All Forum Posts by: Doreen Chaisson

Also, if the 401(k) is with a current employer, you'll need to see if they'll allow an in-service rollover to an IRA. Many plans will not allow this if you are still employed.

There are no taxes due when rolling a 401(k) to a traditional IRA. Only if he were converting to a Roth IRA would taxes come into play. I think Francois' intent is to make the investment with retirement dollars, and not take the funds as a distribution.

Why not create one single member LLC and have both of your IRAs invest in it? It sounds like the companies you are speaking to are facilitators, not IRA custodians. Their forte is setting up these LLCs and charging for their services.

You can probably set up the LLC more cost effectively yourself, using your own attorney if needed. You'd instruct your IRA custodian to invest the funds of both of your IRAs into this one LLC, they'd each hold a percentage share of ownership based on initial investment. You, as non-member manager, would control the checkbook of the LLC. Most IRA custodians who accept single member LLCs as IRA investments will require that you appoint some kind of special advisor (licensed CPA or attorney) who will review all the transactions of the LLC to make sure there are not any prohibited transactions happening.

You know what they say when something seems too good to be true...Look at it as less of a shoot down and more of a tax court/IRS audit avoidance tip!  Have a good one.

This is called reciprocal lending and is considered a prohibited transaction. Basically your company and his company need money - instead of taking a taxable distribution from your own IRAs to infuse cash into your own respective companies, you are cross-lending to each other to accomplish the same end, which results in the personal benefit of infusion of cash into your company - without a taxable event to you -and a loan that you or he don't necessarily have to pay back. The point of IRA investing is to grow IRA wealth, not have any personal benefit.

IRAs cannot invest into S-Corps. Your IRA can own a single member LLC or invest into an existing LLC that is not currently owned by you or any disqualified parties (your spouse, your parents, your children or their spouses). You cannot transfer any existing personally owned assets into your IRA -owned LLC. It is a prohibited transaction to have any sale, exchange or lease of assets between yourself personally and/or any disqualified parties and your IRA. Any properties purchased by the IRA-owned LLC must be new properties not currently owned by your or any disqualified parties. Furthermore, you and disqualified parties cannot live in or use any of these properties, nor can you do any of the maintenance, upkeep or construction work on them. It must all be handled by outside, 3rd parties.

There are many Self-Directed IRA custodians out there. It is advisable to do your due diligence and ask about such things as how long have they been in business, are alternative assets their sole focus, are they BBB accredited and rated, are they a regulated financial institution, have they ever been sanctioned by any regulatory bodies, how many accounts and how much in assets do they administer?

What often gets overlooked is the type of company you are choosing. IRA providers can be put into three separate categories: Custodians, Administrators, and Facilitators.

Custodians are the first type of company, and are usually the most common. They're either a bank, credit union, or non-bank custodian approved by the IRS (usually a broker dealer who obtains IRA approval). Custodians are permitted to custody assets held in an IRA under IRC Section 408. They're also subject to strict regulatory oversight at a State or Federal level. Custodians tend to take a more conservative approach when reviewing alternative assets for investment, as they want to avoid the custody of any assets that may be involved in prohibited transactions. Alternative Asset custodians cannot give any tax, legal or investment advice, cannot assist with the structure of an investment, and cannot endorse, promote or align with specific investment sponsors.

Administrators are the next type of company. Essentially anyone can be an administrator, and their main function is to perform administrative functions only. Because of this, they also need to have an identified custodian for the self-directed IRA named in the account disclosure documents. Administrators are only subject to regulation if required due to profession (CPA or attorney), not for role as administrator. This allows administrators to be much more liberal in accepting assets and allows the ability to align with investment sponsors. Review fee schedules carefully – there may be separate charges for whatever 3rd party custodian they are using.

The third company type is a Facilitator. They educate investors on the process of self-directed investing or assist in setting up single-member LLCs for either "check-book control" or to purchase a franchise or ROBS (Roll-Over Business Startup). They may also provide administrative services for the LLC. Like Administrators, Facilitators must have an identified custodian for the self-directed IRA and are only subject to oversight on a professional level. They are also much more liberal in accepting assets and can align with investment sponsors. Again, review fee schedules carefully – there may be separate charges for whatever 3rd party custodian and/or administrator they are using.

So when you're looking for someone who offers a self-directed IRA, make sure you know the type of company you're dealing with. This will help when determining which company best fits your investment scenario.

If this LLC is an existing LLC that you nor any disqualified parties have any involvement with currently, and your only involvement would be lending funds, then the two loans, as you describe them, would most likely pass muster. (You, as IRA owner, cannot be hired by the LLC to do any of the rehab work on the property). You do run some risk of what is called "enabling" if you are combining personal and IRA funds into one loan (ie - using IRA funds to enable a personal investment). But if I am understanding you correctly, it seems you will be doing two separate notes to the LLC - one from the IRA and one from personal funds. There doesn't appear to be a personal benefit, but I always recommend checking with a qualified professional - CPA or Attorney - to make sure you are not running afoul of any prohibited transaction rules.

Always ask any prospective SD IRA custodian about their reputation and regulatory history. How long in business, are they both administrator and custodian, how many alternative assets under custody, are alternative assets their sole focus, are they BBB rated AND accredited, have they ever been sanctioned by any regulatory body are all very important things to know.

This is a common refrain from CPAs, and they tend to look at it from only the tax perspective. If you're looking to get into RE personally, and your IRA is the only cash available, then it won't accomplish what you're looking for (an additional personal income stream, depreciation, personal tax write-offs, etc). However, if you are trying to grow your IRA wealth with an asset you are familiar with and can count on income and growth from (as opposed to taking chances in the stock market), then the depreciation and other write-offs you could take if done as a personal investment become moot. As you mention, holding RE in an IRA has other benefits - no income tax until distribution, no capital gains tax at sale (if no leverage in place for 12 months). If you have enough cash in a Roth to purchase a property outright (or even with leverage), hold & rent for several years, then sell, and then subsequently have access to all of that earned cash tax-free at distribution...it's hard to find a publicly traded investment that would generate the same type of return. IRA investments should be weighed against each other as far as "what will grow my IRA wealth more?", and not compared to personal investments.