Is it easy to Self direct IRA or not?

8 Replies

I have been trying to figure out how to do  self directed Ira for investment properties of flips, people on the pod cast make it sound fairly easy and then as I talk to cpa they either don't know about it or say it's too hard. Any help would be greatly appreciated. 

@Mike Church

First you will need to transfer your existing IRA to a self-directed IRA with a custodian such as IRA Services Trust Company. Subsequently, you will fill out the IRA custodians investments directive for the real estate purchase. All income and expenses in connection the IRA owned property will then flow through the IRA.

Another option is to invest the self-directed IRA in a LLC (IRA LLC) and place the investments through the IRA LLC. This is ideal from a cost perspective if you plan to invest in multiple properties.

@Mike Church ,

Congrats on your first forum post!

Retirement accounts are designed to be invested passively, to enjoy the ability to shelter all of your investment gains from taxes. When you run an active business from your retirement account, such as flipping, the income and gains might be subject to UBIT (Unrelated Business Income Tax). Be sure to consult with an experienced CPA about tax consequences before venturing out into flipping in your retirement account, this might create a complexity that you want to avoid. Consider alternative investment options that are passive, such as buying a rental property, being a private lender, investing into syndication or private placement, note fund, etc. 

Next, as a real estate agent you are considered to be self-employed and qualify for truly self-directed Solo 401k plan. This vehicle has number of advantages over self directed IRA. Some of them include:

  • Checkbook control
  • No need for a custodian (eliminate all custodian, transaction and asset-based fees)
  • Large contribution limit up to $55,000 per year (10X higher than an IRA)
  • Tax-free investing using designated Roth account
  • Exempt from UBIT on leveraged real estate
  • and more!

You may want to review this thread where you can find in-depth discussion regarding various aspects of the Solo 401k:

Hope this helps!

@Mike Church

Following are the similarities and differences between the solo 401k and the self-directed IRA.

The Self-Directed IRA and Solo 401k Similarities

  • Both were created by congress for individuals to save for retirement;
  • Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;
  • Both allow for Roth contributions;
  • Both are subject to prohibited transaction rules;
  • Both are subject to federal taxes at time of distribution;
  • Both allow for checkbook control for placing alternative investments;
  • Both may be invested in annuities;
  • Both are protected from creditors;
  • Both allow for nondeductible contributions; and
  • Both are prohibited from investing in assets listed under I.R.C. 408(m).

  • The Self-Directed IRA and Solo 401k Differences
  • In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
  • To open a self-directed IRA, self-employment income is not required;
  • In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (Checkbook IRA) must be utilized;
  • The solo 401k allows for checkbook control from the onset;
  • The solo 401k allows for personal loan known as a solo 401k loan;
  • It is prohibited to borrow from your IRA;
  • The Solo 401k may be invested in life insurance;
  • The self-directed IRA may not be invested in life insurance;
  • The solo 401k allow for high contribution amounts (for 2018, the solo 401k contribution limit is $55,000, whereas the self-directed IRA contribution limit is $5,500);
  • The solo 401k business owner can serve as trustee of the solo 401k;
  • The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
  • When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
  • Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
  • When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
  • Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
  • Pre-tax IRA contributions on reported on line 32 of Form 1040;
  • Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
  • Roth solo 401k funds are subject to RMDs;
  • A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
  • Roth IRA funds are not subject to requirement minimum distributions (RMDs);
  • The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
  • The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
  • At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
  • At termination, the self-directed IRA is only required to file a form 1099-R.

@Mike Church

I think it's easy to use self directed Iras to buy properties. However, I am an administrator of SDIRAs so take that with a grain of salt and I have been doing it for 25 years. I also saw you wanted to use the Ira for flips. If all you do is flips your Ira/401k will have to pay tax(UBIT) as you will be considered as an operating business. I would use the 401k option over the checkbook LLC IRA. I think it is safer and less chance of audit and other factors. Get your Cpa and administrator on the same page, usually a conference call with all parties clears up the questions. Your tax circumstances, goals, etc all should be considered when developing your plan-many times there is not just one answer. There may also be multiple entities. Good luck

@Dmitriy Fomichenko In order to utilize a SDIRA in a syndication deal does the investor need to be “accredited”? I’m very interested in using a sizable chunk of one of my IRAs for real estate syndication and I’ve been unable to get an answer to that question. Thank you in advance!
Originally posted by @Jeff Piscioniere :
@Dmitriy Fomichenko In order to utilize a SDIRA in a syndication deal does the investor need to be “accredited”? I’m very interested in using a sizable chunk of one of my IRAs for real estate syndication and I’ve been unable to get an answer to that question.

Thank you in advance!

 Jeff, a Reg D 506b offering allows for up to 35 sophisticated but un-accredited investors. 

@Jeff Piscioniere

As Ben said in some instances accreditation will not be required, in other it will be required. First, find the syndicator you wish to work with and he will provide you with the needed guidance. Also keep in mind that your IRA does not have to qualify on it's own, you can use all of your assets to qualify as an accredited investor.