I'm considering setting up SDIRA LLC for doing private lending. Seems like that's the best way to invest that while avoid UBIT.
My IRA money is in a traditional IRA right now.
I know the main decision factor between leaving the money in traditional IRA vs converting to Roth is based on how much I expect my tax rate to be when I'm 65 vs my tax rate now. But is one of them better than the other, strictly with respect to the investment method (interest income from private lending)?
Also does anyone have any checkbook IRA LLC they recommend? I think I've seen some people using IRA Services.
To answer your question I am a big fan of Roth IRA. I prefer to pay the taxes on the seeds not the crops. If you converted from traditional to Roth today let's say $100k and you were in the highest bracket 36% you would pay $36k. However your 12% interest lending the money out would net you 12% or &12k per year. After 3 years all the interest would be tax free for the rest of your life, your kids life etc. CONVERT!
Not everyone is in agreement with this strategy and most accountants will always tell you to defer taxes. Smart money converts.
You don't have to have a checkbook LLC to do private lending. You can do it straight from the Ira.
I am also doing this with my SD IRA and need to find forms or templates of docs.
- Promissory Note secured by Real Estate
Whether to convert or not is a complex matter, with no one-size-fits all answer. Many variables such as your age, income, tax bracket, amount to convert, etc. come into play. It is best to have such a conversation with your licensed tax advisor. Generally speaking, the longer the funds will remain in the Roth, and the higher the amount of return, the more likely you are to see an increase in the amount of after-tax spendable money in your plan. You also have to look at the opportunity cost of the amount you use to pay the taxes, it is not just a straight route to breakeven based on the performance of the Roth account alone.
A checkbook IRA will be useful if you plan to have a reasonable number or notes or frequent turnover. Such a plan will save you paperwork and fees over the services of a custodian pretty quickly in that case. It does cost more to establish checkbook control initially, but will reduce operating costs over the long term. IRA Services does not offer the legal services necessary to establish a checkbook IRA LLC. They are simply a custodian. Some firms that do establish checkbook control use them as the back-end custodian.
Ahh ok thanks. If I just use a SDIRA Custodian for private loans, how long would they usually take to approve the process the loan?
You would need to check with custodians, but most are going to state 3-5 business days to process a transaction - maybe not in the marketing materials, but certainly on the investment direction form.
@Brian Eastman I looked through IRS's list of approved IRA custodians (https://www.irs.gov/retirement-plans/approved-nonb...) and didn't see any of the ones frequently mentioned here on BP, for example IRA Services, QuestIRA, uDirect, etc. Am I missing something here?
Yes. The IRS list is a certain type of securities focused financial institution. The self-directed custodians are non-bank trustees that are regulated in a similar but slightly different fashion. All such institutions are state registered and for reasons of favorable banking regulations, most choose South Dakota.
Here is a list from the SD Banking Division licensed trust companies:
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