SD IRA: Minimum investment to make it worth the expense

10 Replies

I have an orphaned Roth IRA that I can't really do much with. There is a limited amount of money in it right now (let's say $10k for discussion purposes) and I don't expect to contribute more. I am considering going with a self-directed IRA and using the money to play with"alternative" investments such as tax lien certificates, distressed notes, etc. I am concerned that between the startup fees charged by an SD IRA custodian, the costs of forming an LLC (for checkbook control), and the annual fees for both that it will not be worthwhile.

My motivation is not so much to make big buck$$$ but I still don't want to just bleed the principal away on fees. Any comments or thoughts? Has anyone gone to a self-directed IRA with a small amount of principal?

Look into a self directed 401k as well. I've added a form comparing the 401k vs IRa self directed options in the fileplace. You're going to be limited with how much you can actually use of the 10k (for example a 401k allows 50k or up to half of your account). My sd401k was 1000 roughly to set it up and is intended to be used on smaller loans/purchases <50k for most cases. Definitely check out what you can contribute to 401k vs IRA, its a big difference.

@Steven J. thank you, but I can't for the life of me find anything in the File Place.  Would you mind posting a link here to your form?

Why not just Create a LLC/Trust with other money giving you additional funds? You can also look at buying performing partials, instead of buying the entire mortgage.

@Drew M.

You don't have to form an LLC to buy distressed notes and administrator/custodian fees can be paid outside the IRA, which is encouraged, especially if it is a Roth. Example: If you have 10k, bought a note, and make 10% ($1k) it would cost approx $150/year ongoing annual fee and approximately $150 -200 for a one time setup and purchase. Your Roth would net $1000 but with your fees your return the first year would net 6.5-7% following years 8.5% with costs paid outside the IRA. These fees may also be tax deductible if paid outside the IRA thus increasing overall return. If you do an LLC you would add that cost on to the tab and it would come out of your Roth IRA earnings.

There are many strategies and assets that can use little amounts of monies to yield decent returns which is key to your question. Less than 10% return I would not do a self directed IRA -greater than 10% I believe it is worth it. Tax liens, wrapping mortgages, partnering, borrowing, wholesale, partial sales, etc are all strategies some clients utilize. Use a custodian/administrator that does not charge an annual fee, if you are in cash, looking for an investment. That way you won't bleed down your account value and you can do proper investment due diligence.

I am not sure why you don’t expect to make any further contributions in the future and would like to understand that rationale. No earned income, to much income, to old, etc?

If you want more particulars PM me and we can provide some more information. Good luck. 

@David Putz I'm not 100% sure but yes it sounds like I could use outside money to pay the fees. I think my concern is more that it just seems like too much to pay and too many hoops to go through in order to support the small marginal gain I would get compared to leaving the Roth IRA invested in mutual funds.

@Carl Fischer Thanks for taking the time to respond and provide some ballpark estimates.  To answer your question, it's not so much rationale as it is my particular circumstances.  

I recently consolidated my retirement accounts into my current 401k provided by my day job. The Roth IRA got left behind. Yes, I don't qualify to make IRA contributions either (I guess I could do the "back door" if I was determined to fund the IRA). But most of all I don't expect to make further contributions because I am applying my cash in other ways now, such as to my 401k and to rental property. If there is any rationale, it's that I'm never going to be able to accrete enough money to do something like buy a rental property by contributing $5,500 per year. Not to mention the unfavorable tax treatment for leveraged investments held in an IRA (Hello UBIT/UDFI).

@George Blower Thanks for the recommendation.

@Drew M. That's why we look merge, through a trust, small college funds for different kids along with roth iras to increase the deal opportunity so that the passive income is large enough to make it worth it.  

@Drew M.

The Roth IRA is still very good. Don't get rid of it. You will transfer your 401k Roth $ to the IRA as you approach RMD age. As@David Putz alluded there are ways to get it to work. UBIT/UDFI are not bad and in many cases you still make better cash on cash returns. 

You sound like you studied and picked up a lot. Continue to Study it and get with others that maximize there tax advantaged plans. The older you get the more you wish you had a roth.