I work for a Hard Money Lender, and had a client ask once how he might be able to leverage an SDIRA to create more liquidity. He was using the funds to invest in real estate, but wanted a way to keep at least a portion of his profits, rather than being required to return all profits back to the account until retirement. My solution was to lend against a new investment property that he would like to acquire, and the SDIRA as additional collateral. I figure we can lend against 60% of the account value, after accounting for fees and penalties that would be incurred if a withdrawal were necessary. I believe if the deal is structured this way, the borrower would not be required to reinvest profits back into the SDIRA. I'm curious what everyone's thoughts are on this, and if there is any demand for this sort of structure if we were an option?
Your proposed solution would result in a prohibited transaction, as the IRA may not be used to guarantee personal debt.
What @Greg Dickerson posted is just flat-out incorrect. A checkbook IRA LLC does not give the account holder the ability to charge a management fee. That would be a prohibited transaction as well.
A self-directed IRA is purely a means to diversify tax-sheltered money into investment choices beyond the stock market. When your IRA invests in mutual funds, you don't touch the funds personally until age 59 1/2. Same exact rules apply when the IRA invests in notes, properties, etc.
I work for a Hard Money Lender, and had a client ask once how he might be able to leverage an SDIRA to create more liquidity. He was using the funds to invest in real estate, but wanted a way to keep at least a portion of his profits, rather than being required to return all profits back to the account until retirement. My solution was to lend against a new investment property that he would like to acquire, and the SDIRA as additional collateral. I figure we can lend against 60% of the account value, after accounting for fees and penalties that would be incurred if a withdrawal were necessary. I believe if the deal is structured this way, the borrower would not be required to reinvest profits back into the SDIRA. I'm curious what everyone's thoughts are on this, and if there is any demand for this sort of structure if we were an option?
Thanks in advance!
Check out the Checkbook IRA LLC system where the investor can manage the the IRA LLC and earn a management fee which would be taxable as income but no penalties or UDFI, UBIT etc
Interesting, not something I had heard of before. It looks like the ability to earn a management fee is a legal grey area, and a loophole in the legislation that the IRS may or may not be cracking down on. In your opinion, is this a significant risk? And is there a limit to the management fee? Or could someone conceivably pay themselves a 50% management fee if they wanted to?
Here is the specific quote I am referencing:
IRA law prohibits the IRA owner from providing services to his/her IRA and its' owned assets. The exact definition of what "providing a service" looks like is vague in IRS code, which means courts could interpret the definition of this very strictly to include management and accounting services for an IRA. Such a ruling could put the status of Checkbook IRAs in jeopardy and potentially result in substantial taxes and penalties for the IRA owner.
Your proposed solution would result in a prohibited transaction, as the IRA may not be used to guarantee personal debt.
What @Greg Dickerson posted is just flat-out incorrect. A checkbook IRA LLC does not give the account holder the ability to charge a management fee. That would be a prohibited transaction as well.
A self-directed IRA is purely a means to diversify tax-sheltered money into investment choices beyond the stock market. When your IRA invests in mutual funds, you don't touch the funds personally until age 59 1/2. Same exact rules apply when the IRA invests in notes, properties, etc.
@Brian Eastman I see. I was not aware that by pledging an IRA as collateral for a loan, the IRS would consider it income and it would be taxed as such in addition to the early withdrawal penalty. However, it looks like 401(k)'s can be pledged as collateral? Is this true?
No, a 401(k) may not be pledged as collateral for a personal debt.
One can personally borrow from their 401(k), but that is a different matter.
IRS rules surrounding prohibited transactions apply to both 401k and IRA based plans, and are defined in IRC section 4975.
Section 4975(C)(1)(b) speaks directly to this particular issue.
(c)Prohibited transaction (1)General rule. For purposes of this section, the term “prohibited transaction” means any direct or indirect— (A)sale or exchange, or leasing, of any property between a plan and a disqualified person; (B)lending of money or other extension of credit between a plan and a disqualified person; (C)furnishing of goods, services, or facilities between a plan and a disqualified person;