Can I Setup SDIRA Post Investment Purchase?

Question

Hey guys, new fellow on board.

I partner with my brother on rental properties, a gig we just started a year or so ago.. anyway for our last purchase I ran out of free cash and had to dip into my 401k rollover IRA - to the tune of $15k. Not a great idea, but the equity we walked into was worth it. Anyway, I know I have 2 months to either pay it back or get hit with taxes; but can I instead setup a SDIRA after the close? I'm sure it will complicate how my brother and I split this thing, but it may save me a few thou.

Thoughts?

Jon Holdman · Answer

No, you can't be your own custodian.  You can't do that at all.

The fact you already have an accepted offers makes it too late for your IRA to buy.

Jon Holdman · Answer

Do you already have partial ownership of the property? if so, then, no your IRA cannot take ownership of it. You are a disqualified person w.r.t. the IRA. Any transaction your IRA performs with you is a prohibited transaction. That will result in the IRA being immediately and completely distributed and you will owe taxes and penalties.

Now, had you had this set up before hand, your IRA could have partnered with your brother to buy the property.

Michael Campbell · Answer

Copy that guys, I won't be going that route. I'll see about getting a $15k loan to pay it back as Jon K mentioned.

Thanks!

Keith Blazek · Answer

Michael, as Jon said your IRA is not able to purchase your property if you already own it.  Disqualified persons are individuals or entities from who your IRA cannot buy investments and to whom your IRA cannot sell investments.  According to Internal Revenue Code 4975 some disqualified persons are: the IRA owner (you), parents and their spouses if remarried, grandparents and their spouses if remarried, children and their spouses, grandchildren and their spouses, designated beneficiaries of the IRA, and fiduciaries such as your CPA, financial planner, IRA custodian, etc.  You and your IRA are seen as a separate “trust”.  An IRA cannot buy or sell investments from the IRA owner.  Here is a list of some examples of prohibited self-dealing transactions:

-          Having your IRA purchase real estate you currently own.  This applies directly to your situation, Michael, as you are unable to purchase the property you speak of with a SDIRA.

-          Having your IRA purchase real estate that’s currently owned by a family member of lineal descent, such as your father

-          Issuing a mortgage on a relative’s new residence

-          Granting a child a second mortgage for the down payment on his or her first home

-          Buying stock from the IRA owner (any transaction involving IRA funds and a ‘party in interest’ is prohibited)

-          Purchasing a stock in a closely held corporation in which the IRA owner is an officer or has a controlling equity position

-          Purchasing restricted stock from a relative

Now in your situation, it may be best to stick with your current plan and ride this out as Steven said.  However in the future it may be beneficial to look into SDIRAs if you and your brother plan to continue investing in real estate.  You can open an account now even if you do not have another deal ready, that way it cuts down on your time to set-up and make the deal in the future.  Also, if funding is an issue (you borrowed 15k from your account) you can look around for investors in your area with 401ks or IRAs.  They are able to loan you the money directly from their account on terms you negotiate and it will steer you clear of the tax penalties that you are currently facing (granted only if you do not pay back what you borrowed in 2 months).  Let me know if this helps.

Donna Smolinski · Answer

Michael, 
Penalties are VERY steep if you make any mistakes investing in your SDIRA.  You should take some time to study all the info and be sure you get a Tax attorney that's qualified to help you set it up. Don't rush into it.  You should fund it through a LLC, but the LLC needs to be new (not one u have already been using),.  There's alot of good info online, but there are so many restrictions that can trigger a disqualified transaction, that it can make your head spin.  If it's not setup correctly from the get-go, you can find yourself in big trouble.

This is definitely a good way to invest, just be careful and do your home & invest a few $ to hire a pro to help.

Jon Klaus · Answer

Michael, can you borrow $15k to repay the 60 day loan from your 401k?  Even high interest for a time beats the tax and penalty.

Steven Hamilton II · Answer

It can't be done. The funds would have had to be entirely from the sdira.

You are too late.  Use this one to fund everything.

Michael Campbell · Answer

It's closing Friday or early next week, so there is probably little time to do anything.

Now what if I become my own custodian (retroactively)? Or is that fraudulent?

Can I Setup SDIRA Post Investment Purchase?

Most Popular Reply