All Forum Posts by: Loren Whitney

Michael,

When it comes to self-direction, the LLC IRA or Checkbook IRA model fits a picture perfect model for many investors. The self-motivated and do-it-yourself type individuals love the features of this structure. It's hard to compete with the concept of being able to do everything yourself if that's what you're already used to doing.

Be sure to look at all the potential pitfalls of both structures before getting started.

I'd like to highlight a few questions worth examining during an LLC IRA investigation?

1. Is the structure really that legal?
While anyone in the LLC IRA business will argue that it's a completely legal structure, be sure to do your own research beyond the resources provided to you. The structures legality does in fact hinge on existing case precedents. It's very possible that future audits by the IRS could result in changes to the structure. What has the IRS NOT brought up in other precedent setting cases that could be used at a later date? Ultimately, the legality concern is dependent on your risk tolerance.

2. What happens if you need additional capital in a bind?
Once you're appointed manager of an entity that your IRA owns, you can not contribute additional retirement funds to the LLC. Accomplishing this would require a rather complicated method of dissolving and moving assets into new entities.

3. How complicated will it be to take money out of your IRA?
Everyone should always be thinking about exit strategy, right? How complicated will it be for you to take a formal distribution from your IRA provider?

I personally find favor in the traditional IRA custodian/administration model but my opinion is completely biased as I work in the SDIRA industry. It's just my own belief but I predict that traditional IRA custodians will continue improving their technology infrastructure as time goes on. This will ultimately result in giving investors the ability to conduct business on a same-day basis while maintaining their custodial oversight requirements. If this were to happen, the LLC IRA would eventually become less appealing to main stream investors.

Regardless of which path you take, I applaud you for thinking outside the box when it comes to using your retirement funds for alternative investments. Take care!

I'm a Business Development Coordinator for a National SDIRA provider.

@ Samuel,

Glad to see you're still thinking about this. I've been away from the BP board this weekend and a little late joining in.

While I can't give tax or legal advice, I can highlight that the Solo 401k can help you avoid UBIT in many scenarios. Do some research and I think you'll be pretty happy with what you find. I enjoy seeing the wheels turn in your initial post. I work in the SDIRA industry so seeing that excitement is definitely motivating.

@Samuel Ksiazkieicz
@Steven Hamilton II

That's right Sam! No gimmicks.

Thanks for chiming in Steven! Steven is spot on about income and expenses. You have to make sure to keep everything even (down to the penny). If you're going to involve your IRA in a deal, be sure to due your diligence and figure out what the IRA's expenses will look like in proportion to it's ownership.

Just a side note to keep in mind as you're thinking about IRA investments. Your IRA can also seek non-recourse lending in conjunction with your partnerships. They're a little harder to obtain when partnering with non-IRA entities but they're still a possibility.

Thanks!

You may want re-examine the UBIT rules as they apply to 401(k) plans. While the UBIT rules for IRAs are hard and fast, 401(k) debt leverage can avoid UBIT in many situations. Keep in mind that you're not investing with an IRA any longer if you roll the funds into a 401(k) plan.

Cheers!

Hey Ace! I think it's great you're researching the potential tax advantages of using your Roth IRA. I'm really surprised more investors haven't tapped into their retirement accounts for self-direction yet.

I commonly hear people say things like, "It's better to invest in real estate outside a retirement account". The reality is that every person has a different financial situation and what makes sense for one person, works poorly for another. Determining if a Roth IRA is right for you is the first step to take.

The beauty of an IRA is the tax-deferred or tax-free status that you receive. This can play a big role in your long term planning as it eliminates capital gains and the need for 1031 if you're paying cash. Using leverage in a retirement account does complicate things (ref: UBIT) but doesn't affect your personal credit or lending viability either.

If you're self-employed without employees, consider learning more about the individual(k) plan and it's Roth components. There are some added benefits to use in your comparison of options.

Just a note about SDIRAs. A "Self Directed IRA" is a descriptive term, not a legal distinction. You're really opening an Traditional IRA, Roth, etc. The key is finding a provider that will allow you to invest in the assets of your choice and supply a platform that makes the process as easy as possible. The financial industry has labeled non-traditional investments as "Alternative assets". I make this point because many brokerage companies offer self-directed IRAs and limit you to what they sell (stocks, bonds, funds etc).

When your IRA is involved in a real estate purchase, the IRA itself (an entity) is recorded on the deed. When an IRA is involved in real estate equity, it must be reflected as an undivided interest in ownership. For example, if you partner your Roth IRA with personal funds at the time of purchase (yes it's legal), and your Roth can only afford a piece of the deal (say 10%), the deed would reflect the IRA's 10% ownership along with the other owners. Contracts are commonly written as tenants in common in this example. The important takeaway from this, like someone else mentioned, is that the IRA's portion of expenses must be paid by the IRA and in proportion to the percentage of ownership. Therefore, planning for future expenses becomes a very important component or planning and gauging affordability. If your IRA runs out of money and can't afford to pay expenses, you may ultimately be forced to over contribute or distribute the asset and pay taxes.

If you consider using an LLC within an IRA, be sure to understand all the complexities and potential risks that follow.

Good Luck Ace!

Hey Chad,

I work in the Self Directed IRA field but I don't disclose any business names... If real estate is what you're after, you won't have a problem finding resources.

The big three rules for retirement account investing in real estate.

1. No Self-Benefit: This means you* (disqualified persons) cannot benefit from the retirement account doing business. Thus, you cannot gain work or a place to vacation/stay if you IRA purchases a property.

2. No Sweat Equity: You* are not allowed to personally furnish goods or services to the IRA. This means you're not allowed to repair or improve the property yourself. The IRA must pay for all expenses related to the property.

3. No Self-Dealing: This simply means that you* cannot purchase an asset from yourself, disqualified persons, or disqualified entities.

This is just a small peek into the details. I look forward to helping more. Do you have specific questions?

Hi Patrick,

While it's optional, some people setup separate tax IDs for their 401k to keep reporting clean and organized. You can apply for an EIN online at no cost.

If you ever get yourself into an investment that does require tax filing, having a unique tax id for the plan can prove useful.

If you're going through a company that wants to help you setup the entire plan, etc. etc., be sure to make a second call and check a competitor. I've found that some organizations tend to "bundle" features and services that may not be necessary for your situation. Just look around is all I'm saying...

Best of Luck!

Non-recourse loans aren't as common as recourse loans. You won't find them being offered by larger names in the mortgage industry. Smaller regional banks and credit unions usually do more of this from my experience. There is one large national lender that offers non-recourse loans and I'm sure you can find them with a quick Google. I'd mention their name here but the board admin might disapprove since I'm still a newer user (respect).

One nice advantage about using an SD 401k for leveraged real estate is an exemption from Unrelated Business Income Tax (UBIT). In most cases, debt financed real estate investments in 401ks are exempt from UBIT. Do your research and you'll find that this can add up to quite a bit in savings.

Cheers!

Hi Stephen,

I'm a little slow to respond to this thread but better later than never right...

If your IRA provider (custodian or administrator) goes belly up and declares bankruptcy or worse, the assets that are titled FBO of your name still belong to you (your IRA). Creditors cannot foreclose on alternative assets held by your IRA.

Keep in mind that FDIC does not cover alternative assets, only cash. Also, discover the difference between a depository and non-depository bank. IRA custodians that handle alternative assets are non-depository banks and all cash holdings are kept with a separate financial institution.

An IRA custodian would most likely go out of business for regulatory issues, not lack of capital/profits. If a custodian goes out of business, state banking regulators would step-in and reassign assets or notify IRA holders to find new custodians.