SD IRA help

25 Replies

I am wanting to move an IRA rollover into a self-directed IRA and I have a couple of questions I need help with.
By the way, I am thinking of using it for tax liens and/or private lending.
1) Do I need to set up an LLC in the IRA?
2) the two custodians I am looking at are Sunwest Trust and Equity Trust, which of these two is the better all-round option, for ease of transactions, fees, customer service, etc.

I have only checked with Guidant. They want to set up a "C" corp for me that invest back into a 401k. It sounds more like spinning my money around rather than rolling it over. LLC will not work with their program.
My thoughts were to "sub" corporations out of the "C" corp.
Don

No need for an LLC for the investments you want. But you need a custodian that allows those investments. And realize any of these guys take some time to fund an investment. The big advantage to an IRALLC is the speed of doing an investment. No experience with either of those companies.

Wayne,
Jon's correct, you don't need an LLC for IRA tax lien investing. But you need to check with the custodians on how long it takes for the custodian to issue the deposit check(s) you'll need for purchasing the liens, and also the procedures for issuing the final payment check for any liens you won.

Issues you can run into are that the custodian needs several days notice to issue the deposit check. Then they have fees for processing and issuing funds for your tax lien purchase. Those fees are outside of the annual account and setup fees.

I just looked up ETC fees for investing in Tax Liens - They have a $50 expedited fee if you need the check processed in one business day from when they receive your request (10:00 AM Eastern time). Since most counties want cashier's checks, ETC has an $18 fee for overnight service (they say all cashier's MUST be overnighted) and they have a $10 fee for each cashier's check you need. Some counties want a separate check for each lien - check the rules for the county in which you are buying liens. http://www.trustetc.com/forms/taxliendoi.pdf

I personally am going the route of the SDIRA with a specialized LLC where I'll be the manager and have a checkbook. I invest in tax liens only in counties that do online tax lien auctions. The counties I use require the deposit be sent to them through their website via and ACH transfer. (That may require a fee from ETC but I don't even see the ACH option in ETC's website.) With a checking account, that ACH transfer is free, the funds arrive in minutes.

I can do the same ACH the next day for paying the remaining balance for the liens I purchased and meet the county deadline for 24 hour payment in full for liens purchased.

Note, it will be up to you to keep excellent records of how every penny is spent in that checking account (where it goes, what it was for) and also you need to have reports (spreadsheet) of every lien you purchased in the LLC. The custodian lists only the LLC as the investment. But the IRS wants to know what the LLC bought and how every penny of the checking account is accounted for. Some custodians will require you provide the report of investments (tax liens) you made with the checking account in the LLC.

The IRS wants to make sure you don't spend the money on yourself or prohibited investments. You can't combine your own money into the LLC investments or checking account.

But having a "Checkbook IRA" makes it easier to invest in Tax Liens and other real estate, while keeping all the fees and charges to almost nothing.

TIP - get the checking account through a credit union so that you have no checking fees. My credit union only requires I pay $7.00 for a box of paper checks. No monthly fees, no minimum balance, no other fees. I do have to keep $5.00 in a savings account along with the checking account.

Jerry

I highly recommend the solo K instead of the SDIRA or the SDIRA entity. There is virtually no upside to using a SDIRA LLC over the solo K unless you have Roth IRA funds to self-direct.

Thanks for the advise,
Jerry who do you use for your IRA with the "checkbook" feature?
I would also be interested in any advise and help you can provide for online tax lien investing.

Wayne

The guy I am talking to at Guidant has told me basically the same thing about setting my SDIRA up to have a checking account that I control. But, we need to set it up as a C corp to avoid the UBIT that Jon has mentioned so many times before. Anyone with experience on that?
Don

Wayne,
I'm probably a half step ahead of you in terms of getting an SDRIA with Checkbook setup. I've spent the last several weeks getting educated and decided the structure I wanted with the checkbook.

I don't have the custodian lined up but I'm looking at the usual suspects to decide. BP has been great for uncovering more custodians that can handle a checkbook setup than I was aware existed.

I have an old 401k that when I left a company 20 years ago, I rolled into an IRA rollover. Been in some mutual funds since then, but since December 2007 it's been in a money market fund. Wanted to sidestep the crash I felt coming in 2008.

Now that I'm comfortable with my strategies for online tax lien buying, I'm going to move that particular rollover IRA to an SDRIA with checkbook. I need the checkbook for the freedom to ACH the money on my own to the county auction websites, and also to avoid all the fees custodians put on expediting checks for tax lien purchases.

Don,
I take it you're going to be buying and selling property in your IRA? That would enter the active business arena. If you only buy liens, then you're not creating an active business - and you could use the LLC structure.

Jerry

Originally posted by Jerry Krull:
Don,
I take it you're going to be buying and selling property in your IRA? That would enter the active business arena. If you only buy liens, then you're not creating an active business - and you could use the LLC structure.

Jerry

For now I am only interested in rehabbing and selling. I might do some hard money lending in slack times. It makes more sense when you say it. Thanks.
Don

Jerry,
That is exactly what I am doing, please keep me up to date on how your progress is going.
Should I get a business checking account set-up for the checkbook feature now?

A 401k is employer sponsored. There is no requirement that the employer be an LLC or corporation. The employer could be as simple as your sole-proprietorship which pays you the income it makes lending money or buying tax liens. This is true with or without checkbook access to an SD401k. I think this responds to Jon's comment.

To maintain separation between you and your retirement money, Wayne, an LLC is required to gain checkbook control of an SDIRA. This is not the run-of-the-mill LLC you form yourself through Legal Zoom. There are specific clauses that must be included in the operating agreement that the IRA administrator who sets it up for you will know. If you don't want checkbook access to your SDIRA, you don't need the LLC.

Assuming you want checkbook control, you obviously have to have the LLC setup first to open the checking account.

The 2012 contribution limits for an IRA are $5000 or $6000 if you're over 50 years old. Similarly, 401k contributions are limited to $17,000 and $22,500. If you're going to have self-employment income, why in the word would you go the IRA route when you can shelter more money with the 401k? Similarly, why endure the hassle of maintaining an LLC with your SDIRA when a 401k with checkbook control doesn't require it?

Jeff

Exactly Jeff.

The only downside to using the soloK is that you can't self-direct Roth IRA funds. I really see no other upside to using a SDIRA entity instead of a solo K.

A 401k is employer sponsored. There is no requirement that the employer be an LLC or corporation. The employer could be as simple as your sole-proprietorship which pays you the income it makes lending money or buying tax liens. This is true with or without checkbook access to an SD401k. I think this responds to Jon's comment.

Jeff S and @Bryan Hancock : So, if I understand correctly, I could take IRA funds or funds in a previous employer's 401k, and roll them into a solo 401k. Then I create a company and have the solo401k invest the money into that company. (May have things out of order here.) Then company then makes loans, buys tax liens, flips houses, or whatever. That (hopefully) generates some income. I pay that income back to myself as a salary. The income comes to me, not back into the solo 401k. Did I understand that correctly? That's passes IRS scrutiny and isn't self-dealing?

@Jon Holdman

BTW...I really like this new @ thing so that I know when to check a thread. It keeps you from having to check the thread over and over to see if anyone was responding to your comments.

No..what you described above is self-dealing. There are some subtleties to how things are handled if you are a minority partner, don't have voting rights, etc. Here is an article on ROBS:

ROBS

The funds would be "invested" by the solo K and not require you to construct a new entity for what you described Jon.

The major advantages I see of using the solo K over a SDIRA entity are that:

1. You don't have to set up and maintain a new entity just for the checkbook control of your IRA funds. Think minutes, extra tax returns, etc.

2. You can defer $17k ('12 limit I think) of OI and 25% of your next W2 tranche up to a cap of $49kish ('12 limit may have changed...it also changes with your age)

So if you already have an existing s-corp and are doing the salary/dividend split you can simply set the solo K up and use it for your EXISTING entity. That doesn't help much if you don't have an entity set up, but most investors I know of do have one set up. I would argue you still want to set up a s-corp in most cases rather than forgo the entity entirely unless you aren't making much OI. W2 funds you make from your s-corp's operations can be deferred to the solo K and then the solo K can invest them in other deals. The downside is that these dollars are now "trapped" and can't be taken personally. My preference is to defer the first $17k and then forgo the next W2 tranche (the up to $49kish) to maintain flexibility with how I want to take the distributions.

Another issue is that you can take a $50k loan from your solo K and do WHATEVER you want with it. I am not sure if there have been any legal rulings on using this "loan" for self-dealing activities, but from everything I have read there is no restriction on what you can do with these funds. So as long as the self-dealing activities require less than $50k in capital you should be able to get away with this. I personally would not want this risk on my side of the ledger, but there doesn't seem to be any reason why you can't do it. If someone knows of case law on this I would love to see it.

Question: I have money that I rolled from a 401K plan into a standard IRA rollover account 20 years ago. It's been in some mutual funds.

I have a profitable S-corp business and this year will start taking a salary from that business. It's not my main source of income, but since I will be taking salary, I want to open a solo K for the business.

Is it possible for me to roll the IRA rollover into the solo K since it originally was a 401K account. I've never been able to add funds to the IRA rollover because it was just that - a rollover. Should I be able to roll it into my solo K? This way I can bypass setting up the LLC for a checkbook SDIRA.

Jerry

Yes, you can do this Jerry. In fact, this is exactly how we funded our Solo K. See Table 1-4 on page 17 in IRS Publication 590 for the rollovers permitted between various types of plans.

Anyone helping you set up this plan should also be able to advise you on the rules.

By the way, the fact your funds were once in a 401k is irrelevant.

Jeff

Originally posted by @Jerry K. :

I have a profitable S-corp business and this year will start taking a salary from that business. It's not my main source of income, but since I will be taking salary, I want to open a solo K for the business.

Jerry

Jerry K., I believe you must be spending more than 1000 hours on that business for that business to be able to open a 401k.

@Ravi Veer ,
I have more than 1,000 hours I put into the business. However I've never read that you had to have any sort of "hours" in the business per year in order to qualify for an i401k. Do you have a source where you read that?

Also as an update, I did open an i401k this year and did a rollover from my old 401k rollover account.

@Ravi Veer I think you are talking about the rule about no employees who work more than 1,000 hours per year. Took the below information from http://www.solo401kexperts.com/

Generate Revenue for Profit

There are no established thresholds for how much profit the business must be generated, how much money must be contributed to the plan, or how soon profits and contributions must happen. It is generally believed that the IRS will consider you eligible if the business being conducted is a legitimate business that is run with the intention of generating profits. The self-employment activity can be part time, and it can be ancillary to full time employment elsewhere. A person can even participate in an employer's 401(k) plan in tandem with their own Solo 401k Plan. In such a case, the employee elective deferrals from both plans are subject to the single contribution limit.

The Absence of Full-Time Employees

Unlike a regular 401(k) plan, a solo 401(k) plan can be implemented only by self-employed individuals or small business owners who have no other full-time employees and are not employed by any business owned by them or their spouse (an exception applies if your full-time employee is your spouse). The business owner and their spouse are technically considered "owner-employees" rather than "employees".

The following types of employees may be generally excluded from coverage:

Employees under 21 years of age
Employees that work less than a 1000 hours annually
Union employees
Nonresident alien employees

If you have full-time employees age 21 or older (other than your spouse) or part-time employees who work more than 1,000 hours a year, you will typically have to include them in any plan you set up. However, a Solo 401k eligible business can have part time employees and independent contractors.

Agree with @Jerry K. , I was just told the same thing by the administrator of the solo K that I just established. He did say that if your business has no activity in a given year, you are supposed to terminate the plan and roll the proceeds to an IRA, not a big deal and doesn't threaten tax deferral status. By "business activity", it is written in a vague fashion but I take it to mean that you should have some "revenue" in the business, though there is no stipulated minimum.

@David Beard and Jerry Thank you and David for correcting me. I got things mixed up earlier. I looked at quite a few places now - there is no minimum requirement for number of hours to be spent in the self-employment activity.

Originally posted by David Beard:
Agree with @Jerry K. , I was just told the same thing by the administrator of the solo K that I just established. He did say that if your business has no activity in a given year, you are supposed to terminate the plan and roll the proceeds to an IRA

However, I am curious about the advice from David's solo-k administrator that no self-employment activity in a year requires termination of the solo 401k plan. Wonder why that is the case.

In a 401k plan established when I am employed at a large company, I am allowed to keep the 401k funds at that company even I no longer work at the company. Seems like similar rules would apply for solo-401k.

@Ravi Veer ,

Yes, you can for whatever time the company's plan allows. Often after 90 days to 12 months they will tell you to roll it over or they will cut a check for all of it.

-Steven