All Forum Posts by: Brian Eastman

@Rodney Marcantel

Your statement is not correct. Self dealing is determined by how one transacts with IRA funds, not how the IRA is deployed.

An IRA held by a trust company serving as custodian may transact in real estate. The Trust Co will hold the funds and pay for expenses per your instructions.

Alternately, that IRA may be invested into a specially formed LLC where the IRA is the sole member and the account holder or someone they designate serves as the manager. That manager has to be careful to follow the rules against self dealing - just as would an account holder transacting via a custodian - but they are allowed to administer the LLC and do things like sign contracts, pay for expenses and receive income into the LLC on behalf of the IRA.

The LLC is not a requirement, simply a way to gain more direct control over the administration of the IRA's investments.

In either case, one may not have any direct or indirect benefit - in either direction - between the IRA and a disqualified party (which I will simplify somewhat as the account holder, their spouse and lineal family). Benefit would include financial transactions, lending of capital or provision of goods or services, among other things. I'm staying high level to make the basic point that the LLC does not change the underlying nature of the IRS rules.

@Robert Leonard

I did not specifically detail self-dealing, but did in my prior post indicate that the use of a self directed IRA/401k must be done "at arm's length". Thank you for your extra emphasis on this point however, as it is critical.

Bottom line is that when you invest using IRA funds, you are really serving as a fund manager for those funds, not adding them to your pool of real estate investing capital. Self directed IRA & 401k plans are about having different choices to diversify your retirement savings into alternatives such as real estate - but that retirement savings is very much bundled up in the tax code so as to be reserved for your post 59 1/2 future. But, an IRA or 401k of the Wall Street variety (common model) is equally tied up as far as your access, and even more restricted because of the limitation on publicly traded investments only.

@Greg Wright

There are two options. With a "self directed IRA" (or 401k), the plan is the investor, not you. You can choose to diversify your retirement savings into real estate, but everything must be done at arm's length and you may not derive any income personally. You can have your IRA flip houses, but you would need to hire 3rd party contractors (or JV with a contractor). The gains go back into the IRA or 401k, and in the case of flipping houses - which is considered a trade or business activity - there is a tax implication on the profits from the flip through UBTI (look it up).

Flipping houses and paying UBTI can still be more profitable for your IRA than investing in stocks, or even passive real estate options such as holding rentals or being a hard money lender. So, do not dismiss the strategy out of hand. Do some research by contacting a professional self directed firm and your tax advisor.

The other option is what is referred to as a Rollover as Business Startup (ROBS) plan. In this structure, you form a company personally and that company sponsors a profit sharing or 401k plan. You can rollover a prior IRA or 401k into the plan, then the plan can purchase shares of the parent company with an Employee Stock Option Purchase (ESOP). In this format, you have used your retirement plan to capitalize your business, and you can be directly involved in flipping houses, take a salary etc.

@Bogdan Cirlig

I am not a fan of using IRA Custodians (trust companies) as Solo 401k providers. By rule, they are prohibited from providing any advisement or guidance. Unless you have a CPA or Tax Attorney on your team who understands the rules with regards to investing in non-traditional assets with such a plan, you are very much on your own and at risk.

There are quality advisory firms that offer checkbook IRA and Solo 401k plans that put you in direct control, but also can provide - assuming you pick the right firm and not just a document provider - high quality guidance. You'll find several such firms participating here at BP.

Setting up the plan is just step 1.  How you use the plan is the important piece.

Disclosure.  I run just such an advisory firm.

@Bogdan Cirlig

The main players are:

First Western Federal Savings Bank

www.myiralender.com

Roger St. Pierre

800-908-8845

North American Savings Bank

www.iralending.com

Matt Allen / Jason Zook
866-735-6272

@Blair Poelman

A generalization would be just that.

The determining factors we look at when speaking with an investor and helping them select a plan are their employment/self-employment status today and for the long term, investment goals, funding mix, etc.

Both the SDIRA and Solo 401k are capable of making the investments you note. A 401k has one advantage in that is is not subject to UDFI taxation when leverage such as a mortgage is used, but that would not be a reason to shoehorn someone who is not really a good fit for the SoloK into such a plan. The impact of UDFI on an IRA borrower holding a rental is pretty minimal.

The bottom line is that every investor is unique and one-size-fits-all solutions are going to fall short.

@Adam A.

Your assumptions seem to be mostly correct.  Unfortunately, the tax code does not provide a middle ground where you can have tax sheltered passive income AND benefit personally with current income.

The ROBS plan is not well suited to passive holdings, though if you have a portion of the overall C Corp holdings in passive assets that is OK.  This is really a program for creating an operating business.  In real estate terms that would be an active real estate development and/or construction company.

If you have enough capital, or can start with flips and really get things rolling, the profit sharing plan at the back end of the ROBS structure can be used to hold shares of the operating business and separately hold passive, tax sheltered real estate rentals, as opposed to holding passive income properties via the C corp.  

@John Buchanan

There are a variety of plans available to you, not all of which are offered by IRA custodians.

A Checkbook IRA LLC would put you in control of the funds, operating out of a local bank account. This model eliminates the processing delays and per-transaction fees common of most custodians. If you work with a quality provider of such plans, you will also have access to expert guidance with regards to IRS compliance, which is something custodians are prohibited by rule from providing.

A Solo 401k plan is also a great option, if you qualify by being self employed and having no full time employees.  These plans will also typically offer checkbook control.

There is a good bit of discussion here on BP regarding various self directed plan types and the services of the major players in the industry.

Quality of services is key, whether you choose to work with a custodian or a facilitator of checkbook plans.  Be sure to speak with client references from any firm you are considering working with.

Best of luck to you as you explore your options. Investing your IRA into real estate can be a fantastic way to diversify your retirement savings.

@David Y.

Walk into the bank you normally bank with and open a Roth IRA today. That is the only way you are going to get this done.

In the future, you can easily transfer that Roth IRA to a self directed plan once you have accumulated enough capital to begin investing in real estate or other non-traditional assets.

@Tj Noye

A 401k plan is not a do-it-yourself thing.  In real estate investing and especially in tax planning, there is good reason to pay trained professionals for their specialty expertise.

401k plan documents come from a range of providers, who draft the specialized trust and adoption agreement, and then have these documents certified for compliance by the IRS.

The plan documents themselves, however, are just that... documents.  The use and administration of a Solo 401k requires strict adherence to guidelines.  If you are not a tax professional, you will most certainly muck something up along the way, with tremendous tax consequences.

I don't say this because I am in the business of implementing and supporting such plans, but because it is the plain truth.

You should not get a credit card. The reason is that as a disqualified party to the IRA, you may not pledge a personal guarantee on any debt instrument. A debit card is fine for an IRA LLC.

When an IRA obtains a mortgage, the note must be non-recourse... meaning no personal guarantee and that the lender's only security is the property.

@Gene Mitchell, I think you overstate the need to avoid the use of debt financing. Yes, there is a small tax impact associated with using debt financing, but the corresponding increase in cash on cash return for your IRA dollars far outweighs that cost.