All Forum Posts by: Doreen Chaisson

Plenty of clients at the SD IRA custodian I work for (not Equity) have brokerage accounts within their IRAs, working with TD Ameritrade, Fidelity, Wells Fargo and Schwab. Your custodian should be assisting with setting up this account - you shouldn't have to be doing it on your own or having to reach out to them directly. Your custodian should have established relationships with certain brokerage houses, and should be assisting you with selecting the one you want to work with and processing the application for your IRA to have its own brokerage account.

Some people do themselves with services like Legal Zoom, others hire a knowledgeable attorney. Check with your custodian to find out what docs they'll need to review. You don't need a specialist, but just be sure that the owner/member of the LLC is listed as your IRA and not you personally. Your custodian might be able to give you some recommendations for attorneys that have worked with their clients before.

Many people also fund SD IRAs by rolling funds over from other IRAs or 401(k)s from former employers.   

You will pay not only taxes if you don't replace the funds within 60 days, you will also pay an early distribution penalty if you are under age 59 1/2. Additionally, keep in mind you can do only one rollover in any 12-month period per tax payer, regardless of how many IRAs you may have. Some people think they can "daisy chain" rollovers - take money from a second IRA to replace rollover money from the first IRA, then money from a third IRA to replace money from the second IRA, to continually extend the amount of time they have to actually replace the originally distributed funds. This is now illegal. With the additional complication of conveying a piece of property and relying on financing and closing dates and so forth to align, you'd have to time your distribution very carefully.

You definitely need a non-recourse loan when borrowing with your IRA. Additionally, leveraging your IRA to purchase RE kicks off a tax called UBIT - be sure to research and check with a CPA to see what impact this may have on your investment return. Reduced to a very basic level, the percent of net income that's roughly equivalent to the percentage of the purchase that is leveraged will be subject to UBIT. If you leverage 30% of the purchase, roughly 30% of the net income produced by the property will be subject to this tax. It is recalculated every year as the loan is paid down. Most traditional non-recourse lenders require 30-50% down, and will require a certain amount of cash reserves in the IRA. Many have a list of property types they will not lend on (raw land, mobile homes) - they are generally looking for proven income-producing properties. Most offer 3-5 year ARMs, and the mortgage payments, as well as the UBIT tax, must be paid with IRA funds, not personal funds.

Finally, it's important to check with your 401(k) plan administrator to see if they allow in-service distributions, to rollover to a Self-Directed IRA. Many plans don't allow this while you are still currently employed.

If you can split the lot prior to purchase, and have your personal funds buy the plot you plan to build your own house on, and have your IRA buy the lot for the cottage, you should be OK as long as the IRA pays all costs associated with the construction, maintenance and property taxes of the cottage. The onus is on you to prove that this situation provides to personal benefit to you. You absolutely cannot use IRA funds to build a cottage one personally owned land. That is a form of self-dealing; your IRA is getting the benefit of owning a home at a reduced cost because no land purchase was necessary. It also opens up taxation questions - how will the property tax be split if you own the land and your IRA owns the building? What if a tree on the land falls onto the IRA's cottage - whose insurance covers it? This is an absolute prohibited transaction scenario that could put your entire IRA at risk, and cost you considerable money in taxes due to mandatory distribution of all funds involved in the prohibited transaction, possible early distribution penalty and punitive fees from the IRS. Your mobile home example, owning building on land you don't own, is not the same - that land is owned by a disqualified 3rd party, and your IRA is leasing that plot for the mobile home to sit on.

Any time an IRA buys land adjacent to an IRA owner's personal home, it can raise red flags (is the purchase to improve the surroundings of the IRA owner, keep it wooded, control the neighbors, use land personally?) - you want to make sure you follow the rules and keep the land buying and building transactions completely separate from the get-go.

To clarify a bit, there is no IRA called a "checkbook IRA". This structure is accomplished by opening an IRA, then forming a single member LLC that will be owned by the IRA. That LLC can have its own bank account/checkbook, and can be managed by the IRA owner as a non-member manager.

Some SD IRA custodians will not accept single member LLCs as an IRA investment due to increased regulatory scrutiny that begin in 2009. Those IRA custodians that do accept them will most likely require that you appoint a special advisor to oversee the transactions of your IRA-owned single member LLC, to ensure you are not crossing the line and doing prohibited transactions. Generally the requirement is for a licensed CPA or attorney.

Additionally, this structure is not required for RE investing, but it does simplify things as the LLC manager can write checks for expenses incurred by the LLC-owned property, instead of sending invoices directly to the IRA custodian for payment.

Be sure you're working with a qualified, regulated IRA custodian that has a specialty in Self-Directed IRAs or alternative assets. They will know all the IRS rules and regulations and will work with you to be sure you're fully educated on the Do's and Don'ts before you proceed.

Your custodian charges for incoming wires?  Normally the institution generating the outbound wire charges the fee.  Another option to consider is ACH - many custodians and banks do not charge for this service.

What @Chris Soignier is describing is called reciprocal lending and is generally considered a linked transaction to a prohibited transaction by the IRS. Basically your parents can't lend to you, and your partner's parents can't lend to him; lending to the opposite partner, while it seems "ok" on the surface, is still creating the same end result: a personal benefit to both of you, which is prohibited. If discovered, all IRAs involved risk the chance of losing their tax deferred status. The portion involved in the prohibited transaction would become disqualified funds, distributed from the account(s). The IRA owners would have to pay income tax, including on any gains from the transaction, possible early distribution penalties, as well as a punitive excise tax. No one wants to raise the attention of the IRS and risk further audit. Better to look for funding elsewhere, from completely arm's length, non-disqualified 3rd parties.

Yes, just as disqualified. However, your multiple IRAs (your traditional, your Roth and your wife's IRA) can all invest together in an asset as tenants-in-common. The IRAs can't have any transaction between them, but they can "join forces" for more buying power. For a RE investment, for example, they'd all own a percentage of the property. Real Estate-generated expenses & income would be split proportionate to ownership percentage.