SDIRA - Can I pay off the note with non-SDIRA funds?

16 Replies

I have a $50k balloon note at 5% interest in my Self Directed IRA. My property is barely cash-flowing and the note goes to 9% in December 2019. I need to keep the property because it is upside down (sidenote: thanks Growth Equity Group for your unethical business). I can't refinance it because of the value. I have funds outside of my SDIRA and I'd like to just pay the note so that it at least cash-flows. Is that legal? Any other ideas? I have another one up in December 2020 in the same situation...thanks!

@Natalie Lund

Unfortunatley you cannot use personal funds in any way associated with an IRA investment. That would create a self-dealing prohibited transaction and invalidate the IRA with severe tax consequences.

The only way you can add capital is via normal IRA contributions if you are eligible.

Thank you for the response, Brian! What is the max allowable contribution? I have 2 checkbook IRA accounts by the way - can I move funds from one to the other? Or can my SDIRA sell the property to my LLC?

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Do you have an employer 401k you could borrow against?  Maybe borrow the $50K from there to pay off the note and make monthly payments to pay yourself back in your 401k.  Not sure if this is would be considered self dealing.  Maybe @Brian Eastman could comment?

@Natalie Lund

The IRA may not transact with a disqualified person in any way - directly or indirectly. That list of folks who are poison to the IRA includes:

  • You
  • Spouse
  • Lineal antecedents such a parents, grandparents, etc.
  • Lineal descendants such as children, grandchildren, etc.
  • The spouse of a descendant
  • An entity such as a business or trust where one or more of the above have controlling interest. Control is exhibited either by greater 49% equity or beneficial interest in an entity, or by executive decision-making power over the entity.
  • Fiduciaries to the plan or those providing services to the plan such as investment advisors or tax counsel.
  • A key employee such as a vice president or a holder of more than 10% ownership interest of a company that is controlled by a disqualified party.
  • A 10% or greater joint venture or partner of a business that sponsors a qualified retirement plan.

@Natalie Lund

You may be able to refinance with another non recourse loan or even sell a part of the property for additional cash flow or sharing of the costs. 

Or sell it outright and take the hit. Sorry for your problems. 

@Natalie Lund

Your Ira can sell a percentage of the property say 50%  for $7k to a non disqualified person. That person could then get another loan with his/her credit. However most banks won’t do loans less than $75k. Somebody else may make a loan because cd rates are 2.5% so maybe double it to 5% and lower the payment from the step up 9% interest rate. I hope this helps. 

@Natalie Lund

It makes is worse! Mixing your IRA funds with your personal funds was very bad idea. You may have committed prohibited transaction. How do you handle financials of the property? Where does the rent gets deposited? Who pays the expenses? 

You may want to consider contacting your lender and negotiating loan modification. 

@Dmitriy Fomichenko

Fortunately I have kept everything separated. All proceeds get divided accordingly and deposited into separate accounts, etc. The note and title are divided. I don’t see that as a problem. Is there something else I’m not considering?