Investor · Dallas/Fort Worth · Member since 2023 · 10 posts · 0 votes
So I had a SEP IRA from my other company that sat stagnate since we went to S-CORP (this business is not a real estate business its my other business). I recently moved the SEP IRA to a SDIRA with Trust/LLC and now have all the money in a banking checking account ready to use. The more I learn about disqualified uses though, the more I am thinking I either need to buy a long-term no problem home with this money or I need to go with an REIT or completely change directions.
Any one with experience with SDIRA and if you would do otherwise after doing it or you are an expert in them and recommend/don't recommend them? My CPA gave it to me as an option and said the custodian can help me with the ins and outs of how to use it, but he did mention I can't do the work on it and all the funding and proceeds has to go back to the IRA LLC (so I wouldn't obviously benefit until retirement which is the same for the SEP IRA).
I formed a partnership LLC between my SDIRA and an up-and-coming investor wannabe. He does the work, I provided capital. It's been a pretty good couple years, he's not a wannabe anymore and my valuations has grown substantially. Just another option.
There are limitations surrounding the use of an IRA. The money is tax-sheltered, which means it is not "your money" until you take it out and eventually pay taxes. An IRA or 401(k) is your future self's money. However, by not paying taxes up front and on earnings along the way, the plan is to accumulate a much large amount of savings that if the money were taxed and in your hands today.
The same limitations apply to an IRA in the stock market, but of course nobody thinks about swinging hammers on their IRA's stock portfolio.
The "Should I keep the SDIRA?" questions to think through are pretty simple. Can you better protect and grow this portion of your savings in a mix of alternative assets than you can in conventional stocks in funds? And, if you are still contributing to an IRA or 401(k) that likely is in the market, do you want to be diversified with this portion being in something other than the market?
The "What to invest the SDIRA in?" piece is a bit trickier, because you will achieve the desired "protect and grow" goal for this money best by investing in something you know and understand best. What is that... within the confines of the IRS rules? There are lots of good real estate related choices, including:
- A simple long-term rental property as you mention
- Private lending to builders, flippers, or other investors
- Private REITs & Real Estate focused funds
- Real Estate Syndications
A lot of people come to a self-directed IRA with the misconception that "I am going to invest in real estate and get access to this pile of tax-sheltered savings I have in my retirement plan". Well, that is not what a self-directed IRA is, any more than what a conventional IRA is. The better way to think about it is from the perspective of the IRA as I indicated above. How can you best put this money to work so there will be more of it sitting there when you reach retirement age?
Investor · Dallas/Fort Worth · Member since 2023 · 10 posts · 0 votes
3y
Awesome post, thanks so much. Yes, I think for me it is a diversification question. I have plenty in 401k right now that I will leave and let grow. This SEPIRA was just doing nothing and getting affected by the market heavily (which I cashed out without loosing a ton). So I think the best strategy is to find a home that I can use this money for solely and let it grow at the market rate and really be more hands off since everyone else has to do the work (other than of course managing the people doing the work and checking on the finances). Or private lending would be good too, but not sure the interest rate would be better than I would grow a future home in 20-30 years. I could also invest in a MF property with people and just take a % of dividends, I will explore that too. Thanks for the time!
Investor · Dallas/Fort Worth · Member since 2023 · 10 posts · 0 votes
3y
I also had the notion that good cashflow back into the property is great, but not on an SDIRA because of the UBIT problem. So I want to find a home that doesn't cash flow a ton (enough to make fixes / repairs / Capex, etc...) but really is just a growth on market price of home that I could sell one day and pay taxes then LOL.
Why would you look for a property that performs poorly?
I can make $2 and not pay taxes... or, I can make $10, pay $2 in taxes and still have $8 left over. Last time I checked, $8 post-tax dollars is bigger than $2 non-taxed dollars.
I think you need to revisit this topic with your plan provider and CPA.
Investor · Dallas/Fort Worth · Member since 2023 · 10 posts · 0 votes
3y
Yes, sorry that wasn't very clear (my brain moving faster than my words). I am exploring the type of home I can get straight cash vs. leveraged. So what I was reading in the IRS code concerned me if I was going to do a leveraged home and consideration for tax on top of tax (being taxed twice).
My CPA/Custodian and I will explore more when I actually make a decision, but just looking for other people with experience actually doing it (usually empirical evidence and experience makes for better advice than just knowing the codes). So before I do anything, I was looking for people who have done it and how they learned from it.
I formed a partnership LLC between my SDIRA and an up-and-coming investor wannabe. He does the work, I provided capital. It's been a pretty good couple years, he's not a wannabe anymore and my valuations has grown substantially. Just another option.