Want to Use IRA $ for REI - Who Do I Consult? Tax Att., CPA, CFA?

Question

Hello and thanks in advance for any constructive advice,

Long story short, I was laid off last year and cash savings are all but evaporated.  I've chosen to fund my first REI with cash from my self-directed IRA.  Can anyone point me in the right direction as far as which professional (e.g. tax attorney, CPA,, financial advisor) I should consult with to help minimize the tax burden I'm about to encounter?

This info may help (or not); I'm planning to use $ from REI as personal income

Mark Nolan · Answer

@Chad Bailey

The following IRS document sheds more information on the ROBS 401k program.

https://www.irs.gov/pub/irs-tege/robs_guidelines.pdf

Also, here is how the ROBS 401k program works in a nutshell.

• A new C-corporation is established.

• Corporation sponsors a new 401k/PSP.

• The IRA funds are transferred to a new brokerage account opened for the 401k/PSP.

• The new real-estate corporation issues stock shares to the 401k/PSP for the benefit of the participant.

• The 401k participant must be an employee of the corporation and he or she may take a reasonable salary.

• The corporation owner's family members may be employees of the franchise  business and receive reasonable compensation for their services.

• To the extent that the corporation generates profits and elects to  distribute those profits to the owners of the business, the percentage  of the profits associated with the shares held in the 401k/PSP will flow  back to the 401k/PSP brokerage account.

Dmitriy Fomichenko · Answer

Chad, when you say your "first REI" what exactly do you mean? If I understand you correctly you already have a self-directed IRA established and funded. Did you use those funds to buy a rental property? Using it as a bank and providing private lending? Or attempting to flip a property?

As Brian mentioned all passive income from investments in your SD IRA will be sheltered from taxes and you will not have any 'tax burden'.

If you engage your IRA in an active business such as flipping properties then income of an IRA generated by this activity will be subject to Unrelated Business Income Tax (UBIT), but again - the IRA will be responsible for this, not you personally.

While it is your account, for the purpose of taxation you need to look at it as completely separate entity from you. You control it, you manage the investments but you don't have access to any benefits those investment provide until you start taking distributions at retirement. If you decide to take any portion of the account as early distribution there will be taxes and penalties just like with any conventional IRA.

Account Closed · Answer

Contact Equity Trust

Brian Eastman · Answer

@Chad Bailey

A self directed IRA will not allow you to use the income.  Such a vehicle is designed to operate from a tax perspective exactly like any other IRA, and simply opens up your investment choices to include things like real estate.  But all returns go tax-sheltered to the IRA.

A Rollover as Business Startup (ROBS) plan will be the program to evaluate.  This structure allows you to form a corporation and make your retirement plan a shareholder.  You can work for the corporation and receive an income.

These plans are offered by a handful of specialty providers, (you can find several here on BP) and while you will certainly want to have your own CPA involved in helping you evaluate such a move and operate your business, most CPA's will not form or support the structure itself.

Dmitriy Fomichenko · Answer

and if you want to 'tag' someone, start typing their name immediately after @ and then watch for the name of the person to appear below the text box where you are typing. You have to click on their name to 'tag' them.

Dmitriy Fomichenko · Answer

@Chad Bailey

you can certainly have real estate investments provide you with the passive income you need, but this will not happen overnight. Especially if you don't have any personal savings and starting with nothing. And as I mentioned earlier you need to separate your retirement accounts from your personal finances because retirement account was designed to provide you with benefit during the retirement, not now.

Chad Bailey · Answer

@Brian Eastman, @Dmitriy Fomichenko

Thanks for the quick & informative responses!

@Dmitriy To answer your question, I'm not sure what my first real estate investment (REI) looks like. It may be an SFR, turn-key rental, or possibly a flip.  But before I can decide what direction to go I need funding.  The only funding I have available to me would be from my IRA and 401k (rollover from previous employer) to purchase my first REI.  I'm beginning to believe this was naive, but I was hoping to turn real estate investments into my single source of income.

Want to Use IRA $ for REI - Who Do I Consult? Tax Att., CPA, CFA?

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