I have an IRA and a Roth IRA which I plan to roll into SDIRAs in the next month or so. My wife also has a Roth IRA.
I realize I'll have to create 3 separate SDIRAs to handle these rollovers since the funds cannot be comingles, but was wondering if the resulting accounts could invest jointly to buy multifamily property which none of the individual accounts could afford on its own? The Roths are both twice the size of the traditional, so it would be about 40%, 20%, 40% equity.
If so, how would I structure this?
Quick follow-up. I also have relatively small Coverdells (aka education IRA) in the names of each of my children. Could those also be converted to self-directed, and pooled as well if the first three can? I'm not getting the growth I need with traditional investments. And if so, could they be severed from any joint entity when it comes time to attend college so as to take distributions, without selling the property and dissolving any joint relationship?
It is possible to joint venture several IRA plans into a single transaction, but sometimes the administrative cost and complexity of doing so defeats the purpose.
Because the joint venture parties are all disqualified parties to each other, it becomes very rigid, and extracting any one party (such as a Coverdell) is not possible in most situations. The Coverdell may not sell or transfer its interest to a family held IRA.
While the Coverdell may be self-directed, the cost-benefit of doing so - due to the limited amount of capital you can get into the plans on the front end - generally is not there unless you have expertise in a low-cost, short lifespan asset class such as tax liens.
Once converted to self-directed IRAs (i.e., they have been transferred to a self-directed IRA custodian), the IRAs can be pooled into one LLC and investments would be made through the LLC.
Therefore, title to the property in the case of a real estate investment, would be taken in the name of the LLC. All income and expenses would not flow through the one LLC bank account.
However, and while for informational purposes, the LLC would fall under a partnership so a Form 1065 and K-1s would apply to each IRA.
@Brian Eastman The Coverdells each have a little over 10k in them, and my oldest is still 7 years from college. Do you feel this is too small to convert to SD?
I'm also having difficulty getting my head around why I might not be able to pull the account out of the partnership, as long as there is enough liquid cash in the partnership to do so. Can you elaborate?
@George Blower Would having say all five accounts as joint owners in one LLC allow me to pass in contributions still? This would change the equity balance, as the traditional IRA will receive no further contributions (unless I leave my current employer and roll my 401k in), while the Roths and the Coverdells will have annual contribution.
Also, can a single member of the partnership leave with cash equity as long as it's representative of the interest in the partnership? It's probably frowned upon to create a new partnership and transfer assets, since transferring property between like-entities be considered self-dealing or prohibited transaction?
Once you start changing equity participation in a jointly held venture, you start creating transactions between the accounts - which is a self-dealing prohibited transaction. This applies both to adding and removing capital.
Because of the limitations this creates, it becomes difficult to bring $10K into such a joint venture. We simply will not do it for clients, because while technically possible, it WILL create dissatisfaction and headache for you down the road.
Conversely, it is difficult to find a standalone investment for the $10K account. Can you buy a piece of real estate for that? No. Thus, we do not deal in this particular space.
Feasible and beneficial are two very different concepts.
You should be able to do this easily, once you roll over you can pool them as a JV - but honestly, you would likely be better off trying to do the debt component with them to try to foresee the UBIT and/or UDFI potential exposure, be aware of this little tax trap.
Thanks again to all three of you.
Sorry if I seem like I haven't gotten this exactly, but I first want to summarize my takeaways. Please correct me if I'm wrong.
- It is possible to create a single LLC which I could manage (without collecting any compensation, since it would benefit me, a disqualified person)
- Shares of the LLC (which I manage pro-bono) can be purchased at the time of formation by each of the three checkbook SDIRA accounts, in which my wife and I are beneficiaries, even though they are disqualified parties from each other.
- I'll assume that ownership has to be inline with contribution amounts, so as not to benefit a disqualified party--i.e. 50k, 100k, 100k would result in a 20%, 40%, 40% stake.
- If I use only the cash belonging to the LLC to purchase buy & hold investments outright and cover related expenses, I shouldn't have to worry about UBIT and/or UDFI
- Annual contributions could go into the checkbook SDIRAs, but could not be used to buy additional equity in the aforementioned LLC--It would have to go towards other investments (possibly the creation of another LLC for another venture?)
- Coverdell participation is a headache I don't want because these things are so hard to unwind without dismantling the whole partnership
If I have that much right, could the LLC pay dividends back to the checkbook SDIRAs, as long as they're representative of each owner's equity?
Also, (and this might seem like the dumbest part, since it's the whole purpose) can I put sweat equity in? i.e the LLC purchases all the materials, but I do repairs and maintenance pro-bono for the LLC?
whenever your IRA is involved - you can never put sweat equity, provide any services to your IRA or benefit personally form your IRA (directly or indirectly).
I would second Brian's recommendation not to pull your IRA with another disqualified party. The complications it would create (and possible prohibited transaction) is not worth the benefits.
@Dmitriy Fomichenko that's disappointing.
I was hoping to do some sort of value capture by purchasing an underperforming small multifamily or two, but it sounds like I'm better off just leaving my retirement savings where they are. While note investing and tax liens seem mildly interesting, I'm not interested in trading the passive investments I understand for those I don't.
I understand that might not be the answer you wanted to hear, but when it comes to retirement accounts (or anything else for that matter) there are rules you need to understand and follow. When you get in your car - you must understand and follow the traffic rules - otherwise you may get killed. My advise to you (or anyone else who wish to self-directed their IRA or 401k): understand the rules and embrace them! There is a lot of freedom and flexibility, virtually limitless investment options that would allow you to get better returns with lower risk while gaining much greater degree of control compared to the stock market.
Majority of my personal retirement funds are invested in private loans, I'm getting an average of 12% return (contractually guaranteed), my investment is secured by real property so the risk it very low. Obviously this is not the only option but I'm very satisfied with the returns and the speed my account is growing...