Property Manager · Detroit, MI · Member since 2020 · 11 posts · 2 votes
Hello everyone! I have a 401k with a old employer and I'm looking to roll over into a self directed IRA to borrow against to purchase investment properties. What financial service companies can assist with this?
Here are some issues to consider in choosing an Self-directed IRA provider:
1. In order to have checkbook control, the IRA account will need to be at a trust company that will allow the IRA to invest in an LLC (where you will be the manager and your IRA will be member - an as manager you will have checkbook access to the LLC bank account). Therefore, you will want to confirm that the trust company allows for investing in an LLC and the associated fees and minimum balance that applies to the IRA account.
2. Confirm that the IRA LLC provider will prepare all of the documents needed to not only form the LLC (articles of organization, SS-4 to obtain an EIN) but also the documents needed by the trust company to process the investment of IRA funds in the LLC.
3. Confirm that the provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).
4. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).
5. In addition, if you are self-employed with no full-time employees you may wish to consider opening a Solo 401k instead of a self-directed IRA as it has several advantages over an IRA LLC such as much higher contribution limits, direct checkbook control (i.e. no need to have the account at a specialty trust company), ability to take a 401k loan, exclusion from unrelated debt finance income tax with respect to investment in real estate acquired with non-recourse financing, etc.
In addition, please note if you purchase debt-financed real estate with your IRA, unrelated debt finance income tax should apply to the income attributable to debt-financed real estate held by your IRA. Of course, you will want to review your specific situation with your tax advisor.
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
6y
Most SDIRA companies could help you with that. However, is that something that makes sense?
Since you would be borrowing from yourself, you would have to be super-careful about not blowing up the IRA on the self-dealing rule. Since you are lending money to do deals outside the IRA, the only income you are shielding from tax is the interest on the loan. The custodian fees for an SDIRA are likely to offset any benefit from that.
We are at a unique point in time where the CARES ACT may enable you to just take the money out of your 401(k) now and avoid the 10% penalty. This gives you the chance to release your money from the IRA prison to invest it without restriction.
Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
6y
Learn about the restrictions first before making any moves with that money. You are disqualified from doing business with your own SDIRA, so you can't take a loan from it to buy rental property. You do have a lot of other options to invest it in real estate, though.
Regarding custodians, you'll have a few chime in on this post. Search for client experiences, look at their fee structures, and talk with them before picking one.
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
6y
What we did in that situation is not 'borrow' from the SDIRA (or SOLO401K if you qualify) but to 'use' that as the down payments and acquire 'non-recourse' loans on the properties.
No 'self dealing rules' to worry about. Very similar to traditional investing systems. That are quite a few good providers on here who are likely to chime in.
Here are some issues to consider in choosing an Self-directed IRA provider:
1. In order to have checkbook control, the IRA account will need to be at a trust company that will allow the IRA to invest in an LLC (where you will be the manager and your IRA will be member - an as manager you will have checkbook access to the LLC bank account). Therefore, you will want to confirm that the trust company allows for investing in an LLC and the associated fees and minimum balance that applies to the IRA account.
2. Confirm that the IRA LLC provider will prepare all of the documents needed to not only form the LLC (articles of organization, SS-4 to obtain an EIN) but also the documents needed by the trust company to process the investment of IRA funds in the LLC.
3. Confirm that the provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).
4. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).
5. In addition, if you are self-employed with no full-time employees you may wish to consider opening a Solo 401k instead of a self-directed IRA as it has several advantages over an IRA LLC such as much higher contribution limits, direct checkbook control (i.e. no need to have the account at a specialty trust company), ability to take a 401k loan, exclusion from unrelated debt finance income tax with respect to investment in real estate acquired with non-recourse financing, etc.
In addition, please note if you purchase debt-financed real estate with your IRA, unrelated debt finance income tax should apply to the income attributable to debt-financed real estate held by your IRA. Of course, you will want to review your specific situation with your tax advisor.
It is not possible to borrow from an IRA, IRS does not offer loan provision for IRA. If you convert to self-directed IRA - that would not change anything regarding borrowing, but it would enable you to invest in real estate or other alternative investments in your SDIRA.