Has anyone used a self-directed IRA?

Tax, SDIRAs & Cost Segregation
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Has anyone used a self-directed IRA?

Shelby Willitts
New to Real Estate · El Dorado Hills · Member since 2020 · 32 posts · 13 votes

I am thinking of transferring funds from my Simple IRA to a self-directed real estate IRA. Wondering if anyone has done this and how difficult is it?

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Daniel DietzPro Member
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
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@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.

Dan Dietz

[email protected]608-524-4899
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  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
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    Originally posted by @Shelby Willitts:

    @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.

     Custodians have to report the Fair Market Value of IRAs to the IRS every year. In the syndication space they will typically accept a letter from a managing member of the sponsor company on company letterhead. That may be the reason they want you to get a professional opinion of value done.

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  • Charles LeMaire
    Rental Property Investor · DFW TX · Member since 2018 · 179 posts · 260 votes
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    To add to @Taylor L. 's comment, the FMV is used to determine RMD amounts when you reach that age (you have to do the FMVs at all age!) and if you want to do a conversion, withdrawal, etc. And BTW, don't put yourself in the position that all of your IRA funds are tied up in R.E. It is very hard to saw off a room to make the RMD distribution! And that distribution is taxed, so again you need real money. Be careful as you approach age 72 and beyond so that you don't force a sale.

    Above I think you indicated that this was an appreciation play! Note that appreciation in an IRA (non Roth) turns into income and is taxed as such. Whereas appreciation in a non IRA is Cap Gain and is taxed at a lower rate (current administration plans aside). You also loose the benefit of depreciation, that can offset any current profits (you sound as if there may be none, but dare to hope...). There is also the concept of RE Pro that allows Depreciation to offset Income (you will want to aggregate). And if that is not in the picture, you get similar benefits in the years you dispose of properties (do not aggregate). Putting tax advantaged investments in tax free accounts is a bit sub-optimum.

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  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
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    Originally posted by @Charles LeMaire:

    To add to @Taylor L. 's comment, the FMV is used to determine RMD amounts when you reach that age (you have to do the FMVs at all age!) and if you want to do a conversion, withdrawal, etc. And BTW, don't put yourself in the position that all of your IRA funds are tied up in R.E. It is very hard to saw off a room to make the RMD distribution! And that distribution is taxed, so again you need real money. Be careful as you approach age 72 and beyond so that you don't force a sale.

    Above I think you indicated that this was an appreciation play! Note that appreciation in an IRA (non Roth) turns into income and is taxed as such. Whereas appreciation in a non IRA is Cap Gain and is taxed at a lower rate (current administration plans aside). You also loose the benefit of depreciation, that can offset any current profits (you sound as if there may be none, but dare to hope...). There is also the concept of RE Pro that allows Depreciation to offset Income (you will want to aggregate). And if that is not in the picture, you get similar benefits in the years you dispose of properties (do not aggregate). Putting tax advantaged investments in tax free accounts is a bit sub-optimum.

     RMDs are a very interesting point. What if you owned shares in a syndication and had to make a RMD? Can you make a distribution to yourself in anything other than cash, such as shares in a private placement?

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  • Terry Parkyn
    Investor · Rescue, CA · Member since 2019 · 5 posts · 0 votes
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    @Taylor L. I see you are a syndicator...do you provide FMV statements to your investors at year end? The FMV does need to be reported annually for the IRA LLC, it's just how do they get the information.

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
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    Originally posted by @Shelby Willitts:

    @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. 

    The Federal ERISA code requires that the FMV be reported annually for all retirement accounts.  The challenge with SDIRAs is that the FMV does not really matter unless there is a RMD or a distribution of the asset.  The costs associated with a real valuation do not make sense.  The vast majority of state regulated IRA Custodians will accept something less than a formal appraisal.  We will accept a written Broker's Price Opinion (BPO) or notice/computation from a Syndicator, etc.  Those IRA Custodians that are Federally regulated have been getting more pressure from their Federal regulators to obtain a more formal appraisal or valuation of some type.  It is important that you ask these questions in advance. 

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  • Charles LeMaire
    Rental Property Investor · DFW TX · Member since 2018 · 179 posts · 260 votes
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    @Taylor L.  There may be several ways to skin that cat.  One has to distribute as an RMD a percentage of the total of ones IRAs, so if you keep funds in the market in any of your IRAs, you go there to make the distribution.  On the other hand, as I understand it, one has to distribute from each and every 401K.  If you have a Solo 401K sunk in R.E, that would be a problems.  

    What follows is from the perspective of a more wealthy person.  If you are planning to be broke in retirement, no need to read.  But why would a broke person be on this site anyway...  And I apologize for hijacking the topic a bit.

    For the youngsters that have never heard of RMD (Required Minimum Distributions), at 72 you are forced to take distributions from non-Roth IRAs and 401Ks. Each year the distribution is based on life expectancy; the first year is about 4% (3.8% I think). Say you were a good saver and have $1M in your Trad IRA. You are pulling $40K out at 72, adding that to about 85%* of your Social Security to make tabulate your income and the tax there on. Say you and your spouse both have $1M then you are distributing $80K, and this will likely increase as you age. A couple things can cause some pain. 1. If you are a great saver, when your income hits (this year's numbers) $176K, your Medicare costs increase $50 per person, per month. Look up IRMAA. 2. Note when one of you passes (Financial Planers always kill the guy off first), the remaining person inherits the IRA so will continue to get the full amount. The lower SS disappears. And the Standard Deduction decreases and the tax rates increase (married to single), so that you get a big surprise in your taxes from then on. Look up Widow Tax Trap.

    Another thing to consider is that your RE and all owned assets get a step-up in basis (again, current admin aside!). IRAs do not. If you pass a non-Roth IRA to your kids, they get to pay the tax as they take it out over a 10 year period. Perhaps you don't care because you're DEAD, but perhaps you do.

    If married, consider the idea of Roth Conversions; the distribution tax rate is arguably higher than you think it will be.

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  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
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    Originally posted by @Terry Parkyn:

    @Taylor L. I see you are a syndicator...do you provide FMV statements to your investors at year end? The FMV does need to be reported annually for the IRA LLC, it's just how do they get the information.

     Yes that is provided to self directed retirement account investors who need it. It's not a big 'ask' for an investor to have of a sponsor, it's a very reasonable request and just part of how it works. Basically just ask for it then submit it to the custodian. If the custodian wants it directly, then ask the sponsor to send it directly. 

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  • Todd Goedeke
    Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes
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    @Charles LeMaire the first year of taking an RMD is at age 70 1/2, NOT 72.

    An RMD does not have to be in form of cash it can be taken “in-kind”.A  RE property can be re titled  to reflect % ownership.
    There are over a 100,000 people who have RE in their Solo 401k or IRA. It's an alternative that can provide stable cash flow. There is no need to get tax benefits of depreciation if inside a retirement account. You don t need to declare a capital gain if a property is rehabbed and sold.

    Typically, a Solo 401k serves as a conduit for old employer 401ks and other IRAs. The cash generated from RE master leases can be used for an RMD. No need in most cases to retitle a % of a RE investment to satisfy an RMD.

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  • Todd Goedeke
    Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes
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    @Shelby Willitts a clarification regarding SDIRAs, there are two types of SDIRAs.

    A "checkbook" type SDIRA utilizes setting up an LLC via an administrator. This Type of IRA can hold any number of assets in addition to RE.
    Another type of SDIRA utilizes a custodian who makes all distributions and buy/sells on your behalf. The set up fee for the IRA is lower but the annual fees can mount up as the number and value of your account rises.

    2Reply
  • Shelby Willitts
    OP
    New to Real Estate · El Dorado Hills · Member since 2020 · 32 posts · 13 votes
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    @Todd Goedeke Right! I have researched this pretty extensively in the last couple weeks and have found that the traditional SDIRA is best for turnkey properties where there’s a purchase and then very few expenses to be paid (taxes, insurance and property manager). I have found that distributions from the account are charged a fee per transaction so for every payment the administrator makes they charge $10-35 depending on the provider and type of distribution (wire vs. check).

    The checkbook IRA is expensive to set up (and in California an LLC must pay an $800 per year tax), but ultimately will avoid all the little charges for each distribution. Makes sense for buying properties that are rehab-type where you're paying for contractors, materials and other items to many different companies. Also allows freedom to make those payments instantly rather than having to file paperwork to have payments made on your behalf.

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  • Todd Goedeke
    Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes
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    @Shelby Willitts did you know you can still maintain a SIMPLE plan at your employer while having a SDIRA elsewhere? Do a direct transfer of desired assets to the SDIRA from the Simple plan. Keep SIMPLE plan open for ongoing contributions and transfer some annually.

    Are you sure the LLC has to be set up in CA?

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  • Shelby Willitts
    OP
    New to Real Estate · El Dorado Hills · Member since 2020 · 32 posts · 13 votes
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    @Todd Goedeke I have confirmed that I can keep my current employer simple open and can continue to make contributions to this account which is ideal because I would like my money not invested in real estate to still be getting the best return. My current financial advisor on my company plan has assured me that he can liquidate any investment in the market within 48 hours, which matters if I have an expense I need to pay for the property in the SDIRA. I am able to make direct wire transfers within the two accounts without penalty as often as I need. As long as I don’t take a distribution and redeposit into the SDIRA I can make multiple money transfers (for the small fees they charge) but the distributions/redeposit you can only do once a year.

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  • Shelby Willitts
    OP
    New to Real Estate · El Dorado Hills · Member since 2020 · 32 posts · 13 votes
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    @Todd Goedeke The LLC does not HAVE to be setup, it just makes sense for certain investments. It also limits liability if set up properly.

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  • Todd Goedeke
    Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes
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    @Shelby Willitts , what I meant is I m not sure that you need to set up an LLC domiciled in CA thus paying $800 in LLC fees per year. Demitry would know.

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  • Charles LeMaire
    Rental Property Investor · DFW TX · Member since 2018 · 179 posts · 260 votes
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    @Todd Goedeke   - The age for RMDs changed recently from 70.5 to 72.  I think it was the SECURE act.

    I did not know that one could distribute in-kind, that makes the distribution easier.  But I pretty sure the taxes have to be paid in money, so one needs to not be RE rich and cash poor.

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
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    Originally posted by @Todd Goedeke:

    @Charles LeMaire the first year of taking an RMD is at age 70 1/2, NOT 72.

    The age at which RMDs are now required was increased to 72.  It is no longer 70 1/2.  

    An RMD does not have to be in form of cash it can be taken “in-kind”.A  RE property can be re titled  to reflect % ownership.
    There are over a 100,000 people who have RE in their Solo 401k or IRA. It's an alternative that can provide stable cash flow. There is no need to get tax benefits of depreciation if inside a retirement account. You don t need to declare a capital gain if a property is rehabbed and sold.

    It is important for the SDIRA Owner to consult with their tax and financial planning advisors as well as their IRA Custodian when making partial in-kind distributions.  There are prohibited transaction rules to be aware of. 

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  • Jared Friedman
    Investor · Studio City, CA · Member since 2016 · 38 posts · 54 votes
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    @Shelby Willitts

    This is completely untrue. I own several single family rental properties in my SDIRA and you never need to get an appraisal every year. You’ll get an asset valuation form to fill out online that you do yourself. There is no charge for this. You can literally just use your year end property tax statement as verification of the property value. The problem with getting advice from financial planners is they will 99% of the time steer you away from SDIRAs because they have no way to make money off of you anymore.

    2Reply
  • Shelby Willitts
    OP
    New to Real Estate · El Dorado Hills · Member since 2020 · 32 posts · 13 votes
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    Originally posted by @Jared Friedman:

    @Shelby Willitts

    This is completely untrue. I own several single family rental properties in my SDIRA and you never need to get an appraisal every year. You’ll get an asset valuation form to fill out online that you do yourself. There is no charge for this. You can literally just use your year end property tax statement as verification of the property value. The problem with getting advice from financial planners is they will 99% of the time steer you away from SDIRAs because they have no way to make money off of you anymore.

     Would you mind sharing what SDIRA administrator you use?

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  • David B.
    Investor · Worcester County, MA · Member since 2016 · 122 posts · 72 votes
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    I just wanted to add my experience. I have had a SDIRA with one of the big providers for 5 years. I own a couple of rental houses and have invested in a mortgage fund as well as Crypto with the IRA. One of my rental houses is leveraged.

    The custodian will handle the taxes completion for the leveraged house, for a fee. I have had them do it, and have done it myself.  I have not had taxes to pay, because the depreciation deduction and other expenses, like interest, have wiped out any profits on paper. 

    i have not had to do an annual valuatiion of the houses . I don't pay fees for routine bill payments, only expedited payments and wires. I can do routine bill payments on line.

    I would say the whole process, for me, has been painless.

    2Reply
  • Matt Aquino
    Investor · Bergen County, NJ · Member since 2016 · 32 posts · 37 votes
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    @Taylor L.

    Thanks for sharing your knowledge and experience on this topic in the thread. 


    As the syndicator what is required to accept SD IRA capital into a deal? Does accepting SD IRA funds add additional burden to the sponsor? (I did see you mentioned that sponsor will have to provide fair market value of property if requested)

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  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
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    Originally posted by @Matt Aquino:

    @Taylor L.

    Thanks for sharing your knowledge and experience on this topic in the thread. 


    As the syndicator what is required to accept SD IRA capital into a deal? Does accepting SD IRA funds add additional burden to the sponsor? (I did see you mentioned that sponsor will have to provide fair market value of property if requested)

    The FMV bit is quite easy, for my custodian a letter from the sponsor on their letterhead stating the value is sufficient. The sponsor can do that pretty quickly. Your mileage may vary. Other than that I haven't run into anything.

    1Reply
  • Jenna Harris
    San Diego, CA · Member since 2018 · 32 posts · 11 votes
    4y

    @Shelby Willitts what did you decide to do? I am considering the same thing but am still looking for any and all guidance. 

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  • Shelby Willitts
    OP
    New to Real Estate · El Dorado Hills · Member since 2020 · 32 posts · 13 votes
    4y
    Originally posted by @Jenna Harris:

    @Shelby Willitts what did you decide to do? I am considering the same thing but am still looking for any and all guidance. 

    I jumped!  I got an account set up with a self-directed company and then we set one up for my husband as well.  I bought a condo last April with my funds and my husband bought a home last June with his.

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  • Terry Parkyn
    Investor · Rescue, CA · Member since 2019 · 5 posts · 0 votes
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    @Shelby Willitts congrats! I too have entered the realm and have had a variety of investments on both Roth and regular SD IRA

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  • Shelby Willitts
    OP
    New to Real Estate · El Dorado Hills · Member since 2020 · 32 posts · 13 votes
    4y

    Hi Terry! This is great to hear. Have they been profitable for you?  Are you holding as rentals, are you flipping them?  Maybe let's get together again and catch up on details?

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