Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
5y
@Shelby Willitts, both my 3 partners and I all use Self Directed IRAs (SDIRA) and SOLO401Ks that are very similar (But you must be self employed). We love it.
As to @Greg Scott's comment asking if 'it makes sense' because real estate investing is ALREADY 'tax advantaged' (you will hear a lot of that) I would argue that IF you already have funds in a retirement account, the question THEN becomes 'how to make the best use of those funds'.
You don't want to compare real estate outside of a retirement account to real estate INside a retirement account. You want to compare "what is the best use of these funds ALREADY inside of your account'. For us, that is a big portion of real estate. Stocks give an average of about a 10% return with moderate risk, and real estate give us a 12-20%+ return, with much less risk in our opinion.
As far as how to do it there are quite a few good Plan Providers here in the forums, such as @Dmitriy Fomichenko (who we use) @Brian Eastman, @Carl Fischer, @Bill Hampton, @George Blower just to name a few. When I called to find a provider all of the ones on here I talked to seems WAY more personable than a few of the large companies such as Equity Trust.
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
5y
I'm sure there are a lot of people out there that will help you do this. A better question is does it make any sense to invest in an asset class that is tax-advantaged via a vehicle that is only tax-deferred?
Investor · San Francisco, CA · Member since 2016 · 192 posts · 95 votes
5y
I did it a while back and then undid it. A lot of hoops and restrictions regarding what you can do. Everyone’s situations and goals are different though so I wouldn’t discourage it. Depending on the amount you have there are other less restrictive options out there. Google “lasaii” if you have over $100k, for instance.
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
5y
@Shelby Willitts, both my 3 partners and I all use Self Directed IRAs (SDIRA) and SOLO401Ks that are very similar (But you must be self employed). We love it.
As to @Greg Scott's comment asking if 'it makes sense' because real estate investing is ALREADY 'tax advantaged' (you will hear a lot of that) I would argue that IF you already have funds in a retirement account, the question THEN becomes 'how to make the best use of those funds'.
You don't want to compare real estate outside of a retirement account to real estate INside a retirement account. You want to compare "what is the best use of these funds ALREADY inside of your account'. For us, that is a big portion of real estate. Stocks give an average of about a 10% return with moderate risk, and real estate give us a 12-20%+ return, with much less risk in our opinion.
As far as how to do it there are quite a few good Plan Providers here in the forums, such as @Dmitriy Fomichenko (who we use) @Brian Eastman, @Carl Fischer, @Bill Hampton, @George Blower just to name a few. When I called to find a provider all of the ones on here I talked to seems WAY more personable than a few of the large companies such as Equity Trust.
New to Real Estate · El Dorado Hills · Member since 2020 · 32 posts · 13 votes
5y
@Daniel Dietz Thank you for all this detail. We have quite a bit of cash in our current IRA's. My question now is can I convert funds from a Simple IRA to a self-directed and how simple is that process? I have researched all the restrictions and I'm fine with the rules and regulations because we have funds that we can put to better use. However, I've read that the contribution limits are different for these two vehicles which makes me think I can't convert the funds because they're not equivalent.
Any type of IRA can be self-directed; traditional, Roth, SIMPLE, SEP, even inherited. A Self-Directed IRA is still an IRA, just with different servicing architecture so it can be invested more directly under your control rather than limited to what the IRA provider sells. Anything you have read indicating different contribution limits is either incorrect or something you are misinterpreting.
It is typically about a 3-4 week process to setup a new plan and get it funded via rollover from a prior plan. It is not particularly difficult, especially if you work with a professional provider that will walk you through all the steps.
Anything you have read indicating different contribution limits is either incorrect or something you are misinterpreting.
Please correct me if I'm wrong, but it's my understanding that Simple IRA contributions are pre-tax dollars and the contributuion limits for 2021 are $13,500 (for under 50), and a traditional IRA is after-tax dollars with a limit of $6,000 for 2021.
You are correct that the contribution limits between a SIMPLE IRA and a Traditional differ.
Either type of IRA can be self-directed, so there is no difference in contributions between a conventional "stock market" IRA and a truly self-directed IRA.
Investor · Houston · Member since 2021 · 57 posts · 21 votes
5y
Hey Shelby! Piggybacking on what the others have said that you'll first want to consider if the SIMPLE is right for you. With the contribution limits, it sounds like maybe the self-directed IRA limits you were looking at were for a self-directed Traditional IRA. Good news is that SIMPLEs can also be self-directed, and a self-directed SIMPLE IRA would have the same contribution limits as a SIMPLE IRA at a more traditional custodian. The important thing to understand is that "self directed" isn't a special or different type of IRA, it just indicates the type of assets you can hold. So, moving from a SIMPLE IRA to a self-directed SIMPLE IRA (or another account) can be done.
When it comes to ease/difficulty... I think the biggest thing to consider is what custodian you want to go with. The ease and speed of moving from a SIMPLE IRA to a self-directed IRA will largely depend on the SDIRA custodian you choose to go with and how quickly they process your requests. Some custodians can open up the account and help with the movement request within 2-3 days. At that point, it largely depends on the place the funds are coming from. But, as others have mentioned, larger companies tend to move at a slower pace.
I did it a while back and then undid it. A lot of hoops and restrictions regarding what you can do. Everyone’s situations and goals are different though so I wouldn’t discourage it. Depending on the amount you have there are other less restrictive options out there.
Gabe, you are correct: there are rules you must follow with self-directed IRA. However, SD IRA opens up virtually unlimited investment options (expect collectables and life insurance), whereas with conventional IRA you are limited to institutional investments only, typically tied to the stock market. So the "self-directed" option is certainly less-restrictive. So I'm just curious: when you say that you ended up "undoing" it, did you go back to conventional "more restrictive" IRA, or just cashed it out?
New to Real Estate · El Dorado Hills · Member since 2020 · 32 posts · 13 votes
5y
@Sarah Shellam That’s awesome info. I didn’t realize that a simple could be self directed so that means I can still contribute at the higher rate! Thank you for the clarification.
Investor · Naples, FL · Member since 2016 · 256 posts · 75 votes
5y
@Shelby Willitts
I have......you can be charged alot t of fees for transactions, and if you are used to buying stocks,mutual funds and ETFs in your 401k it can be disappointing along with the service being slow..
Investor · San Francisco, CA · Member since 2016 · 192 posts · 95 votes
5y
@Dmitriy Fomichenko Agreed! I initially went with the SDIRA for the reasons you specified. I agree that it is superior to a standard IRA, and if I had a different situation, I probably would have stuck with it. The reason I backed out was that I found another way to access the IRA money for the purposes of Real Estate. It's basically an annuity that grows with the stock market that allows you to take metered payments until 59.5 yrs old to pay off real estate, no real restrictions (can even be your primary residence or remodel). It is a setup that only makes sense for someone with a certain amount in the IRA and at a certain age with specific goals. Definitely not a one size fits all solution, and there are some trade-offs (tax benefits, minor penalties). But it is a low overhead, passive way to use the money for the same goal without restrictions. I'm able to enjoy accelerating my investments now without having to wait until I'm 60 to benefit from it tangibly or having to put the profits back into the SDIRA. It works for my situation.
New to Real Estate · El Dorado Hills · Member since 2020 · 32 posts · 13 votes
5y
@Daniel Dietz
I talked with my current financial advisor yesterday and as expected he gave me many pitfalls of moving to a Self-directed. However, the only thing that scared me was that he stated a client of his was required to do an evaluation on the property every year (basically an appraisal) and that the SDIRA charged him $2500 to do this. Do you know this to be true? If so this will change some things in my calculations. Also, none of the people at the SDIRA companies I’ve talked to have mentioned this nor is it listed in their fee schedules. Could there be other hidden fees they don’t need to disclose I should be aware of?
A formal appraisal of assets in a self-directed IRA should not be required. An updated valuation is required, but for real estate realtor comps are generally sufficient.
If someone is over the age of 72 and required to take distributions, there can be a need for certified valuation depending on the custodian. In this case, the RMD calculation is a taxable event so a more precise valuation is necessary.
Some custodians charge based on account value, and they then make it sound like the annual certified valuation is an IRS requirement when actually it is just a means to ensure they get fully paid. The solution is to avoid custodians that establish their fees based on account valuation, which is a bad idea to begin with.
I finished moving mine into a self-directed IRA two weeks ago. Just know the process takes a bit of time start to finish. Give yourself about 5 weeks or so to get the process completed. (At least that was my experience) Good luck.
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
5y
@Shelby Willitts, @Brian Eastman cover that pretty well. We use the value in our 'buy sell agreement' that we have within our LLC, which VERY closely match comps. It sound like he might also be on track with *why* they want you to do that.
Depending what type of investigating your are planning on doing I would recommend taking a look at 'check book control' SDIRA. Just a small yearly fee and very few 'transaction costs' on an ongoing basis.
Have you talked to any of the providers I tagged up above?
New to Real Estate · El Dorado Hills · Member since 2020 · 32 posts · 13 votes
5y
@Daniel Dietz
Yes I spoke with Dimitriy a few days ago. He doesn't do the SDIRA's but was willing to set up the checkbook IRA for us. We're still evaluating these products before making the final decision.
I talked with my current financial advisor yesterday and as expected he gave me many pitfalls of moving to a Self-directed. However, the only thing that scared me was that he stated a client of his was required to do an evaluation on the property every year (basically an appraisal) and that the SDIRA charged him $2500 to do this. Do you know this to be true? If so this will change some things in my calculations. Also, none of the people at the SDIRA companies I’ve talked to have mentioned this nor is it listed in their fee schedules. Could there be other hidden fees they don’t need to disclose I should be aware of?
When a financial advisor talks that way it means that he is scared of losing an account ( less Assets Under Management, less fees he can charge you)......none of my SDIRA"s have ever charged my for a yearly appraisal....my .02 cents
Rental Property Investor · DFW TX · Member since 2018 · 179 posts · 260 votes
5y
I looked through the above, but did not see UBIT/UDFI mentioned. I think the largest problem with IRAs is that if you make much profit on a leveraged asset, you will owe a fairly hefty tax on the pro rated part of the deal.
I know that a Solo-401K avoids this tax. Not sure about some of the other flavors mentioned above. I strongly suggest you check.
Investor · Rescue, CA · Member since 2019 · 5 posts · 0 votes
5y
@Shelby Willitts, I have been evaluating the SD IRA LLC, with checkbook control so I could invest in different real estate ventures. I thought I had found a provider, but they are requiring I hire a real estate appraiser for any real estate owned. For private placement, the manager must provide a signed and notarized valuation statement. Or I could hire a certified appraiser to provide a full appraisal of the LLC annually. It keeps getting more complicated. I will be following this thread!
@Shelby Willitts, I have been evaluating the SD IRA LLC, with checkbook control so I could invest in different real estate ventures. I thought I had found a provider, but they are requiring I hire a real estate appraiser for any real estate owned. For private placement, the manager must provide a signed and notarized valuation statement. Or I could hire a certified appraiser to provide a full appraisal of the LLC annually. It keeps getting more complicated. I will be following this thread!
It doesn't hurt to talk with a few custodians while you're at it. Plus figure out which CPA you'll be using for UBIT, if your investment is likely to incur it. I found that the typical CPA doesn't understand how it works well enough to be efficient.
New to Real Estate · El Dorado Hills · Member since 2020 · 32 posts · 13 votes
5y
@Charles LeMaire Thanks for the info. Being new to this we are looking for all points that would help/hurt us if we choose to go this route. I did some research on the points you made and it looks like we won't have UBIT since we aren't going to be using financing. We are also not eligible for the solo 401 since we are not self employed. Our only options at this point are the SDIRA or the "checkbook IRA". Both are good options, but it will depend on what type of property we ultimately purchase. (Fixers will be better suited for the checkbook, and turnkey would be better with the traditional SDIRA)
New to Real Estate · El Dorado Hills · Member since 2020 · 32 posts · 13 votes
5y
@Terry Parkyn My current financial advisor warned me of this as well. I spoke with the SDIRA providers that I’m considering and they informed me that a formal appraisal was not necessary, but that an annual evaluation from an industry professional is required. I would surmise that some providers would ask for this either to cover their risk or they are cutting fees elsewhere to make their product look more enticing to perspective clients then use this as a way to make up for the missed fees.