All Forum Posts by: Brian Eastman

@Val Csontos 

You are not entirely on target with your summary of the scenario. In an IRA LLC, the format is as follows:

1) Establish and maintain a self directed IRA account with a registered IRA custodian
2) Have that IRA document the IRA's ownership of the special purpose LLC

There are no transaction fees when you invest.  This is all done through the LLC entity and does not require 3rd party involvement

There is an ongoing relationship with the IRA custodian and minimal annual account fees as a result.

The IRA custodian does the annual filing of form 5498 with the IRS. This is not something that can be done independently by a CPA.

There may also be state registration fees or taxes for the LLC entity.

IRA custodians do not establish the LLC entity as they are prohibited by rule from providing legal services (they are a reporting layer for the IRA).

Find a reputable firm that can educate you on the process, implement the structure and provide you with guidance along the way as you invest.

This is a great way to diversify your retirement savings into real estate.

@Rick D.

The decision on which plan is right for you will be best answered by speaking with a professional in the field (or more than one), as well as your tax advisor. There are a lot of variables that go into this determination such as employment status, age, amount and type of capital to invest initially, investment goals, etc.

There are a handful of well qualified advisory firms that offer both self directed IRA LLC and Solo 401k programs and can objectively help you determine which is the better platform for your situation.

@Lee S. 

You absolutely cannot rent a property from your IRA, or have it rented or used in any way by a disqualified party to your IRA. That would be a self dealing prohibited transaction and would result in severe penalties and a full distribution of the IRA.

@Andrew Grieb 

The level of IRS scrutiny is likely equal for a custodial self directed IRA vs a Checkbook IRA (wherein the LLC itself is held by a custodial IRA). At the reporting layer, which is the IRA itself, they are the same.

One of the key misunderstandings in the self directed realm is that "the custodian has your back" from a compliance standpoint.  Custodians are purely processors and if you give them the paperwork to execute a transaction and the paperwork is "complete" they will process regardless of the potential of a prohibited transaction.  Sure, if you tried to issue a check to yourself, they would probably stop and ask questions, but they are prohibited by rule from providing tax or legal guidance and when you sign an investment authorization form, you note that you are fully responsible for the tax implications of your actions.

If you work with a quality provider of a checkbook plan (as opposed to what might be referred to as a document provider), you should have access to expert guidance. So, in reality you are less likely to get in trouble with a checkbook plan - so long as you are willing to stop and ask questions if you are unsure.  At the end of the day, you are still solely responsible for compliance with the rules, but with an expert on your team, that should be easy to do.

@Account Closed noted, the potential of a Solo 401k is something you may wish to look into if you will have some form of qualifying self employment. The conversion to Roth can be done within the plan on an incremental basis - thus reducing the tax impact in any given year. A 401k is also not subject to UDFI taxation on leveraged investments as an IRA (Tradional or Roth) would be.

@Michael Hurdle 

I'll start by noting that there is no simple answer to your question. Seeking the advice of a competent professional in the field will be the best route to a plan for your specific situation.

If a self directed IRA or 401k is used to purchase property, all income from that property must be returned to the plan. There can be no direct or indirect benefit between the plan and a disqualified party - meaning you cannot receive income from plan investments among other things (except of course by taking a distribution from the retirement plan, which may be taxable).

A self directed plan may utilize a mortgage to purchase property, in which case all income still returns to the plan. The mortgage must be non-recourse. This means no personal guarantee from you. The use of a mortgage under an IRA triggers a tax known as UDFI, which is paid by the IRA. Even though the IRA pays this tax on income derived from the use of non-IRA funds, you can still achieve a higher cash-on-cash return for your IRA dollars as a use of leverage.

A self directed IRA or 401k may also joint venture with another party, including the account owner in certain well structured arrangements. In such a joint venture, the income is proportionally divided between the JV partners in accordance with their capital contributions. This type of strategy requires great care to get it right.

In @Matthew Newcomer 's case, the retirement plan is not the investor.  He has simply borrowed money from his plan, which is treated as personal funds for the purpose of the investment.

@Matt T. 

Yes, once you have access to a former employer plan, you can roll that over to an IRA or perhaps Solo 401(k) of your choosing.

You can control how the IRA/401k funds are invested, and use the funds for investing in real estate, but, the sole purpose is to grow your retirement savings for your future benefit. You cannot compensate yourself or use IRA owned properties in any way - you are simply directing your IRA into arm's length investments.

There is a lot of good information on BP in the forums and blogs on this topic, and that is a good way to teach yourself "the questions to ask" on this topic.  Ultimately, every individual's situation and goals are unique, and no web site will be able to provide you with the specific information you need to achieve success.

The best thing to do is to consult with a firm or tax consultant who specialize in this area. Self directed IRA & 401k plans are very much a niche product, but there is a community of advisors who really understand the concept and can help you out.

@Account Closed 

Non-Recourse lending is a niche banking product.  The underwriting guidelines will depend on various factors including the type of property, dollar value, market, purchaser, etc.

The big banks will typically only offer non-recourse loans for large scale projects such as building condo complexes, malls, hotels and the like.

Some local or regional banks will be willing to offer non-recourse loans on personally held investment properties, but they are few and far between.  For the most part, you will be better off creating private lenders in this realm.

There are lenders that specialize in non-recourse loans specifically for IRA or 401k held properties. As IRA providers, we are most familiar with this realm. Typically, a non-recourse loan of this nature will be 60-65% LTV max, with 10-15% cash reserves requirements. The main lenders offering such loans will generally want to lend in excess of $50K in order to make it worth their time and effort. Rates are in the 4.875% to 6.25% range currently - depending on the structure and payback terms of the loan.

Good luck!

@Brent Mattison 

You absolutely may not pledge your retirement account as collateral for any personal debt. Any lending or extension of credit between a plan and a disqualified person (i.e. you) is prohibited and would invalidate the IRA.

An IRA may obtain a loan, such as a mortgage for the IRA to purchase real property. In this case, the subject property is the lender's collateral.

@Edward Synicky 

Your information is incorrect.

A Solo 401(k) is not subject to the UDFI taxation that applies in an IRA to returns generated from leverage such as a mortgage.

If an IRA or a Solo 401(k) engages in a trade or business on a regular repeated basis (such as flipping more than one house), then the gains from that business activity are taxed as UBTI (Unrelated Business Taxable Income). A 401k is NOT EXEMPT from this type of taxation.

That said, you can flip houses, pay the UBTI taxation and still walk away with superior returns.  I'd rather gross 30% return on a flip and net 20% after UBTI taxes than simply earn 7-10% on a passive rental.