Self Directed Roth IRA

[Brian Pleshek]

My father has some annuities coming due this spring. A couple of them(his + inherited from his wife) are held inside Roth IRAs. It is my understanding that you can hold property inside a self directed Roth IRA. It is current I have a few questions.

How is the best way to set this up?  Currently the Roths are being held by an insurance company(who set up the annuities).

Does the self directed Roth need to be in a corporation(an LLC)?

Can the funds be used as a down payment such that he can purchase larger properties through leverage or does the entire property have to be purchased outright?

Does the rent go into the Roth each month?  Is it treated like an owner contribution?  If the rents are high enough or there are enough properties to generate sufficient income do I run into any issues with the maximum annual contribution to a Roth?

Is there an issue with paying the lien down early with outside funds?

He needs some of the rent money to live on. Is it like an owner draw from an LLC or if not, how does that work? Does he take it before putting it into the Roth when he gets the rent check?

Can the funds from the two Roths be combined into the new self directed Roth or must they remain separate?  If separate, can the two be partial owner of the same properties effectively doing the same thing?

Who is the best type of person to talk to about other details?  Estate lawyer?  CPA? Other?

Has anyone heard of American Estate and Trust?  We have been in contact with them and they seem to do this type of thing, but we wanted to check up on them as trustworthy and reputable.

Does anyone have a list of questions that I should ask any perspective company to make this happen ?

Thank you.

Brian

[Brian Eastman]

@Brian Pleshek

A Roth IRA can be self-directed. The simplest way to describe a self-directed IRA is simply that the investment choices are opened up beyond just what Wall St. sells, to include things such as real estate, private mortgages, stock in privately held companies, precious metals, etc.

As with any IRA, all activities must be wholly within the IRA and exclusively for the benefit of the IRA. So, if an IRA invests in real estate, all expenses are paid from the IRA and all income accrues to the IRA - tax free in the case of the Roth. Income from investments is not considered contributions, but rather just earnings. You can still contribute new funds to the Roth IRA just as with any other IRA.

An IRA may borrow with a mortgage to purchase property. The loan has to be non-recourse, meaning no personal guarantee. You (your father) cannot pledge your personal assets as security for the IRA's debt. There are a handful of lenders that offer such loans, and while the down payment requirements are a bit more and the rates slightly higher, there is the clear benefit of being able to leverage the IRA dollars for a higher return.

The use of debt-financing in an IRA does create a small tax liability for the IRA know as UDFI. Basically, the percentage of the income that is derived from the borrowed - non-IRA - money is taxed. The tax does not add up to that much and a skilled professional can help you to get a better understanding of how this works.

There are two flavors of self-directed IRA plans.

Accounts held by a custodian as trustee function much like a brokerage, but with a different business model.  You tell the custodian what to do and they handle the processing.  This means that all interactions such as buying a property, paying for expenses and receiving income take paperwork, delay and processing fees.

The alternative, which is generally superior for a time-sensitive and transaction intensive asset such as rental property is the IRA LLC. In this case, a custodian held IRA such as above makes a single investment into a specially created LLC. You then can be the manager of the LLC and operate the investments directly out of the LLC bank account you will setup at the institution of your choosing. This is a much more nimble vehicle, adds a layer of asset protection and can reduce administrative fees over the long term.

There is much good information on these topics here on BP and a number of professionals offering these types of play services who participate in the forums.  Do a bit of reading to set the framework and think of the questions you might ask, then reach out to one of us for a thorough analysis of your situation.