Transferring money from a Roth IRA to a Self Directed Roth IRA

[John Humphries]

I've got $30,000 in a Roth IRA with Ameritrade that I used to actively manage in stocks and corporate bonds. I'd like to use this money in real estate and real estate related investments now, but I am only 40 years old and (to my limited understanding) I can't just pull this money out without penalty. It has been over 5 years since I have opened and/or contributed to this Roth.

As an added wrinkle, I live in Canada now and have not had US income since moving here almost 10 years ago so I am not able to contribute new money to my Roth.

What I would like to do is to use this money to invest in two different real estate investment vehicles. One is a crowdfunding, "alternate investment" which basically would be buying shares in a portfolio of houses to be rehabbed, rented, and eventually sold. The other way that I would like to use the money is to buy individual investment properties in the US myself.

My understanding is that you can do either of these with a Self Directed Roth IRA. Is it possible to use one custodian to do both? Can anyone recommend a SDRIRA custodian or at least someone that is qualified to answer some of these questions?

[Mark Nolan]

@John Humphries

Try IRA Services Trust Company out of San Carlos, CA. They offer self-directed IRA services for investing in real estate, for example.

[John Humphries]

@Mark Nolan Thanks for the tip.  I'll check them out to see they can work for me.

As an aside... Is there any way to pull any of the money out the Roth IRA without taking a penalty? Same as above applies - under 59 years old, money not to be used for education, primary residence, death/disability etc. Just trying to find a way to make the money in that Roth more available and flexible for real estate.

[Daria B.]

Originally posted by @John Humphries:

I've got $30,000 in a Roth IRA with Ameritrade that I used to actively manage in stocks and corporate bonds. I'd like to use this money in real estate and real estate related investments now, but I am only 40 years old and (to my limited understanding) I can't just pull this money out without penalty. It has been over 5 years since I have opened and/or contributed to this Roth.

As an added wrinkle, I live in Canada now and have not had US income since moving here almost 10 years ago so I am not able to contribute new money to my Roth.

What I would like to do is to use this money to invest in two different real estate investment vehicles. One is a crowdfunding, "alternate investment" which basically would be buying shares in a portfolio of houses to be rehabbed, rented, and eventually sold. The other way that I would like to use the money is to buy individual investment properties in the US myself.

My understanding is that you can do either of these with a Self Directed Roth IRA. Is it possible to use one custodian to do both? Can anyone recommend a SDRIRA custodian or at least someone that is qualified to answer some of these questions?

I had a Roth with Schwab and transferred my funds to MidlandIRA. There was no penalty since it was a like-transfer to the new account I opened with MidlandIRA. I can now use Midland to invest in RE.

[John Humphries]

@Daria B. Thanks for the tip on Midland. I think they may have just won my business. By far, the best and most informative website of all the SDIRA custodians that I looked at. Also, the most knowledgeable rep that I have dealt with so far. Definitely cheaper than IRA Services Trust in terms of fees too. They also beat out the others that I looked up. Although, full disclosure, SDIRA fee structures all seem to be a bit different and for my purpose, Midland's seem to work best.

Perhaps this will have to be a different blog post to get a good response, but the next step is now to find real estate to buy in the SDIRA. I'd love to hear from anyone who has been through this process already, as it there are quite a few more layers of complication than just buying property outside of a Roth or trad IRA.

In my situation, because I have limited funds in my IRA and can no longer contribute to it (living outside of US with no US income), I will not have enough money in my SDIRA to buy the property with it alone. Looks like I will have to partner with myself somehow in order to fully fund a purchase. If anyone has does this before and has any advice, I'm all ears!

[Daria B.]

Originally posted by @John Humphries:

@Daria B. Thanks for the tip on Midland. I think they may have just won my business. By far, the best and most informative website of all the SDIRA custodians that I looked at. Also, the most knowledgeable rep that I have dealt with so far. Definitely cheaper than IRA Services Trust in terms of fees too. They also beat out the others that I looked up. Although, full disclosure, SDIRA fee structures all seem to be a bit different and for my purpose, Midland's seem to work best.

Perhaps this will have to be a different blog post to get a good response, but the next step is now to find real estate to buy in the SDIRA. I'd love to hear from anyone who has been through this process already, as it there are quite a few more layers of complication than just buying property outside of a Roth or trad IRA.

In my situation, because I have limited funds in my IRA and can no longer contribute to it (living outside of US with no US income), I will not have enough money in my SDIRA to buy the property with it alone. Looks like I will have to partner with myself somehow in order to fully fund a purchase. If anyone has does this before and has any advice, I'm all ears!

So glad I could help.  I was impressed with MidlandIRA after opening my account even more because I have one person that works with me and my accounts. She actually delved deeper into a question I had about utilizing my account for more than just "note" buying, which is what I am currently doing. She also was instrumental in passing along unsolicited information. LOL Usually, we don't want to hear what's being told to us if we have not asked the question. I had already opened the account and chose a particular maintenance fee. She pointed out, after one of my deals to utilize my money, that I could switch (midstream) to another maintenance fee method in order to save money. And she was right! I like the attention to detail and the patience they have with me. I tend to ask a lot of questions. LOL

Since you can no longer contribute to your existing funds, maybe a partnership or "lending" or even note purchasing might be options. I had also been looking into being the bank for someone else's business - on a smal scale less than $10k.

[Larry Fried]

@John Humphries You can use the same custodian to do both, although two things to consider if you are going to buy property with a part of those funds. One is you won't be able to get conventional financing for retirement, instead what you will need to do is something called non-recourse lending, which is usually only about 50% LTV, and has considerably higher costs. I am not sure about a Roth SDIRA, but with other SDIRA, the part borrowed will be subject to UBIT taxation. So be sure you get good tax advice before purchasing property.

Second, if you are looking to buy property quickly (such as wholesale) a custodian can be very slow at releasing funds. In this case you might want to consider a checkbook IRA, which gives you complete control over the funds, and you serve as the trustee. The upfront costs to set one up are high, but usually less to maintain (annual fees etc). Frankly, you have to consider these costs as part of the accounts expenses, so be sure you do so in looking at opportunities and their potential returns.

[John Humphries]

@Larry Fried Hi Larry. I was just starting a new discussion about this at the same time as your response! I've spent my entire day today on SDIRA research it would appear that you are correct about all above. The checkbook IRA is next on my list of research topics.

I'm interested in investing in the crowdfunding model that you and I have discussed by email and have been in touch with them and wait-listed. I think the SDIRA would be a good tool for that type of investment. However, when it comes to buy and hold rentals, I think that with only $30000 in the account to work with, that the red tape and other expenses associated might outweigh any tax free benefits that I might get.

Basically, in the other thread, I was just asking if it is better to just cash out of the Roth and take the penalty vs using that little amount to try to buy real estate in an SDIRA.

[Larry Fried]

@John Humphries How much is the penalty? I would think that if you don't need the cash that continuing to maintain the account without distributions until you are 59.5 years would be the better course. But instead of investing in buying a house, invest in the CF model you and I talked about (I just made my 5th investment with them BTW) and/or you can also do private lending or some other form of REI that will not have tax consequences. Probably using a custodian with low fees would be the best way to go about this.

[John Humphries]

@Larry Fried My understanding of the Roth is that the penalty would be at least 10%, so $3000 if I were to cash out of it completely.  Not to mention, possibly other tax implications. As it currently sits, there is only $10000 invested in corporate bonds at the moment as I rotated out of my stock portfolio a few months back to cash. Just leaving it as is for another 19 years (I'm 40) is not an option.  That money needs to work!

I agree with you that the best option at the moment would be to move it to an SDIRA (no penalty, just a $50 set up fee and then yearly fees around $250-$300) and invest in the CF that you mentioned.  I missed out on the Equity portfolio that just closed, but I'm wait listed for the upcoming debt as well as the next Equity.  I may end up just splitting my money into those two options. Glad to hear that you are still investing with them.

I also like the private lending possibility, but do people actually go that route for smaller amounts like $10,000 to $30,000?

[Larry Fried]

John, I am glad you have reservations in the upcoming portfolios.  Hint: when they do come up for investment you might want jump in with you investment commitment right away - preferably the first day. This is what I did (I had a reservation already) on this last one that opened on Friday, and was filled up over the weekend. Of course they are planning to have a portfolio a month open up this year, but it remains to be see if they can keep that pace.

You are right the smaller amounts are harder to loan, especially if you want a 1st position lien against the property.  Chances are unless you know somebody close at hand, like a family member, this may be too little for you to securely lend and still get a good return.