using Inherited IRA for REI

Tax, SDIRAs & Cost Segregation
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using Inherited IRA for REI

Pamela Starnes
Rental Property Investor · Culver City, CA · Member since 2015 · 61 posts · 41 votes

The more I read the Self-Directed IRA and solo 401K posts, the more questions I seem to have. Specifically, my questions have to do with investing with an Inherited IRA that I am already having to take required minimum distributions from (based on my stepmothers life expectancy unfortunately, not mine). Several questions at hand are:

1. Would it be more advantageous (or even possible) to transfer the inherited IRA to either a SDIRA vs. a solo 401k? (I know one big advantage mentioned regarding solo 401k is higher contribution limits but this is irrelevant in this case as I am not contributing to the plan.)

2. Can a RMD be taken from another traditional IRA to meet the RMD each year?

3. If the inherited IRA was converted to a SDIRA and used for a buy and hold property, would this require an appraisal to be done at the end of each year to determine the next year's RMD? If so, do you think buy and hold investing would be more or less cumbersome than using the SDIRA for other RE activity, (flipping, lending, etc), which seem to have their own concerns.....Unrelated Business Income Tax, self-employment tax.

I'd appreciate any feedback on your recommendations as to how to best utilize these IRA funds within REI. Thanks in advance!

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Dennis Tierney
Investor · Omaha, NE · Member since 2011 · 475 posts · 211 votes
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@Pamela Starnes I hate to say this but i think you've received bad advice if you are taking the RMDs based on your stepmom's life expectancy. If you inherited it, it is based on your life expectancy. I know this because I deferred on my father's IRA so my children could get it and their distributions are based on their life expectancy.

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  • Rick H.
    Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes
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    Great questions. I've had to deal with most of these issues concerning both my own multiple retirement accounts.

    Since subtle, nuances can make big differences in interpretation, I've only felt satisfied by getting my pension guys, my two CPA's and my bookkeeper on a conference call to get the straight skinny. 

    I've concluded that I know a lot more about how to make money, some about managing money, and little about tax issues and concerns. 

    My solution, generally, has been to keep the account very separate and create criteria buckets for certain deal types, both from risk and cash flow perspective. It's far from perfect but it has worked to date. I prefer paper for pension accounts and shut down my Mother's modest account after her death, but this was specific to my own tax and estate planning objectives.

    I'd be careful to incorporate advice you get on a free public forum. Lots of opinions but much fewer qualified and experienced. After all, no one treats your money as carefully as you do.

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  • Dennis Tierney
    Investor · Omaha, NE · Member since 2011 · 475 posts · 211 votes
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    @Pamela Starnes I hate to say this but i think you've received bad advice if you are taking the RMDs based on your stepmom's life expectancy. If you inherited it, it is based on your life expectancy. I know this because I deferred on my father's IRA so my children could get it and their distributions are based on their life expectancy.

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  • Pamela Starnes
    OP
    Rental Property Investor · Culver City, CA · Member since 2015 · 61 posts · 41 votes
    10y

    @Rick H......I know that isn't the typical case and I wish it were not the case here, but I spent many hours on the issue early on and it is because the IRA was initially inherited by a trust which then was distributed to the beneficiaries of the trust and there was some technicality having passed first to the trust that it had to then have distributions taken based on the life expectancy of the oldest trust beneficiary, which was my stepmother in this case. In fact, each beneficiary had to sign something in particular stating that they were aware of the fact that it had to be taken out on this schedule. If anyone knows of something different in this particular regard, I'm all ears and would definitely look back into it if it still sounds off. Thanks again!

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  • Carl Petterson
    Investor · Minneapolis, MN · Member since 2015 · 29 posts · 11 votes
    10y

    Hi Pamela - I completely agree with @Rick H.. You are going to need some sophisticated tax and estate planning advice. Much more than a free forum. Sorry - but the last thing you (probably) want to do is blow up your inherited IRA. The additional information (about the IRA trust) adds quite a bit more complication to your initial question - is the IRA still pointing to the trust - was it split - does the trustee make RMDs to you - is the IRA in your name or the trust - is the 5-year rule triggered - etc ?

    The oldest beneficiary's measuring life makes sense now for calculating the RMD. 

    I'm guessing perhaps your father directed his IRA to a family or marital trust for your step-mother's life. Then upon her passing split to your father's children. Or perhaps a share was slivered off during her life for each of the beneficiaries.

    1. What's "more advantageous" depends on your goals. You can't roll a non-spousal inherited IRA into a solo-401k. Perhaps/maybe you can, but probably not, roll a non-spousal inherited IRA into a directed IRA. You may be able to do a trustee-trustee transfer. Call up a self-directed IRA trust company and ask. There are other concerns too though besides "wouldn't it be cool to do this, avoid some taxes, and use this pot of money I inherited" such as valuation and liquidity. RMDs suffer no one - you have to make them. Again with Rick on this one - it may be better to keep separate buckets.

    2. Typically yes, one can take all their RMDs from one IRA - if they are their own. But you have a non-spousal inherited IRA which is further complicated by a trust. I'd ask your accountant and lawyer. I'd especially ask if the trust triggered the 5-year rule.

    3. Yes - you're spot on. Valuation, liquidity, and regulatory requirements are the complications. It's much more cumbersome using the SDIRA -- you'll be subject to all those prohibited transactions under pub 590.

    Check out Natalie Choate's book - Life and Death Planning if you're intent on going it alone.

    Hope that rambling helps a little bit. Again, go with Rick's suggestion, advice is worth what you pay for it. 

    Carl

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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
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    @Pamela Starnes

    1) You can not transfer an IRA that you inherited into your Traditional IRA or a Solo 401k. An IRA that you inherited would have to be transferred into "Inherited IRA", it would be named in the name of the original owner of the IRA and you will be designated as the beneficiary.

    2) I do not believe so, you would have to pull out RMD from an inherited IRA.

    3) You will be required to get the valuation of your IRA (which comes from all of the assets that you IRA owns), and depending on the provider you might be required to get the appraisal, while others would access value from a CMA.

    Hope this helps.

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  • Pamela Starnes
    OP
    Rental Property Investor · Culver City, CA · Member since 2015 · 61 posts · 41 votes
    10y

    @Carl Petterson, @Dmitriy Fomichenko.......thanks for taking the time to give feedback. It does indeed get complicated. I have asked lots of questions to paid professionals (attorney, CPA), and it is interesting how beyond a certain level of complexity it always gets volleyed back to the other professional ("ask your CPA", "ask your attorney", or "ask the company holding the plan"). When I was initially trying to sort this all out it was really frustrating as I felt like it was highly unlikely that I needed to recreate the wheel, so to speak, as it didn't seem like such a unique situation. I got my initial questions answered for the most part, but now that I am exploring the option of REI with that money it just brings up a whole other level of questions. I am cautious to take everything as input and not professional advice, but certainly every little bit of further understanding I can achieve by asking publicly will hopefully help me ask the right questions to the paid professionals. Thanks again!

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  • Mark Nolan
    Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
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    @Pamela Starnes

    You can learn about the beneficiary IRA rules from the following IRS webpage.

    https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Beneficiary

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  • Pamela Starnes
    OP
    Rental Property Investor · Culver City, CA · Member since 2015 · 61 posts · 41 votes
    10y

    Thanks @Mark Nolan!

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