris Koch

    I have also been looking into finding a good custodian.  I have been in touch with ETC and asking a lot of what if type questions.  The representative with whom I have been working confirmed that I could place the funds into a traditional brokerage account by simply having the owner of the account be my SDIRA, rather than me personally.  This may not be an ideal situation, since you would be paying the ETC maintenance fee, whereas having the brokerage itself serve as your custodian would be much more cost effective.  However, at least you now have your account set up and are ready to move funds into an RE type investment when the opportunity arises.

    By the way @Brian Eastman or anyone else who may have some knowledge in the area, are there any suggestions on a cost effective, customer friendly SDIRA provider.  I am considering both checkbook style and non-checkbook style, as I haven't actually signed up with ETC as of yet.

    @David Calme

    As a provider of plans, it would be outside of BP guidelines to make specific recommendations.  Custodial fees vary, not necessarily in direct correlation to responsiveness or quality of service.

    A custodial account may be well suited for assets that are relatively singular and static in nature. For assets that are time-sensitive or involve a lot of expense/income transactions, the custodian will become a real barrier in terms of paperwork, processing delays and fees. A checkbook IRA or Solo 401(k) will be much better suited to such investments.

    Brian Eastman

    @Chris Koch but a mortgage note - can invest in a performing or a partial performing and get 10-12% return and notes are easier to exit especially at lower price points if you needed to get out of the deal. Put the $ in there for a few years and continue to contribute then when you have enough you can diversify into something else

    Chris Seveney

      @David Calme @Brian Eastman may not be able to recommend himself because of BP's self-promotion rules, but I can recommend him. I do not actually have an IRA through him yet, but have done extensive research on IRAs as well as 401ks. There are only a few people in BP that I would call IRA gurus, and Brian is one. I'd reach out to him and see what he can provide.

      Bryan O.

      @Chris Koch Attend one of the local REIA meetings or Look for someone in your local area that you trust and see if they could borrow the small funds and pay you interest... Most RE Investors and Developers need money... Just be sure you trust them and you have the proper documents.

      Steve Racicot

        If you time frame is 5 years or less I would advise against  investing in stocks. Most experts have this rule on investing.

        Stocks go up and down, long term it will work out with stocks short term you can lose a lot of money.

        @Chris Koch Help me to understand why you opened an IRA then put it in a ROTH right off. If the money was in a savings account (assuming it was W2 money) the taxes are already paid on it. Wouldnt you have to pay Taxes on the conversion to ROTH? Why not just put it in the ROTH from the start?

        If it was 1099 money wouldn't a SOLO K account be better? I am in no way an expert on any of this but this was just nagging at me because I didnt understand it.  @Brian Eastman

        Mike Reynolds

          @Mike Reynolds It's W2 money. I'm above the income limits. No way into a Roth directly, so did the "Backdoor Roth". (nondeductible contributions to a traditional IRA, then conversion into a Roth)

          Originally posted by @Chris Koch :

          @Mike Reynolds It's W2 money. I'm above the income limits. No way into a Roth directly, so did the "Backdoor Roth". (nondeductible contributions to a traditional IRA, then conversion into a Roth)

          I understand now. I love my Roth because when I retire I plan on taking enough out of the tax deferred and the Roth that I may not have to pay so much tax. I used to take so much out every year of my IRA to put into the Roth for that. Now I use a Solo and the Roth. I thought maybe there was something I may be missing to maximize that.

          Mike Reynolds

            Chris,

            I have a small SDIRA that I have used to make a "micro loan" to an investor. IRA took first position lien on a property he owns in a neighborhood I invest in personally as collateral. He uses the money like a line of credit, monthly interest payments on outstanding balance but pays balance down when he refi's or sells his project. Works and a nice return.

            FYI, Brian Eastman helped my wife and I set up our SDIRA's 

            Dean H.

              Originally posted by @Dean H. :

              Chris,

              I have a small SDIRA that I have used to make a "micro loan" to an investor. IRA took first position lien on a property he owns in a neighborhood I invest in personally as collateral. He uses the money like a line of credit, monthly interest payments on outstanding balance but pays balance down when he refi's or sells his project. Works and a nice return.

              FYI, Brian Eastman helped my wife and I set up our SDIRA's 

              Sounds interesting. How did you set up the parameters of the loan if you don't mind me asking?  

              Mike Reynolds

                I have found a RE investor (a good friend actually) who will give me a 10% return on a small hard money loan like this until I build up enough to do something else with it.  Easy enough!

                Thanks everyone -- great advice in this thread!

                @Chris Koch

                One option may be to invest in tax liens or crowd funding. Also, another way to get more Roth money into a retirement account is through a solo 401k plan if you are self-employed. For example, for tax year 2017, you can contribute $18,000 to a Roth solo 401k, and if you have enough self-employment income, the difference $36,000 to the "after-tax" bucket of the solo 401k and then convert the after-tax funds to a Roth IRA or a Roth solo 401k designated account.

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