Can my wife and I combine IRAs for the purposes of a Real Estate Self-Directed IRA?

Question

Hello BP,

In order to gain greater buying power (sooner) I was wondering if it's legal or if anyone here has ever combined their spouses 401k to use in a self directed 401k trust to purchase real estate property.

• I understand how a trust would work (all monies have to flow through the custodian, etc..)
• I will probably follow up with my tax advisor / financial advisor / trust companies

All the same, just wondering if anyone has experience w/ this "strategy"?

Thanks in Advance,

-Alonzo

Dmitriy Fomichenko · Answer

@Daniel Dietz

it may be possible under certain circumstances to partner with a disqualified person in your IRA but you want to approach it very carefully in order to avoid committing prohibited transaction.

Jean G. · Answer

I just did something like this for me an my wife's Roth IRA through a "checkbook" SDIRA. The Roth IRAs are both transferred to the same custodian, and they both become members in the same purpose created LLC, which then opens a checking account that gets funded with your IRA moneys, and from where you do your investing.

What's important in that setup is that once the 2 IRAs have invested into the LLC (each IRA is a member in proportion to the amount invested) you can never add more money into the LLC with future IRA contributions because the LLC becomes a prohibited party after it gets funded (or this is what the lawyer explained anyway). If you get a lot of contributions over the years, you could always create a second LLC from these contributions at a later stage.

I did a lot of research about fees and used iraservices.com as the custodian (lowest fees that I could find) and mysolo401k.net to create the LLC for $800 (they work together with the custodian).

I hope this is useful, and most importantly, factually correct (Any experts seeing something wrong with this, feel free to correct me).

Jean

Mark Nolan · Answer

@Alonzo Garza

Yes both solo 401k participants funds can be aggregate for investing in real estate. What is more, both spouses may participate in a solo 401k plan.

Daniel Dietz · Answer

@Jean , I have heard others mention on here too that you could not make 'any additional contributions' once things were set up, and have questioned that from what our lawyer said when we set ours up.

My *understanding* is that in our case, where each of us own 33.33% of the LLC (all with SDIRAs) that any additional funds would all have to be invested into the LLC in the EXACT same portion.... meaning we could not 'change the make-up' or ratio of how things were set up.

I think I will follow up with my lawyer who set things up as we are on the verge of rolling more funds into the LLC so we can purchase another property.

I would love to hear any of the experts on here chime in too :-) @Dmitriy Fomichenko or others.

Thanks, Dan Dietz

Daniel Dietz · Answer

@Kyle Rutz

My recollection at the time, which as an 'after fact' when I realized all this as we jumped in kind of fast in setting things up when an opportunity arose, is as follows;

You CAN set up an LLC with a disqualified person such as a spouse, but there are a TON of rules and restrictions if you do.

One is that once that original investment is made, we could not contribute any more to THAT particular LLC, although we could have formed another similar one I believe. Essentially you are 'froze' as to the original structure and contributions.

The hassle did not seem worth it to us to continue this way. A NON disqualified party bought out the partner that was disqualified and now we operate as an ongoing LLC made up out of 3 non-disqualified parties and all is well.

Would you or your wife have enough in your accounts to do deals each on your own? Or possibly each of you partner up with someone that is NOT disqualified?

IF you choose that route, I would DEFINITELY recommend using a Self Directed Specialist Attorney to do it.

I am a HUGE proponent of investing with SD accounts, but the disqualified party things is the biggest thing to throw a wrench in the works.

Dan Dietz

Dmitriy Fomichenko · Answer

@Kyle Rutz

It is possible to use an IRA to invest into an LLC. However this is not a DIY project. The LLC must be setup to meet the IRS-requirements, otherwise your IRA is running a risk to being disqualified. Co-investing alongside with your wife's IRA brings up another set of challenges. You are welcome to PM me so we can discuss the specifics of your situation.

Kyle Rutz · Answer

@Dmitriy Fomichenko

@Daniel Dietz

Sorry to resurrect an old post.  I have a question about a point that was made and wanted to see if you could provide some clarification.  My wife and I have setup SDIRA's and are yet to purchase a property with them.

I had planned to setup an LLC with 50% ownership from each SDIRA.  I had planned to continue to contribute to the IRA and invest more in the LLC each year (in equal amounts).  Buy and sell assets in future years with the LLC whether properties or mutual funds.

Is this possible or is the one time contribution correct?

Is it more appropriate to use the SDIRA's to fund Project specific LLC's?

Thank you for your time,

Kyle

George Blower · Answer

@Tim Stephenson

Correct regarding paying bills separately from each IRA owned LLC if done under a TIC arrangement.

Tim Stephenson · Answer

That's helpful, thanks.  Would maintenance become a challenge though? (e.g. every bill on the property would have to be paid 50/50 by each separate LLC and each tenant payment would be to owners as tenants in common and distributed 50/50)  -- seems like you'd almost have to have a 3rd party manager

Brian Eastman · Answer

@Tim Stephenson

What you propose would work.  As you have noted, the key problem with any entity formed between IRA accounts of disqualified parties becomes a one-time funding shot.  The other concern is that a partnership LLC as you describe would need to file a partnership tax return at the state and federal level.  The K-1's resulting from the federal return go in a file drawer.  Not all states will see the underlying IRA partners as tax-exempt however, and may want to tax the partnership.  Be sure to check with your local state-knowledgeable CPA.  It might be simpler to just have the two IRA-owned LLC's vest title to a project property as tenants-in-common and forego the project LLC.

Can my wife and I combine IRAs for the purposes of a Real Estate Self-Directed IRA?

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