Invested in a House with Your SDIRA? Remember to Keep a Cash Reserve.

[Kaaren Hall]

After you have invested using your self-directed account, you might wonder about the next steps to take. Importantly, it's crucial to be aware that a lack of available cash in your Self-Directed account can expose you to potential pitfalls in maintaining your investment.

Focusing on the realm of real estate, maintaining available cash in your Self-Directed account becomes particularly crucial when your IRA owns a piece of property. Unexpected expenses can arise at any time, and you will already have regular monthly expenses such as property management, landscaping, and cleaning services. Consequently, what should you do when the property incurs unforeseen costs? These emergency costs could include significant repairs like roof repair, furnace or air conditioning replacement, or water heater issues. Since these repairs can be quite expensive, having sufficient available cash in your account to cover unexpected expenses can save you both time and frustration.

Moreover, it's worth noting that, on average, it takes about two weeks to transfer or roll over additional funds to your Self-Directed account. Therefore, a lack of reserve cash can potentially jeopardize your tenant or property. By ensuring you have an ample amount of available cash, you are able to address these repairs immediately, thus safeguarding your tenant and property.

Regarding the policy of uDirect IRA Services, they mandate a 10% reserve for such expenses. This policy means that 10% of the property's value needs to be set aside for the expenses the IRA is responsible for. The rationale behind the 10% reserve is that it can be used to pay bills related to the property since you cannot pay those expenses personally.

When considering LLC interests, it's essential to know that investing in an LLC or entity often involves "Capital Call" requests for additional funding. If you are unable to meet such a request, in certain situations, failing to meet a capital call request could dilute your Self-Directed IRA's percentage of ownership. Particularly, if your IRA is the sole owner of the LLC, this might render you unable to cover the expenses incurred by the LLC, which could be costly.

It's also important to be aware that Capital Calls can happen at any time. As a result, it's advisable to be prepared by having enough available cash in your account to meet these calls promptly. Given that these calls often have deadlines, the need to transfer or roll over additional funds becomes urgent. The consequences for defaulting on a capital call, as explained in the Investor Agreement associated with each fund, can include loss of equity and rights in the fund, interest charges, or the sale of the investor’s stake to third parties.

Lastly, according to IRS regulations, all expenses related to an investment held in your Self-Directed IRA must be paid by the IRA itself. Using personal funds to cover these expenses could result in a prohibited transaction. Therefore, ensure your Self-Directed account maintains a sufficient balance of available cash.