Self Directed IRA issues/questions
I'm trying to put together my first deal using our Self Directed IRA.
Our problem is we have no money for investing except what is in our SD IRA. I'm trying to find a way to use the SD IRA and be involved in a deal to receive part of the profits...we need to build up cash outside the SD IRA for future purchases. Is there a way to do this?
First, I get a loan and use the SD IRA for the down payment and fix. Won't work because the banks do not do non-recourse loans so the SD IRA requirements are not met.
Second, I understand that I can loan the money to anybody as long as they are non-disqualified (not a spouse, up line or down line)...using a promisary note. But how do I get a share of the profits?
Third, I also understand that I can loan the SD IRA to a business I'm affiliated with as long as it is 49% or less ownership...and the partner has to be a non-qualified individual and the managing member in the LLC. The SD IRA can NOT be used as collateral.
I feel like the stick man hitting his head on the wall over and over.
If anyone has information regarding investing with the SD IRA...I would greatly appreciate your input.
thx!
Stopping hitting your head because this is not going to happen for you, legally.
SD IRA rules are very strict and the trustees who operate them are typically very vigilant. Bottom line, you cannot personally see any benefit from the IRA investment.
If the IRA is involved in the transaction there is much paperwork involved to keep the money going where it should go. For example, if the IRA partners with you on a rental, you cannot even receive the rent checks. The IRA has to get their portion before you even touch the money.
Equity trust's website has lots of info on it about this.
I'm trying to find a way to use the SD IRA and be involved in a deal to receive part of the profits
Stop right there. There's just no way to legitimately do this. If you receive any benefit as a result of a transaction your IRA does, its, by definition, a prohibited transaction. Performing a prohibited transaction will result in the entire IRA account being immediately and irrevocably distributed. You immediately owe all taxes and penalties due on the full amount.
You can get a loan in your SDIRA. Last I checked, 1st Bank is doing them. 65% max LTV. Keep in mind, though, that debt financed rental income is subject to tax even if its inside your IRA.
I agree! Legally you cannot derive any personal gain/profit from your investment. Strict rules apply. With that said; In my opinion, A Solo 401K Self Directed plan is much better. Some restrictions remain the same but the flexibility for the owners of the plan is far superior to a SD Ira. The reason why you don't see them advertised by the big custodians is because the Solo K plan is not only self directed but also self managed. No third party custodian required. Also you don't need to set up a separate LLC.
Matt,
Thanks for the tip. I'll have to look into that!
Penny,
What you need is a self-directed 401k, IRA no. This will give you the opportunity to do business both inside and outside the retirement fund since you can borrow from the 401k. The 401k also has another advantage in that there is no Unrelated Debt Financing tax which may be imposed with an IRA if debt is used.
If you use a 401k it is best to use a compliant LLC to protect the 401k against litigation.
Dan
Thank you for all the great feedback and tips.
It looks like what I need at this point is an elephant!
Wehave a client that is in your area. Would you like to talk with someone who has gaone through the process and may be able to give you a user's perspective?
Dan,
Yes...please. I would love to talk to someone that is using their SD IRA.
THANK YOU!
You'll need to send me contact info. I don't know if this is against the rules but you can reach me at [PHONE NUMBER REMOVED]
Peggy can you please follow me so I can send you info looks like the system does not allow for numbers on the posts
If you have additional questions, Peggy, post them here. There are a number of us using SDIRAs for real estate related investments.
I just read old threads on the topic which were very helpful. I wrote out a more detail post which was erased so I'll just ask.
Please tell me who you use as your SDIRA administrator? I'm looking at Entrust.
Thanks in advance!
#4 Off Topic Contributor
- Investor
- Round Rock, TX
Entrust is a good choice. Dan uses someone different for his clients so they may be a bit cheaper.
Originally posted by Elisha Lowe:
Please tell me who you use as your SDIRA administrator? I'm looking at Entrust.
Thanks in advance!
I really only looked at two different companies, Equity Trust and Entrust. I don't want to come across as a shill, but I thought Equity Trust was better across the board. They had lower initial fees than Entrust and they don't charge for check writing and other features that other custodians do. Maybe Entrust has changed things since then (I set mine up two years ago)?
-
Contractor
- First Property Management
Thanks for replying. I will check out both companies. At first I thought SDIRAs were overly complicated and a sure way of just tying up funds. I see it differently now. I have (2) 401ks just sitting and I'm thinking of rolling them over for the purpose of investing in deals outside of my own. I plan to sit down with a professional and go over details but it seems like a good way to invest towards retirement.
The SD IRA company that I'm working with is Equity Trust. They have been very helpful.
Equity Trust does not charge for check writing...in fact, they will handle all the transactions associated with your account.
We do not have enough to buy an investment on our own...that is where the complications come in. The easiest method is to loan to someone for puchasing property...you can not loan to yourself, up and down line of relation or business partners.
Elisha,
Something to keep in mind. Custodians become your IRA Mother. If they don't feel like doing something one day they don't have to let you and they don't have to be accountable to their changes.
And there seems to be some magic about being big. Two "big" IRA custodians have gone into receivership this past year. And in each case there were multiple problems with people that needed to get transactions done. By in large transactions go without a problem but there will come a day when you need to do something and it won't get done because something slipped or it was beyond their policy (not law). Look into being your own manager of your IRA and avoid needless fees and delays; your time is worth something and there is no sense in paying "aggravation" fees. And if the custodian gets into problems then you continue to do business as usual.
I'm sure there will be rebuttals to my comment from those who theoretically know what happens upon problems however, we solve them everyday!
I've used Sterling Trust Company in the past and still have an account with them and one asset there. Their fees are less than Entrust or Equity Trust. I also looked at Fiserv, but they were very rude on the phone. Fiserv's fees were the lowest I found.
The issue I had with Sterling was responsiveness. Each loan was a new deal and had to go through their review process. Usually took about two weeks to get the money sent. Usually this wasn't too much of a problem, but did require extra planning to avoid delaying closing. It came to a head when releasing one of the liens. They have to sign off, and Colorado requires the original deed of trust to be returned. It took forever to get this sorted out.
I ended up creating an IRA LLC using Guidant Financial. That's expensive, and has had a bit of a hassle and expense when the custodian/trustee (not sure which it is) jacked up their fees. But much faster to fund. And one of the loans has defaulted and now I'm dealing with finishing a rehab and getting the house sold. No way I could have that with Sterling writing a check for each expense.
Penny,
I looked at both Entrust and Equity Trust when setting up my SDIRA. Entrust is a little more personal and more often than not has an office in a major metropolitan area near you. Equity Trust is a large company with some pretty steep fees and have quite a bit of lag time on the approval process. They all have different ways of charging, but Entrust seemed to be the best choice for me when setting up my account.
I recently took some of my SDIRA funds and invested in a web platform, so there are many options that work within an account like that. I will say that Entrust's approval process was very efficient.
Just a side note. Get creative loaning funds to others and taking loans yourself from an SDIRA as this will allow you to maximize the funds outside the restrictions of what can and can't be done within your plan if you are borrowing the funds from someone else's plan. Talk to Entrust or Equity Trust and they should be able to help answer these questions.
Equity and Entrust fees are based on the number and/or values of transactions, that one plans on doing during the year.
I'm not shilling for either company, we have accounts at both, though we started at Equity, and newer accounts are at Entrust.
I'd suggest printing out the fee schedules for both, and matching it up to how you plan on investing.
[though once you pass the value threshold, there's like only a $100 difference in the annual fees, in the unrestricted number of transactions or value accounts. Hence, one should determine both the number of transactions and the value of the assets expected to be in the accounts]
A great book on this is by the president of Entrust, which explains the SD IRA [ in a non-partisan way--I don't think he even mentioned his company website... ] to investors new to self directing, rolling over 401ks, etc.:
"How to Invest in Real Estate with your IRA & 401k
by Hubert Bromma
McGraw Hill Publishing
Originally posted by Brian Levredge:Originally posted by Elisha Lowe:
Please tell me who you use as your SDIRA administrator? I'm looking at Entrust.
Thanks in advance!
I really only looked at two different companies, Equity Trust and Entrust. I don't want to come across as a shill, but I thought Equity Trust was better across the board. They had lower initial fees than Entrust and they don't charge for check writing and other features that other custodians do. Maybe Entrust has changed things since then (I set mine up two years ago)?
I am currently trying to find a way to use my SD IRA to invest in a JV with another BP member who buys at auction, rehabs and flips. He offered me 50% of profits.Tom, two possible answers to yoru problem.Problem is, you can't invest in a JV using SDIRA funds if the other party is an S-Corp or sole prop. IRS forbids it. Only C-Corp, LLC or LP.
I could invest in a promissory note, but there has to be an interest rate. Not 50% of profits from flip blah blah
1. Estimate the time in which the entire process of the deal will take from acquisition date to close of escrow on the flip. Then calculate your estimated net profit before income taxes, which includes acquisition price, acquisition costs, holding costs, re-sell costs, rehab costs, etc. Once you have both these figures, you can calculate what your % of return would have been for funding the deal as a JV partner with 50% equity share. Lets say it was 4 months and the total profit would have been 40k split 2 ways and you funded $100k. Your cash on cash return would have been 20% for an annualized return of 60%. Now simply create a note and deed of trust and charge somewhere close to that amount in interest and fees. (Please be sure to evaluate usury laws in the state you are lending in).
Option 2. Fund the deal and have title vested in both your IRA and the other party's new entity.