How to convert Roth to self directed IRA

Question

Hello, I am a startup REI from Lake Saint Louis MO who is trying to get information on how to convert my Roth IRA into a self directed IRA. Does anyone have any recommendations on who I should talk to? Does anyone have any experience with this- good or bad? Appreciate all suggestions and insights.

Dmitriy Fomichenko · Answer

@Jaclyn PeytonYou have couple options: You can create a custodial self-directed IRA, in which case the funds and all investments are held by the custodian and you direct them what to do. The down side of this model is that there is a fee for every transaction and it takes time to execute a transaction since you don't have direct access to your funds.The alternative to that is what's know as Checkbook IRA. With this model special purpose, single-member LLC is created, your IRA owns it and you manage it. Doing so allows you to bypass the custodian. There is even better options, that is truly self-directed Solo 401k (this is the best of all three options if you qualify), however it is not for everyone. To qualify for it you have to be self-employed (can be part time) or own a small business. With this model you don't need an LLC, you eliminate the custodian all-together and gain total control over your retirement funds. Unfortunately Roth IRA can not be rolled over into Solo 401k, but it allows for huge contributions nearly 10 times of an IRA (up to $60K for 2017) so you can grow your account very quickly. The subject of self-directed IRA is a frequent discussion here on the forum, you should do a quick search and will find lots of materials to keep you busy reading and learning from other discussions for days :-). Hope this is helpful.

George Blower · Answer

@Jaclyn PeytonYou could go the self-directed IRA route by opening a self-directed IRA with a traditional IRA custodian such as Pensco or SunWest Trust, for example. When you use a custodian to hold the self-directed IRA, the custodian will hold the investments (e.g, the real estate purchase documents and recorded deed), and will also process the purchase (i.e., send the proceeds out for the purchase). Because the self-directed IRA custodian is more involved, they generally may charge higher fees then if you opened an IRA LLC.Therefore, an IRA LLC may be a better fit after considering the following. The IRA LLC manager is responsible for the administrative review of alternative investment purchases, a function generally performed by the self-directed IRA custodian. Therefore, the self-directed IRA custodian’s role in connection with the IRA is greatly reduced to, for example, issuing annual Form 5498, processing annual valuation directive of IRA owned LLC, which is provided by the LLC manager to the custodian, and processing and reporting IRA distributions once distributions commence, to name a few.Further, holding and safekeeping fees are eliminated with respect to the alternative investment holdings, with the exception of precious metals, which the regulations require stored with an approved depository institution such as Delaware Depository.The self-directed solo 401k may not be a good option for you since Roth IRA funds cannot be transferred to a Roth solo 401k. This is a Roth IRA restriction not a solo 401k restriction. The main reason for this rule is that the distribution rules are different for Roth IRA vs a Roth solo 401k.

Chris Policicchio · Answer

@Jaclyn Peyton I think @Dmitriy Fomichenko is spot on. While I have not yet opened a self-directed IRA, I have spoken with both uDirect (Jeff Dixon) and Pensco (Allison Vandenberg). They are both very helpful and informative. The LLC route, IMO, is the only way to go b/c of the checkbook control that Dmitriy mentioned. You open the self-directed IRA, create an LLC (the funds in the IRA *have* to pay for the LLC, then open up a business bank account for the LLC. Good luck!

Jaclyn Peyton · Answer

Thank you everyone! The additional options and companies to look into is a big help!

Jeremy Paschedag · Answer

Thank you @George Blower

George Blower · Answer

@Jeremy PaschedagClick here for a helpful list of lenders to IRAs and solo 401k plans.

Jeremy Paschedag · Answer

I had the same questions about a year ago. I ended up doing checkbook control with SunWest Trust. My LLC and bank account are at a local bank. The other decision you have to make is finding a lender that will do non-recourse loans. A Google search will help. There aren't that many. You'll want to get their guidelines for loans. For example, if the property is over 60 years old, you have to put 50% down. The property has to be rent ready. You can't buy a property that the current owner just rehabbed. It has to be a certain cost per unit. All this to say, BRRRR will be challenging, if at all possible. Feel free to reach out for more info.

Edmund Ricker · Answer

@Jaclyn PeytonI recently opened a SD IRA/LLC with Camaplan and they have been great. I got all of the legal work done by Kevin Kennedy at KKOS lawyers. @Mat Sorensen is one of the partners in the firm and is a leading expert on self directed IRA's. The process is pretty simple and the folks I mentioned above have made if seamless. This type of account costs a little bit to set up and maintain, but for me, it is well worth it.If you are self employed, then a SD 401k gives you more options, but you have to have the income to fund it.Let me know if I can answer any other questions.Ed