Is a self directed IRA even worth it?

Tax, SDIRAs & Cost Segregation
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Is a self directed IRA even worth it?

Matt Millard
Lewisville, TX · Member since 2015 · 341 posts · 264 votes
Even with using the lowest cost IRA provider out there the fee for 4 separate accounts is over $600 annually assuming my wife & I open a Roth & traditional each. If I put this in one of my best investments that takes IRA Money it earns around 15%. However the account still wouldn’t meet their minimum & even if it did the cumulative fees are 3% of my investment 1st year & then slightly less after that because of growth & compounding. Over 5 years with setup fees that’s 15% of my money & investment! Why not just follow Tom McElroy’s tax advice from rich dad books & ignore all middle class savings tools including IRA’s, 401ks etc. & pay the IRS the 15% capital gains tax on the investment. Some charge me yearly others are 3, 5 or 10 years but I can’t think of a scenario this would work me unless I inherited a $500k IRA or really wanted to manage all these accounts & fees & IRS contribution & withdrawal rules or I took on a large gamble investment for a 30 to 100% return & got into active market again like flipping houses, etc. I guess I would rather pay the IRS less than a company like Quest IRA?
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Carl FischerPro Member
Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
8y

@Matt Millard

It sounds like you don’t pay much tax right now. I hear it all the time. You will find merit and $ by taking advantage of tax free and tax deferred accounts. Everyone that has money uses qualified plans. I don’t know of any that don’t. They may not be all self directed but many are for good reason-control,true diversity, etc. 

SDIRA qualified plans increase earnings for many by 50%. If you make $100k in a Roth you spend $100k minus $150-$500 fee for the Ira administrator.   Versus only getting $$50k.  Even if it only $20k taxes it’s worth it to me. Go from forever taxed to never taxed.  $20k/yr for 50 years is $1m. 

It may not be right for you now but if you are successful I’ll bet you will have one. Or is it you get one and then you will be succesful. 🧐

There are also some very powerful strategies some smart people employ. 

Good luck, don’t rush it, open a Roth with no fees to at least have one in case they are stop having them as well as starting the ownership clock. 

[email protected]215-283-2868
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  • Carl FischerPro Member
    Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
    8y

    @Matt Millard

    It sounds like you don’t pay much tax right now. I hear it all the time. You will find merit and $ by taking advantage of tax free and tax deferred accounts. Everyone that has money uses qualified plans. I don’t know of any that don’t. They may not be all self directed but many are for good reason-control,true diversity, etc. 

    SDIRA qualified plans increase earnings for many by 50%. If you make $100k in a Roth you spend $100k minus $150-$500 fee for the Ira administrator.   Versus only getting $$50k.  Even if it only $20k taxes it’s worth it to me. Go from forever taxed to never taxed.  $20k/yr for 50 years is $1m. 

    It may not be right for you now but if you are successful I’ll bet you will have one. Or is it you get one and then you will be succesful. 🧐

    There are also some very powerful strategies some smart people employ. 

    Good luck, don’t rush it, open a Roth with no fees to at least have one in case they are stop having them as well as starting the ownership clock. 

    [email protected]215-283-2868
    3Reply
  • Matt Millard
    OP
    Lewisville, TX · Member since 2015 · 341 posts · 264 votes
    8y
    My other concern is that I don’t like tying up my money until almost age 60 & given the governments finances & what’s happening & about to happen to social security I don’t trust the Fed’s to even keep the Roth IRA benefits in tact to even the early adopters & others after it was promised too.
    3Reply
  • Mark Welp
    Investor/Agent/CPA · Columbus, OH · Member since 2015 · 249 posts · 207 votes
    8y
    Matt, I agree with you. I don’t like qualified plans as they lock up your money. I still like index funds held in a brokerage account and I like HSAs as they offer triple tax benefits. Rental properties and whole life cash value insurance work well together.
    1Reply
  • George Blower
    Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    8y

    @Matt Millard

    You may also want to look at the solo 401k plan if you are self-employed as both spouse's can participate in the same plan. This will greatly save on fees.

    2Reply
  • Matt Millard
    OP
    Lewisville, TX · Member since 2015 · 341 posts · 264 votes
    8y
    So Mark do you do a lot with life insurance & infinite banking? I have a policy that’s almost at 10 years & well seasoned I want to use. It’s not an ideal fit but I could use a part of it or pay & do a conversion to something better for infinite banking.
    0Reply
  • Mark Welp
    Investor/Agent/CPA · Columbus, OH · Member since 2015 · 249 posts · 207 votes
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    Matt, I am not a life insurance agent but I could always give you my agents name if you wanted to chat with him. I have 4 whole life policies where i put as much cash into them as I can without triggering a MEC and then take policy loans for investment opportunities (rental properties). All tax free and liquid. If you ever want to chat about them, shoot me a PM and we can jump on the phone. Thx,
    3Reply
  • Joe Stretch
    Salinas, CA · Member since 2018 · 17 posts · 16 votes
    8y

    @Mark Welp @Matt Millard

    Great conversation thread here fellas.  Personally fond of the Roth and the life insurance for liquidity, have both myself. 

    I'm a licensed life agent myself in CA (OK68442), and have a couple clients that do fund their RE purchases with life insurance loans and its a fantastic product for that.  The key is that when you take the money you borrower AGAINST the policy cash, not FROM it.  You get gains on the full cash value as if you never touched it.  When you pay yourself back, you're that much further ahead...not sexy products, but very functional when structured correctly. 

    2Reply
  • Justin WindhamPro Member
    Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
    8y

    @Matt Millard

    I agree with @Carl Fischer's comments on the benefits of tax-deferred (or tax free) accounts. You probably see the benefit in having one, but the ones you've considered have fees that are too high for the number of IRA accounts you'd want. If you are self-employed, the Solo 401k could solve that problem for you. There are many benefits that plan can offer over a self-directed IRA, one of which being that you and your wife could possibly have 1 plan for both of your traditional and Roth funds.

    If you're not eligible for a Solo 401k, the IRA will likely become a better value proposition for you as your income (and taxation) grows.

    0Reply
  • Carl FischerPro Member
    Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
    8y

    @Matt Millard

    I have the life insurance but all the earnings are taxed-not a big help. I basically get to borrow my money for free and if I die my family gets what’s not borrowed. 

    Also there are many loopholes and strategies to get your money out of Qualified plans early without penalty. However, You can always take your money out by paying a 10% penalty. The government wants you to pay for your own retirement so they should cut other programs first because the govt would have to take care of you in retirement. 

    [email protected]215-283-2868
    1Reply
  • Mark Welp
    Investor/Agent/CPA · Columbus, OH · Member since 2015 · 249 posts · 207 votes
    8y
    Carl, Earnings are tax free on whole life if you reinvest them to buy more insurance. If you follow the Infinite Banking concept, all earnings and policy loans are tax free. Great process and product and as a i mentioned, great for real estate investors!
    0Reply
  • Thomas RutkowskiPro Member
    Financial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
    8y
    Originally posted by @Matt Millard:

    So Mark do you do a lot with life insurance & infinite banking?

    I have a policy that’s almost at 10 years & well seasoned I want to use. It’s not an ideal fit but I could use a part of it or pay & do a conversion to something better for infinite banking.

     Matt - You don't need to convert your policies in order to take advantage of the leverage opportunity. If you've had your policies for 10 years now, they've probably accumulated significant cash value that you can leverage any time you want. If you convert to a policy optimized for cash value, you'll be trading death benefit for cash value. You'll have to ask yourself if you still need the death benefit that you did when you bought the policies.

    Read this thread before you consider trading into an infinite banking policy...

    https://www.biggerpockets.com/forums/519/topics/245380-paradigm-life-infinite-banking-whole-life-insurance?page=3

    0Reply
  • Thomas RutkowskiPro Member
    Financial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
    8y
    Originally posted by @Carl Fischer:

    @Matt Millard

    I have the life insurance but all the earnings are taxed-not a big help. I basically get to borrow my money for free and if I die my family gets what’s not borrowed. 

    Also there are many loopholes and strategies to get your money out of Qualified plans early without penalty. However, You can always take your money out by paying a 10% penalty. The government wants you to pay for your own retirement so they should cut other programs first because the govt would have to take care of you in retirement. 

     Carl - The earnings on a life insurance contract are only taxable if you withdraw it.

    Regarding loans...You are not borrowing "your" money. All 50 states have language written into their state statutes that require insurance companies to make loans to their policy holders secured by the cash value of those policies. 

    Here is Florida...

    http://www.leg.state.fl.us/Statutes/index.cfm?App_...

    Your cash value never leaves the policy.

    It boils down to this... If you can put your money into an asset that is growing at 5-7%, and you can get a line of credit against that asset at Prime, then anything you do with that borrowed money that earns more than Prime is adding value on top of the dividend/interest crediting rate of the cash value in the policy. Do the math. You'll see that you will build more wealth by putting your money into an over-funded policy and then leveraging that cash value to do what you were going to do anyway.

    Read the thread I shared on my reply to Matt's post.

    1Reply
  • Carl FischerPro Member
    Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
    8y

    @Thomas Rutkowski

    I want to put the money into a piece of real estate rent it and eventually sell it. Making approx 15% /year return. Can I do this in my life insurance policy. I’ve been told no. 

    But I can do the following:

    I take $$ out of the policy buy the real estate pay tax on the income and repay the loan to the policy. Not nearly as good as my Roth IRA.

    [email protected]215-283-2868
    0Reply
  • Steve C.
    Las Vegas, NV · Member since 2017 · 89 posts · 52 votes
    8y
    I'm also just now looking into a SDIRA, meeting with a lawyer 7/27 & getting more details. From my research right now, I've spoken with SunWest Trust & it's a flat fee of $275/year after a $50 start up fee. That's $50 + 2.75% if I'm only putting in 10k to start, but the price/year doesn't flux with amount managed. So as I grow that percentage drops every year. If I'm doing Roth, I can pull out my initial capital anytime with out penalty is my understanding. The 10K is 2 years of contributions.. Only my gains have to be left in.
    1Reply
  • Mark Welp
    Investor/Agent/CPA · Columbus, OH · Member since 2015 · 249 posts · 207 votes
    8y
    Carl Fischer I am not sure if you understand how the life insurance and real estate work. You take out a policy loan from a policy tax free and then invest in real estate. If you work with a good CPA, you will not pay income tax on the real estate. Real estate is a tax shelter. Therefore your money is growing on the cash value side and you are making money in real estate all tax free. Way better than a Roth. Also, if you buy policies when you are young, they are not expensive. Have fun trying to get term when you are in your later years in life. Thanks!
    0Reply
  • Carl FischerPro Member
    Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
    8y

    @Mark Welp

    I’m pretty sure I know how it works as I have both term and whole life policies. However, I am always willing to learn. 

    Fortunately my real estate makes money and the real estate earnings outside the Ira I pay tax on. I have several CPAs that I believe are quite good not to mention a tax attorney. I don’t think it is advantageous to lose money to have a tax write off. I don’t invest for tax write offs. Sure I get some depreciation and expenses etc so it is somewhat sheltered but depreciation is recaptured and I pay tax on my returns. 

    Tax free income in my Roth is so much easier and provides tax free income for my life and my grandkids.  I don’t need a cpa for the real estate in my Roth as the tax return is basically a one line entry.

    I have done both and my vote is my Roth. My life insurance  providers /financial advisors also says my useable return is better in the Roth. Useing your life insurance money is way better than letting it sit there being lazy. 

    [email protected]215-283-2868
    1Reply
  • Mark Welp
    Investor/Agent/CPA · Columbus, OH · Member since 2015 · 249 posts · 207 votes
    8y
    Got it. Thanks Carl!
    0Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    8y

    @Matt Millard If you take a self directed Roth IRA with checkbook control and buy single family homes at the right price you will beat the pants of any insurance policy or stock out there. My ROTH IRA owns 4 houses. I bought them cheap. The tenants deposit the rent right into my ROTH IRA (local bank) I have a custodian that report to the IRS every year.

    You need to know the rules but you can save big on fees from a custodian that holds your money and charges you for every transaction.

    My self directed IRA w/ checkbook control had grown significantly since I opened it. I could care less about the stock market and its lackluster growth and unpredictability and I certainly am not going to buy insurance with it.

    All this growth in a ROTH grows tax free also!

    2Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    8y

    @John Underwood your post is spot on.

    I have checkbook IRAs for my wife and I and they only cost $20/quarter by the custodian. I transferred funds from old 401Ks and IRAs to the custodian and I have them invest those funds into two IRA LLCs. I had a work colleague (CPA) set up the LLCs for free ($125 secretary of state fee) and had an IRA services company draft the operating agreement for $225 I think. And I will never go back to not having checkbook control...it was awful going through a custodian.

    0Reply
  • Lesley Resnick
    Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
    8y

    I am looking into solo 401(k).  I will most likely not use the checkbook for RE.  I am concerned that my transactions will be prohibited, since I make my living in RE.  I am going to fully fund it with an S&P index.  Low overhead and I will never out perform or underperform  the market.  Further, I like the diversity it offers.  I make my living in RE and the majortiy of my holdings are in RE.   

    The plans also allows me to borrow up to 50% of the balance maxing out at $50k.  I will use this as necessary, should I need additional liquidity.   

    0Reply
  • Thomas RutkowskiPro Member
    Financial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
    8y
    Originally posted by @Carl Fischer:

    @Thomas Rutkowski

    I want to put the money into a piece of real estate rent it and eventually sell it. Making approx 15% /year return. Can I do this in my life insurance policy. I’ve been told no. 

    But I can do the following:

    I take $$ out of the policy buy the real estate pay tax on the income and repay the loan to the policy. Not nearly as good as my Roth IRA.

     As I stated in my earlier post, you do not "take money out" of a life insurance policy. You borrow against it. So no, you cannot do that "inside" your policy. You invest outside of your policy with the line of credit against the cash value of your policy.

    I don't know who your carrier is. Or if its a Whole Life or Indexed UL. Mass Mutual and Penn Mutual (Whole Life) are both currently paying a 6.4% dividend. You can also get a cash value line of credit at Prime.

    So if you have $100,000 of cash value, then you can get a line of credit for, let's say, $90,000 or a policy loan for all $100,000. So using your numbers, that $90,000 could earn $13,500 at 15%. Prime is currently 4.5%, so your net return is 10.5% before tax. If you are in a 33% tax bracket, you'll give up 3.465% to the US Treasury. At the end of the year, you'll net $6,294 -- outside of your policy. And the cash value will earn $6,400 in dividends for a combined gain of $12,694. 

    This is obviously not as good a return as you'll get in a Roth with Tax-free growth, but the cash value, if its there, is sitting idle and unused. There is no limit on how much premium you can put into a policy. A roth is limited by your contribution limits. Life insurance offers a death benefit (a self-completing plan).

    2Reply
  • Mark Welp
    Investor/Agent/CPA · Columbus, OH · Member since 2015 · 249 posts · 207 votes
    8y
    Marc No argument from me there. Stocks can definitively provide much greater returns than insurance. Insurance is just a place to store cash safely, still while providing a tax free return. Stocks can also lose a lot more money than insurance. Thanks for your insight,
    0Reply
  • Matt B.
    Greenville, SC · Member since 2013 · 81 posts · 16 votes
    8y
    @mark welp Can you expand on this tactic?
    0Reply
  • Mark Welp
    Investor/Agent/CPA · Columbus, OH · Member since 2015 · 249 posts · 207 votes
    8y
    Matt B. Matt, Google Nelson Nash and the Infinite Banking Concept. It is a great place to start. Similar to real estate, whole life insurance are not sexy products like stocks and mutual funds. But because they are tax free and flexible and work great with real estate, I like them better than IRAs and 401ks. Just my opinion after exploring lots of different things. Thanks!
    1Reply
  • Jacob Calbillo
    San Antonio, TX · Member since 2016 · 15 posts · 3 votes
    8y
    I have a full time (W-2) job but I also do side contract (1099) work and then I also have a LLC for real estate transactions that I have been doing. I am the owner of that LLC and I do pay self-employment taxes every April. Am I eligible for a solo 401k?
    0Reply
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