Hi all,
I wanted to pick the community's collective brain on investing in an IRA and get people's experiences on it.
1. Can I invest in a self directed Roth IRA or does it have to be traditional? The goal is to use post-tax dollars in order to avoid paying taxes on the gains.
2. Can I flip houses in an IRA or does it have to be buy and holds?
3. Does anyone know any good brokers that they could recommend for a self-directed Roth IRA? I noticed that some other brokers that I already use don't offer the option.
Thanks!
Hello Salon, you are at the right place!
To answer your questions:
1) Any IRA can be self-directed (Traditional, SEP, Roth).
2) You can buy rentals as well as flip properties in an IRA. When flipping however, if you do more than one or two per year it is likely that the flipping activity will be considered an active business and incomes and gains from that would be subject to Unrelated Business Income Tax. Be sure to consult with a qualified tax professional to guide you through this and to help you understand the tax consequences in your particular situation.
3) You don't go to a broker to setup a self-directed IRA. You need a custodian who offers self-directed IRAs. Also you may want to consider Checkbook IRA (aka IRA owned LLC), which will enable you to bypass the custodian and have checkbook control over your retirement funds. If you are self-employed or own a small business - your best option would be Solo 401k plan, which is superior to SD IRA and Checkbook IRA, but there are eligibility requirement you must meet in order to set one up.
Hope this helps. If you have any further questions don't hesitate to ask.
Hello Salon, you are at the right place!
To answer your questions:
1) Any IRA can be self-directed (Traditional, SEP, Roth).
2) You can buy rentals as well as flip properties in an IRA. When flipping however, if you do more than one or two per year it is likely that the flipping activity will be considered an active business and incomes and gains from that would be subject to Unrelated Business Income Tax. Be sure to consult with a qualified tax professional to guide you through this and to help you understand the tax consequences in your particular situation.
3) You don't go to a broker to setup a self-directed IRA. You need a custodian who offers self-directed IRAs. Also you may want to consider Checkbook IRA (aka IRA owned LLC), which will enable you to bypass the custodian and have checkbook control over your retirement funds. If you are self-employed or own a small business - your best option would be Solo 401k plan, which is superior to SD IRA and Checkbook IRA, but there are eligibility requirement you must meet in order to set one up.
Hope this helps. If you have any further questions don't hesitate to ask.
Short of buying a property in cash and having it managed at a distance with a professional property manager, I think you'll find that the hassles and headaches of "traditional" IRA real estate investing just isn't worth it. Especially labor intensive endeavors like flipping.
I think you'll find that using an IRA works best if you a) purchase in cash and have a professional property manager, b) invest in notes or c) loan your funds out to other investors for a higher rate of return than what one could expect from Wall Street.
Could you flip houses in an IRA? Sure. But with all the red tape, why would you want to?
Ken,
I currently invest in option b-notes and found this to be the simplest so far. I have not used the funds for anything else.
How does one loan funds to other investors (opion-c)? Would the SDIRA have to approve of the loan-out and wouldn't this be considered HMLing and what specifics are involved if that is the case? Is it a contract just between the person being loaned to and the SDIRA owner (by way of FBO-owner in the IRA)?
Dmitriy gave you great answers to your questions. I agree the Solo 401k is a better structure if you are eligible. I will add one important fact here since you have a preference for Roth funds: In case you have a Roth IRA already, you are not able to transfer this to the Solo 401k. You could transfer it to a self-directed Roth IRA, however.
@Daria B.
The loan would be a non-recourse loan to the IRA or the solo 401k. This means the IRA or the solo 401k would pay back the loan.
Because flipping real estate inside a solo 401k or an IRA will subject both to UBIT, it may not be advantageous to flip real estate inside an IRA or a solo 401k plan. However, if you are looking to turn the flipping of real estate into a business, then you may want to explore the ROBS 401k as it is not subject to the UBIT rules. See the following bigger pockets post for more information on this.
https://www.biggerpockets.com/blogs/3441/25171-robs-401k-small-business-financing-explained
To answer question #2....
Everyone is entitled to their opinions. Personally, I like facts. The fact is that many more SDIRA beneficiaries are buying property with SDIRA funds rather than lending, according to public records. The majority of sales from a SDIRA involved a "flip", where holding period was <365 days. Next came what I would call 'land speculation' (SDIRA purchases unimproved parcel and subdivides or does site improvements, then cashes out) followed by a distant last place - rental investment.
From my summary: "...It's clear that SDIRA investors are anticipating more profits from flipping than lending..."
This is one just county. But until someone provides evidence (via their primary research like I did) that central NC, with 1M in population is completely different from everywhere else as far as SDIRA investment behavior, I will assume the above is consistent with the rest of the country.
By the way... I didn't expect to see these results before cracking open hundreds of recorded documents. Everyone says to lend with a SDIRA. It happens that the facts in Wake county didn't support my preliminary expectations. So my view changed.
As you can see there are LOTS of different thoughts on how to best use your funds!
I dont necessarily agree with @Ken Badziak that it is not worth it to invest in SDIRA or Solo401K. It depends completley what your goals are AND where your assets are situated.
In my case, 90%+ of my assets were ALREADY in an IRA when I learned about Self Directed plans. So it made COMPLETE sense to go this route. If I did not ALREADY have the assets built up (had been saving for 20+years at that point) the answer would probably be different.
I dont really see a disadvantage to investing in the self directed field other than it is not as easy to 'cash out' if you need the funds for something else, which is not always a bad things IF you are investing for the longer term, and that you can not leverage as highly as outside a plan. We are looking at 40% down borrowing non-recourse with only a 20 year lock. But that still produces 20%+ long term gains.... Ill take that over the stock market day in and day out!
The issue of paying taxes inside of a plan is minor in my thoughts as your depreciation offsets 'paper profits' (taxes) to make UDIF almost a non issue (in our case at least).
As far as the providers go, check out the posters links in this and other SDIRA thread who are "providers" or "professionals" - they are not allowed to outright promote themselves, but a lot of the ones providing answers are some of the great choices out there in who can help you with this.
Good Luck, Dan Dietz
@Daniel Dietz, you need to re-read my post. I never said it's not worth investing nan SDIRA or Solo 401k.
What I said was "Short of buying a property in cash and having it managed at a distance with a professional property manager"...
Purchasing in an IRA makes perfect sense... IF you're going the "all cash" route. And, as in your case, with 20 years of savings under your belt, you had enough cash to purchase the property outright.
What DOESN'T make sense is to use the IRA to purchase the property using leverage. It gets really complicated at that point. Or to use the IRA for an "active" endeavor such as flipping.
IRA's are great for passive purchases; buy and hold with a property manager, notes or lending out to other investors.
How does one loan funds to other investors (opion-c)? Would the SDIRA have to approve of the loan-out and wouldn't this be considered HMLing and what specifics are involved if that is the case? Is it a contract just between the person being loaned to and the SDIRA owner (by way of FBO-owner in the IRA)?
I would get in touch with your SDIRA provider. They would have all the proper paperwork to facilitate that type of transaction.
I personally have never lent my money out to other investors, but I know plenty who have. In my particular case, I only had $50k in my SDIRA, and I found my options extremely limited. I could've lent the money out or invested in notes, but I'm more interested right now in asset accumulation.
I ended up simply rolling my SDIRA into my current 401k and taking a loan against that, thereby being able to utilize almost 100% of those funds (not quite at $100k in the 401k, but close) and purchase a duplex with a conventional 30 year loan.
If I had $150k or more in my SDIRA I would have looked at other options, but with only $50k I found the path I chose to make the most sense.
How does one loan funds to other investors (opion-c)? Would the SDIRA have to approve of the loan-out and wouldn't this be considered HMLing and what specifics are involved if that is the case? Is it a contract just between the person being loaned to and the SDIRA owner (by way of FBO-owner in the IRA)?
I would get in touch with your SDIRA provider. They would have all the proper paperwork to facilitate that type of transaction.
I personally have never lent my money out to other investors, but I know plenty who have. In my particular case, I only had $50k in my SDIRA, and I found my options extremely limited. I could've lent the money out or invested in notes, but I'm more interested right now in asset accumulation.
I ended up simply rolling my SDIRA into my current 401k and taking a loan against that, thereby being able to utilize almost 100% of those funds (not quite at $100k in the 401k, but close) and purchase a duplex with a conventional 30 year loan.
If I had $150k or more in my SDIRA I would have looked at other options, but with only $50k I found the path I chose to make the most sense.
$50k is still a good number to invest in notes, but if you are wanting to use more than that then I guess it would not seem like a good investment. I've purchased for that amount and they turned out to be good notes.
I liquidated my RothIRA for a SDIRA Roth account in order to invest and continue to contribute. It's a better income builder than where it was.
I'll ask about the loan to the custodian to see if they have had other investors "lend" from their SDIRA. Seems like it would be a good way to get gain as well.
@Daria B.
The loan would be a non-recourse loan to the IRA or the solo 401k. This means the IRA or the solo 401k would pay back the loan.
I understand the part about the IRA owning amd being paid back. What I don't understand are the logistics of loaning the money. The contract would be between the IRA FBO (me) to the person being lent to. Are the steps and documents the same as if of were a bank loaning to an individual? (Credit check, putting up collateral as protection for my IRA loaning to, etc)
Yes, the process for funding a loan within the account is much the same as doing so outside of the account. One of the major differences is making sure you are not transacting with disqualified persons, but the documentation can be much the same (or identical) in most cases. Credit checks, collateral, and other methods of ensuring repayment are largely up to you, but are generally recommended.
Hello Salon, you are at the right place!
To answer your questions:
1) Any IRA can be self-directed (Traditional, SEP, Roth).
2) You can buy rentals as well as flip properties in an IRA. When flipping however, if you do more than one or two per year it is likely that the flipping activity will be considered an active business and incomes and gains from that would be subject to Unrelated Business Income Tax. Be sure to consult with a qualified tax professional to guide you through this and to help you understand the tax consequences in your particular situation.
3) You don't go to a broker to setup a self-directed IRA. You need a custodian who offers self-directed IRAs. Also you may want to consider Checkbook IRA (aka IRA owned LLC), which will enable you to bypass the custodian and have checkbook control over your retirement funds. If you are self-employed or own a small business - your best option would be Solo 401k plan, which is superior to SD IRA and Checkbook IRA, but there are eligibility requirement you must meet in order to set one up.
Hope this helps. If you have any further questions don't hesitate to ask.
Could you elaborate on what the Self Directed Solo 401k (roth) is superior to a Self Directed Roth IRA other than how much can be put into it per year ($7,000 vs $30,000+)?
I have a Self Directed Roth IRA and currently use it to loan money to house flippers on the fintech platform, GroundFloor. I am at the point in my one man business where I could fund a Solo Roth 401k with more than the $7000 a year, and ramp things up, but would like to invest in higher yield options (Groundfloor is getting me a steady 11%, however).
I feel buying and holding a rental managed by a property manager in the IRA could have a higher yield, but one would not be able to use deprecation to their advantage, so one year flips make more sense (instead of 1031 exchanges for tax optimization).
@Michael M. I work with Dmitriy. Solo 401k has many benefits over the SDIRA. Here are a few:
$8k vs. up to $76,500 (up to $30,500 can be Roth) annual contribution limits over 50. Under is $7k vs. $69k (up to $23,000 can be Roth).
Not UBIT on leveraged real estate
Roth and Traditional built into the same plan
Cheaper and generally easier to maintain than IRA LLC especially with checkbook control
Hope this helps.