All Forum Posts by: Brian Eastman

@Ivan Lopez

If you are still serving, you cannot rollover your TSP to an IRA.

Once you separate from service, you will have the ability to rollover the TSP to a retirement plan of your choosing.

With a self-directed IRA, you can joint venture with other investors or us non-recourse mortgage financing to extend your purchasing power. You cannot combine IRA funds and personal or close family funds for investing. The IRA is the investor, not you, and you need to keep personal and IRA finances very separate to retain the tax-sheltered status of the IRA.

@Kelly Lane

When an IRA (or other tax-exempt entity) uses leverage like a mortgage, it creates taxable Unrelated Debt-Financed Income (UDFI) which is then paid as UBIT (Unrelated Business Income Tax).

The percentage of the income directly attributed to the IRA's down payment is not taxed. The percentage of the income that the IRA receives through the use of borrowed money is what is taxed.

So, if a deal is 60% financed, 60% of gross income is taxable as UDFI. You then apply a $1000 exemption and the same ratio (in this case 60%) of allowable deductions like interest, depreciation, certain operating expenses like property taxes, etc. As a result, the net taxable income - especially on a $135K property being discussed here - it not typically that much. The IRA pays the tax at trust tax rates, which can ramp up as high as 37%, but most investors don't get to that level. Even then, a high marginal rate on a small percentage of overall income results in a relatively low effective tax rate.

Leverage boosts your return. UDFI will put a small dent in that boost, but your IRA will still see a better return from a leveraged deal than a comparable all-cash deal. Using leverage in an IRA introduces a little complexity, but can be well worth it in terms of superior ROI.

For a self-employed person eligible to utilize a Solo 401(k), there is a huge advantage.  A 401(k) is not subject to tax on UDFI when the debt instrument is used for the acquisition of real property.

@Padric Lynch

The question you ask really cannot be answered. Folks will know the IRA firm they work with, not what is available across the entire industry. Also, different structures are better suited to different investor needs.

As a plan provider, I cannot make a specific recommendation as to a company to work with per BP guidelines.

What I can help you do, however, is refine your question.

Self-directed IRA's come in several formats offered by different types of companies. The type of self-directed IRA that will best suit your situation and goals will drive the process of identifying the right firm to work with.

A self-directed IRA custodian is a processing entity. Think E*Trade or Fidelity with different paperwork. All IRA based plans are required to have a custodian to administer and report on the account. What makes a self-directed IRA custodian different is that they are not purely connected to the public exchanges and limited to investing in stocks, bonds and funds, but rather have the staff training and paperwork to document the IRA's investment in the more individualized transactions that occur when investing in real estate, notes and other non-traditional assets. Such custodians will hold funds, sign documents, issue expenses and receive income on behalf of your IRA and act as your processing layer. This works OK for relatively static and simple investments like a private placement or crowdfund, but can become rather cumbersome and expensive with a more time sensitive and transaction intensive asset such as a rental property. You also need to be aware that custodians are passive in nature and simply process transactions at your direction. They do not provide meaningful oversight or guidance with respect to tax code compliance.

A checkbook IRA LLC is an enhancement on the above structure that is generally more time and cost efficient for investors with a more diverse portfolio. It starts with a self-directed IRA held by a custodian, but the IRA simply makes one investment into a specially designed LLC entity. The IRA owns the LLC, but you can be the non-owner manager of the LLC and have signing authority. This allows you to directly manage transactions via the LLC and eliminates the paperwork, processing delays and per-transaction fees of the custodian. These plans typically cost a bit more to establish due to the legal work, but in most cases will save you considerably over the long term. With a quality provider, such plans also come bundled with meaningful consulting guidance to help you get the most out of the program while staying inside the IRS guidelines.

A similar checkbook program is a Solo 401(k). Such plans are available to those who have some form of self-employment and no full time employees. As an owner-only business retirement plan, the Solo 401(k) has higher contribution limits, allowing you to build your savings on the front end as well as providing investment flexibility. The Solo 401(k) also has the advantage of being more favorable for real estate investments using debt-financing such as a mortgage - as the 401(k) is exempted from a small tax called UDFI that an IRA would pay on the percentage of income derived from the borrowed money.

So, as you continue your research and get feedback here on BP, think about what type of program will best suit your needs and be sure to ask questions along that line. Get on the phone and speak with a few of the providers that are active here on BP. You will pretty quickly be able to tell who is just selling something and who can become a valuable member of your team.

@Chip Chronister

The ROBS platform requires an active business providing a product or service and generating earned income.  Rental property produces passive rental income and is not suitable.  Even if you could structure something like a property management company, the ROBS would work well for that service, but would be a very inefficient means to hold your own rental properties.   

And yes, some people do things that are either non-compliant and/or the wrong tool for the job, so I am not surprised you were told what you relay in your note about rentals.

We typically establish ROBS plans for people wanting to do active real estate development, construction, or flipping, or capitalize some other type of active business like a restaurant, auto repair shop, software startup, gym, etc.

@Bob Reinhard

If one is self-employed and has no full time employees, they can establish a Solo 401(k) plan. A Solo 401(k) can accept rollovers from most tax-deferred IRA plans and any tax-deferred or Roth employer plan such as a prior employer 401(k).

As an employer sponsored retirement plan, a Solo 401(k) has several advantages over an Individual Retirement Account (IRA), such as higher contribution limits, the ability to house both tax-deferred and Roth funds within the same plan, a participant loan feature, and an exemption from tax on the portion of income attributed to debt-financing in real estate investments (UDFI).

Not everyone qualifies for a Solo 401(k), however, and a self-directed IRA is still a fantastic way to take more control over your existing savings and be diversified.

@Kevin Hayes

Dmitriy has covered the topic well, but the key point in evaluating a self-directed strategy is to understand this is still tax-sheltered retirement money, not personal money. Investing rules and taxation are very different as a result. If you can grow and protect your retirement savings in a self-directed IRA or Solo 401(k) and investments in alternative assets like syndications better than you might by allocating 100% of that money to conventional publicly traded investments, then a self-directed retirement plan can make sense for you.

@Victor Andrade

As a plan provider, I cannot make a specific recommendation as to a company to work with per BP guidelines.

What I can help you do, however, is refine your question.

Self-directed IRA's come in several formats offered by different types of companies. The type of self-directed IRA that will best suit your situation and goals will drive the process of identifying the right firm to work with.

A self-directed IRA custodian is a processing entity. Think E*Trade or Fidelity with different paperwork. All IRA based plans are required to have a custodian to administer and report on the account. What makes a self-directed IRA custodian different is that they are not purely connected to the public exchanges and limited to investing in stocks, bonds and funds, but rather have the staff training and paperwork to document the IRA's investment in the more individualized transactions that occur when investing in real estate, notes and other non-traditional assets. Such custodians will hold funds, sign documents, issue expenses and receive income on behalf of your IRA and act as your processing layer. This works OK for relatively static and simple investments like a private placement or crowdfund, but can become rather cumbersome and expensive with a more time sensitive and transaction intensive asset such as tax liens or rental property. You also need to be aware that custodians are passive in nature and simply process transactions at your direction. They do not provide meaningful oversight or guidance with respect to tax code compliance.

A checkbook IRA LLC is an enhancement on the above structure that is generally more time and cost efficient for investors with a more diverse portfolio. It starts with a self-directed IRA held by a custodian, but the IRA simply makes one investment into a specially designed LLC entity. The IRA owns the LLC, but you can be the non-owner manager of the LLC and have signing authority. This allows you to directly manage transactions via the LLC and eliminates the paperwork, processing delays and per-transaction fees of the custodian. These plans typically cost a bit more to establish due to the legal work, but in most cases will save you considerably over the long term. With a quality provider, such plans also come bundled with meaningful consulting guidance to help you get the most out of the program while staying inside the IRS guidelines.

A similar checkbook program is a Solo 401(k). Such plans are available to those who have some form of self-employment and no full time employees. As an owner-only business retirement plan, the Solo 401(k) has higher contribution limits, allowing you to build your savings on the front end as well as providing investment flexibility. The Solo 401(k) also has the advantage of being more favorable for real estate investments using debt-financing such as a mortgage - as the 401(k) is exempted from a small tax called UDFI that an IRA would pay on the percentage of income derived from the borrowed money.

So, as you continue your research and get feedback here on BP, think about what type of program will best suit your needs and be sure to ask questions along that line. Get on the phone and speak with a few of the providers that are active here on BP. You will pretty quickly be able to tell who is just selling something and who can become a valuable member of your team.

@Neil Henderson

Fidelity and other mainstream brokerage houses do not support investments in alternative assets. Well. they do if you are in their private client group, but do not really do a good job of it.  It is not their focus.

Documenting an IRA's investment in unique private opportunities is an entirely different business model than brokering publicly traded assets. There are a handful of specialty firms that offer self-directed IRAs for alternative assets. You will want to seek out an alternative asset custodian or a provider of "checkbook IRA" programs if you want to diversify your tax-sheltered IRA into syndications.

@Nicolas Boivin

You state that you obtained a plan from a provider.  Are they not able to assist you with this question?  Usually your plan provider would be your best resource for such questions.

The investor is not an IRA. Rather the LLC that is owned by the IRA is the investor. The LLC is disregarded, and the underlying IRA is the taxpayer. You should complete form W-9 to indicate this relationship.

@Daniel B.

DO NOT DO THAT.

The IRS rules prohibit any direct or indirect transactions or provision of benefit between a plan and a disqualified person. The transaction you describe is use of your IRA to facilitate the sale of your personal residence, which is clearly such a self-dealing transaction.

An IRA custodian is not capable of providing tax advice. They are simply processing agents. The person you spoke with should not be giving you advice in the first place, and should be embarrassed by the bad information they provided.

@Jason Powell

!!! STOP !!!

That is the number one mistake people make with a checkbook IRA. The LLC is not the IRA, it is the investment of the IRA. If you do as you propose you will break the reporting chain of that money and create potential tax penalties.

To accomplish what you seek, you must liquidate cash from the LLC back to the IRA at Entrust that owns the LLC. You could then have Kingdom request a trustee-to-trustee transfer from Entrust.

But, none of that is necessary. Your IRA owned LLC can make the investment and there is no need to have Kingdom involved at all.

You should definitely have a conversation with your LLC provider and get a better handle on what you have and how it works.