All Forum Posts by: Kaaren Hall

Ask your custodian if they will accept the FMV.  Because the conversion is taxable and will be reported to the IRS, a third-party valuation may be needed.  Your custodian can give you their criteria.  I doubt this conversion would trigger an audit, but if you truly are concerned about it, please discuss with your tax advisor.

You can do this.  Yes, a conversion is is allowed.
I would not assume your investment amount is the FMV.

First, you will need a valuation of the syndication asset from a third-party valuator.  The reason for the valuation is to give your custodian the $ amount to report to the IRS.  You will then be able to convert your Traditional asset to Roth at that determined value.   The amount of the conversion will be taxable to you, but the future proceeds from the asset will grow tax-free.  

Discuss the valuation criteria with your SDIRA custodian before proceeding.

I did a podcast on this topic in May this year (#770) If you are already a real estate investor then you are more than half-way there. When you use your own SDIRA, remember you need to keep things arm's length. That means your SDIRA can purchase an investment property, but not one you might have personal use of. It also means that all expenses must be paid with IRA funds and all proceeds must return to the IRA. If you like, hit me up here on BP and we can set up a time to go over your questions. ~Kaaren Hall

Embarking on the journey to financial freedom in retirement? This guide you through the ins and outs of rolling over your old employer's retirement plan into a self-directed Individual Retirement Account (IRA). This isn't just any rollover - it's your ticket to taking charge of your retirement nest egg and exploring exciting investment avenues, especially in real estate.

Getting to Grips with Rollover Basics

First things first, let's break down what a rollover really means. It's when you move your retirement savings, maybe from a 401(k) or similar plan, into an IRA. The best part? You dodge immediate taxes and penalties. It's like transferring your hard-earned money into a new home, one where you're the boss.

Step 1: Chat with Your Current Plan Keeper

Kick things off by reaching out to the custodian of your current retirement plan. This is the financial guru or organization holding your employer's plan. It's the first step to unlock your IRA adventure.

Step 2: Gather the Rollover Game Plan

Your custodian has the roadmap - the rollover documents. These are the treasure maps with all the Xs, forms, and instructions you need.

Step 3: Gear Up with Your New IRA Account Number

Got your new self-directed IRA lined up? Perfect! Your current custodian will need its account number to set the wheels in motion. If you're still shopping for the perfect self-directed IRA, lean towards those that are real estate-friendly.

Step 4: Dot the I's and Cross the T's on Forms

With the rollover paperwork in hand, fill it out with the precision of a seasoned investor. Accuracy here means a smoother ride to your IRA destination.

Step 5: The Waiting Game**

After you’ve sent off your request, give your current custodian some time to work their magic. This process time varies, so use it to plan your next investment moves.

Remember

It’s always wise to consult with a financial advisor to ensure that your decisions align with your long-term financial goals.

Ron - You can read about Prohibited Transactions in the Internal Revenue Code4975.  Or you can reach out to me.  

Richard - Yes, you are correct!  That FinCEN site is also a hotlink in the article.

Important 2024 Update for IRA-Owned LLC Investors: New Reporting Requirements Under the Corporate Transparency Act

Attention Real Estate Investors with IRA-Owned LLCs! As of January 1, 2024, a significant change is coming your way due to the Corporate Transparency Act (CTA). This law, initiated by the Department of Treasury and Financial Crimes Enforcement Network (FinCEN), requires all U.S. formed or registered LLCs, including those owned by IRAs, to submit a Beneficial Ownership Report. This is a crucial update for our community, especially if you're using an IRA-owned LLC to fund your real estate investments.

However, there's a silver lining for Solo 401(k) holders: this new rule doesn't apply to your investment vehicle.

Why is the CTA Being Implemented?

The primary goal of the CTA is to combat under-the-radar financial crimes like money laundering. In the context of IRA-owned LLCs, the IRA holder is considered the beneficial owner. You'll need to provide detailed personal information including your legal name, birth date, address, and ID documents (think passports or driver's licenses). Be warned: failing to comply could lead to hefty fines or even imprisonment. Remember, any costs for filing this report are covered by your IRA.

How to Comply with the New Requirements

Ready to file? You'll need to submit your beneficial ownership details electronically via FinCEN's secure platform. This development underscores an increasing regulatory scrutiny on IRA-related entities, a contrast to Solo 401(k)s which remain unaffected by this change. For more details, [click here].

Before making any moves, it’s wise to consult with a financial or legal expert. For those of you looking for specialized advice on self-directed retirement plans.

Introduction to Real Estate Investment through Retirement Accounts

Have you ever considered that a Self-Directed IRA or Solo 401k could be used to invest in rental real estate? Surprisingly, many people are unaware of this possibility. However, it's not just about buying real estate; these accounts can also utilize mortgage loans to facilitate the purchase. Crucially, when the IRA or Solo 401k takes out a loan, the IRS stipulates it must be a non-recourse loan, made specifically to the IRA or Solo 401k, with no personal guarantees from you. Additionally, the loan must be a portfolio loan, meaning it cannot be sold in the secondary mortgage market. Importantly, this financing option opens the door to potentially acquiring more expensive properties or multiple real estate investments.

Qualifying for Loans with IRAs

Concerning the IRA's eligibility for borrowing, since these are portfolio, non-recourse loans made to the IRA without personal guarantees, you'll find that the number of willing lenders is limited. Your personal financial situation, including income, credit, or assets, is not considered in the loan application because you are not the borrower. As a service, we can provide a list of lenders who are open to loaning money to an IRA. It's important to note that these are not lenders we endorse; we're merely offering this list as a helpful resource.

Lenders are primarily interested in the property's ability to generate positive cash flow after covering the mortgage payment and other expenses. Essentially, the rental income is what repays the loan. Additionally, lenders expect the IRA to maintain cash reserves in the account, as all property expenses must be covered by the IRA. For instance, uDirect mandates that the IRA retain a 10% cushion of the sales price after purchasing the property. Remember, personal funds cannot be used for this investment.

Understanding Lender Requirements

One example of lender criteria involves the Debt Service Coverage Ratio (DSCR). Typically, lenders want to see that the Net Operating Income is at least 125% of the loan payment, known as a 1.25 DSCR. This is the minimum cash flow requirement to qualify a property. To calculate this ratio, divide the Net Operating Income (after taxes, insurance, HOA fees, management costs, etc.) by the Principal and Interest payment on the loan. Furthermore, lenders generally require substantial down payments, often 40-50%. Discussing the rate and terms with the lender is essential for a clear understanding.

Addressing Loan Default Scenarios

In cases of loan default, it's critical to understand that with non-recourse loans, personal guarantees are not permitted. Consequently, the lender's only recourse is to foreclose on the property, attempting to recover their investment. They cannot pursue other assets owned by the IRA or by you personally.

Understanding Unrelated Debt Financed Income Tax (UDFI)

Borrowing in an IRA incurs a tax known as Unrelated Debt Financed Income Tax (UDFI), though the Solo 401k may be exempt from this tax. For example, if you finance 60% of a property, 60% of the rental income is potentially taxable. The IRA must show 60% of the rents on the 990t tax return and can write off 60% of the expenses. If there's a net profit, the IRA is responsible for the tax. The taxable percentage changes annually as the loan balance decreases and the property value fluctuates. A year and a day after the loan is paid off, UDFI no longer applies.

While the IRA owing taxes on rents and profits might seem daunting, it doesn't necessarily detract from the investment's value. It's crucial to calculate the net profit after taxes to assess the investment's viability. Consulting with a tax advisor can provide clarity in this area. Additionally, potential property value appreciation can further enhance your Self-Directed IRA's value.

Relevance of 1031 Tax Deferred Exchanges

Generally, a 1031 Tax Deferred Exchange may not be relevant since IRA-owned assets are already tax-deferred. However, selling an IRA-owned property with a loan attached could be an exception, potentially avoiding UDFI taxes associated with the sale. This is a complex topic best discussed with a tax advisor.

Final Recommendations

Your Self-Directed IRA custodian does not offer tax, legal, accounting, investment, or other professional advice. Seeking expert advice in these areas is highly recommended. This article is meant to point you in the right direction.

After you have invested using your self-directed account, you might wonder about the next steps to take. Importantly, it's crucial to be aware that a lack of available cash in your Self-Directed account can expose you to potential pitfalls in maintaining your investment.

Focusing on the realm of real estate, maintaining available cash in your Self-Directed account becomes particularly crucial when your IRA owns a piece of property. Unexpected expenses can arise at any time, and you will already have regular monthly expenses such as property management, landscaping, and cleaning services. Consequently, what should you do when the property incurs unforeseen costs? These emergency costs could include significant repairs like roof repair, furnace or air conditioning replacement, or water heater issues. Since these repairs can be quite expensive, having sufficient available cash in your account to cover unexpected expenses can save you both time and frustration.

Moreover, it's worth noting that, on average, it takes about two weeks to transfer or roll over additional funds to your Self-Directed account. Therefore, a lack of reserve cash can potentially jeopardize your tenant or property. By ensuring you have an ample amount of available cash, you are able to address these repairs immediately, thus safeguarding your tenant and property.

Regarding the policy of uDirect IRA Services, they mandate a 10% reserve for such expenses. This policy means that 10% of the property's value needs to be set aside for the expenses the IRA is responsible for. The rationale behind the 10% reserve is that it can be used to pay bills related to the property since you cannot pay those expenses personally.

When considering LLC interests, it's essential to know that investing in an LLC or entity often involves "Capital Call" requests for additional funding. If you are unable to meet such a request, in certain situations, failing to meet a capital call request could dilute your Self-Directed IRA's percentage of ownership. Particularly, if your IRA is the sole owner of the LLC, this might render you unable to cover the expenses incurred by the LLC, which could be costly.

It's also important to be aware that Capital Calls can happen at any time. As a result, it's advisable to be prepared by having enough available cash in your account to meet these calls promptly. Given that these calls often have deadlines, the need to transfer or roll over additional funds becomes urgent. The consequences for defaulting on a capital call, as explained in the Investor Agreement associated with each fund, can include loss of equity and rights in the fund, interest charges, or the sale of the investor’s stake to third parties.

Lastly, according to IRS regulations, all expenses related to an investment held in your Self-Directed IRA must be paid by the IRA itself. Using personal funds to cover these expenses could result in a prohibited transaction. Therefore, ensure your Self-Directed account maintains a sufficient balance of available cash.

Embracing New Opportunities in the New Year

As we transition into the new year, it's imperative for savvy investors to keep abreast of the evolving landscape surrounding retirement savings plans, especially when it comes to Self-Directed Roth IRAs. Significantly, the year 2024 heralds key adjustments in the income phase-out ranges for these accounts, which could notably influence your retirement savings strategy. In this article, we'll delve deeply into these changes, exploring what they signify for individual investors.

Key Changes in 2024: A Closer Look

Firstly, it's important to note that for 2024, the contribution limits have risen substantially. For individuals under 50, the limit has escalated from $6,500 in 2023 to $7,500. Meanwhile, the catch-up contribution for those aged 50 and above steadfastly remains at $1,000.

Additionally, the income phase-out ranges for Self-Directed Roth IRAs have experienced a considerable uptick. This alteration is crucial for both individuals and couples to grasp, as it directly impacts their ability to make contributions to a Roth IRA.

1. Singles and Heads of Household: Remarkably, the income phase-out range for this group has increased to between $146,000 and $161,000, up from the previous range of $138,000 to $153,000 in 2023. Consequently, if your modified adjusted gross income (MAGI) falls within this bracket, the amount you're eligible to contribute to a Roth IRA starts to diminish.

2. Married Couples Filing Jointly: Similarly, for those married and filing jointly, the range has now been expanded to between $230,000 and $240,000, a notable rise from the 2023 range of $218,000 to $228,000. This shift potentially opens the door for couples with higher incomes to qualify for Roth IRA contributions.

Implications for Investors: Understanding the Impact

These adjustments lead to several important implications:

- Increased Contribution Opportunities: With the elevated phase-out ranges in 2024, a broader spectrum of individuals and couples, particularly those earning incomes near the previous limits, now have the opportunity to contribute to Roth IRAs.

- Strategic Planning: Those situated near or within the new phase-out ranges must place an even greater emphasis on strategic financial planning. This becomes crucial as you navigate how your income and other retirement contributions influence your eligibility for a Roth IRA.

- Tax Planning: Given that Roth IRAs provide the advantage of tax-free growth and tax-free withdrawals in retirement, they remain a pivotal component of future tax planning. The expanded income limits mean that an increased number of people can benefit from this aspect.

Actionable Steps: Preparing for 2024

1. Review Your Income: It's vital to assess your MAGI to determine where you stand in relation to the new phase-out ranges. This assessment will aid in ascertaining your contribution limits for 2024.

2. Consult a Financial Advisor: If your income hovers close to the phase-out range, seeking advice from a financial advisor is prudent. They can assist in developing strategies to maximize your contributions and offer guidance on broader retirement planning.

3. Plan Ahead: Integrate these changes into your comprehensive retirement strategy. Remember, Roth IRAs are a single element in a larger financial picture, and it's essential to maintain a holistic approach to your retirement planning.

Conclusion: Embracing the Future with Confidence

The 2024 enhancements in the income phase-out ranges for Self-Directed Roth IRAs present increased flexibility and opportunities for investors. By grasping these changes and applying them to your financial scenario, you can make well-informed decisions that fortify your financial future. The key is to plan early and strategically, ensuring a more secure and prosperous retirement.