Woodbridge, VA · Member since 2016 · 6 posts · 2 votes
Hello!
I am fairly new to the forum but have been quietly following some of the post. My husband and I are in the process of buying our first investment property, a multi family short sale in Puerto Rico. The plan is to rent the first unit to a full-time tenant and the second unit as a vacation home given that the property is only blocks from the beach. We currently live in the states but have family members that can help take care of the property as well as access to a property manager. My question is, should we directly use the funds from the pension plan for the down payment? or should we open a Self Directed IRA and use that as a vehicle? I have been reading about SDIRA but still not clear as to how it works.
Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
10y
If you use an SD IRA you cannot use the property for personal use. It would probably be better cash flow to rent both units and take a withdraw to rent a place when you want to visit.
Woodbridge, VA · Member since 2016 · 6 posts · 2 votes
10y
Thank you @Bob E. What I meant was as vacation rental and then staying maybe once a year for a week or so. Would that be allowed or not at all?
So if we do not need to stay there at all would an SDIRA be best? I am trying to minimize the tax impact since we do not meet the age requirements for withdrawal.
Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
10y
You can not use a property held in an SDIRA for personal use. Ever. If you get audited and caught your entire account holding the property becomes subject to penalties and taxes. Very likely you will be wiped out for that account. Keep your unit rented and rent someone else when you visit.
Also be very careful about billing any expenses to the IRA. Our IRA is looking to fund an LLC and we just started talking with an attorney, he mentioned the people charging travel to their IRA is a common violation.
Bob is right - if your SD IRA invests in a property or anything else, you personally cannot benefit from it directly, only the IRA may benefit.
It works like this...
When your IRA or 401(k) is with a brokerage such as Fidelity, Charles Schwab, etc., you typically can only have those funds be invested in what the brokerage offers. Sometimes it's limited by the SPD, other times you can invest in ANY thing the brokerage offers (their interpretation of "self-directed).
A true self-directed account is held with a custodian who invests the funds in the account as YOU direct (hence, "self-directed") and investment are options are only limited to "any investment which is not a prohibited transaction". An easy way to understand "prohibited transaction" is anything which benefits you directly or anyone in your direct line of descent or ascent. That is, you cannot invest in your own business, your spouse's business, your child's business, your parent, grand-parent, etc., your grand-child, great-grand-child, etc. You can, however, invest your SDRP in a sibling's business, uncle / aunt, niece / nephew, cousin, etc.
Your accountant or attorney should be able to answer your questions. I'm neither.
David J Dachtera
"Success is not a destination. Failure is not an event. Success is a process, failure is a choice." - DJ Benedict
Woodbridge, VA · Member since 2016 · 6 posts · 2 votes
10y
Thank you so much @Bob E. and @David Dachtera. I greatly appreciate you taking the time to explain it to me in such detail. I now have a better understanding!
Also, consider opening a solo 401k and transferring the IRA into it. Subsequently, you can borrow from the solo 401k plan. You can borrow 50% of the solo 401k balance not to exceed $50,000. You can use the borrowed funds however you wish as they are no longer considered solo 401k funds once borrowed. Since each solo 401k participant can borrow up to 50% of their respective solo 401k balance not to exceed $50,000, if your husband is also self employed and has funds that he can transfer to the solo 401k, he can also borrow from the solo 401k. To learn more about the solo 401k and the loan rules, see the following IRA links.
Woodbridge, VA · Member since 2016 · 6 posts · 2 votes
10y
Thank you @Mark Nolan! Our challenge now is that we got the check from the pension plan and don't know what path to follow. The shortsale paperwork was submitted to the bank on Tuesday and it could take up to 120 days before we get a response. My question now is, if we open a Solo 401K, how soon could the funds be withdrawn?
We have 60 days to deposit the check on another eligible retirement program or I.R.A. and avoid paying taxes on it otherwise we will be taxed and penalized.