Distribute or Rollover?

Question

I'm just starting to invest in real estate and am wondering if I should just take the 23K to roll into a self-directed IRA or the +18K and use to fund my LLC for real estate after tax withholding? I'm finding that putting it in a self-directed is expensive and does not allow for flexibility vs if I just take a distribution to put in my LLC, I could do whatever I want. I'm looking to buy and resale as my first property investment. Interested in your thoughts and thanks in advance!

Jon Holdman · Answer

The 20% withholding is not the complete story.  You will pay tax on the full amount at your marginal rate.  That could be as low as 15% or as high as 35%.  If nothing much has changed from last year, income wise, look at last year's AGI, look up the tax tables and see what your marginal rate is.  If its higher than 20%, then you will have additional taxes due at year end.  Plus the 10% penalty and state taxes.

It is possible to create a "real estate IRA".  It is NOT a DIY project.  You must have an operating agreement with a number of very specific provisions.  I used Guidant Financial to do this some time back.  With your small amount, it doesn't make any sense.

When you try to borrow in an IRA, you must get full non-recourse funding.  There are only a few lenders who will do these loans.  Typical down payments are 35%.

If your IRA doesn't have the money to do something, e.g., a new roof, you are just about stuck.  You absolutely cannot put in any other money for a property owned in your IRA.  If you do, its considered a contribution, and is part of your annual contribution limit.  You can't work on the property either, since your labor would also be considered a contribution.

If you create an IRA LLC, you and your wife could be the managers.

Be aware of UBIT - unrelated business income tax.  IRAs, while theoretically tax free, are subject to UBIT.  Its a complex topic.

Before jumping into rentals, read in the rental property forum about the reality of rental property.  In particular expenses.

Realize that getting a NOO loan right now means 20-30% down even for an conventional loan.  Be sure you have enough cash for both the down payment and closing costs and cash reserves.

Bill Gulley · Answer

IMO, much more information about your circumstances will be needed before any good advice can be given. Telling you to draw your money out or rolling it over to another qualified plan is not really advice as speculation. I suggest you contact a CPA/accountant/CFP.

Are you employed? Too many questions to ask that may play a role in your decission. There are ways to acquire property without using alot of money. Get local specialized advice. Bill

Will Barnard · Answer

Several here have commented on your senario and possible options. In my humble and professional opinion, you have only ONE choice, which eliminates the distribution and tax/penalty implications and it is this:
Roll it over into a SDI (I use Equity Trust Company) which has low, all inclusive annual fees) and for your small amount, would be a very small fee. Go to www.trustetc.com for more info on their services (I have no affiliation with them, I am only a current customer)
Now you have full control over your retirment funds unlike leaving it to a fund manager or the rollercoaster ride of the stock market.
Due to your small amount, you should not be buying and holding as explained by others, what you should be doing is using those funds to make loans. You do not get hit with UBIT, you stay passive, but remain in control. For self directed IRA accounts, becoming a real estate lender with those funds is the best method in my opinion.

Please make sure you are very careful and selective on who you loan to (they must have skin in the game and the loan to value should not exceed 70%. I also recommend you eductae yourself on lending practices and the pitfalls to better protect your retirement funds.

Michael Lauther · Answer

You have limited funds to work with and taking money out of the IRA now would deminish your resources further. I would suggest opening up a simple self directed IRA with a custodian that has reasonable fees. there are several that can be found on this web site. I use Equity Trust. Once the money is available you may be able to partner with other investors who have similar goals. Financing is available through non recourse lenders who will lend up to 70% based on the deal but there is usually a minimum loan of $50,000. and as previously mentioned this leaves very little for contingencies as well as subjects you to UBIT.
Partnering with other investors in similar situations can benefit all and get you started sooner.

J Scott · Answer

Bill hit the nail on the head...there isn't enough information here to help you make a determination...

Keep in mind that if you take a distribution, you will be on the hook for ordinary income taxes (assuming it's not a Roth IRA), plus a 10% penalty.  If you have $23K in the retirement account, expect to pay anywhere from $5500 to $10K of that money, depending on your total income for the year.

Dale Osborn · Answer

I was never able to grasp the concept of locking your money up and not being able to take it back out until you reach the age of 59.5! I watched many who put their money in and let the "Wall Street gurus" manage it for them. The only person making any money off of this was the middle man. Got talked into trying mutual funds one time. The fund went down, but some stocks they had in the fund had made a profit so I got a tax bill. I do not mind paying taxes when money increases, but when the value goes down and I have to pay the taxes on somebody elses gain, that is another concept hard for me to grasp. We made a few mistakes over the years, but putting our money into the hands of a "Money Manager" that works for a commission was not one of them!

Bryan Hancock · Answer

It seems you are being quoted $5k to set up the self-directed IRA LLC.  That is too high.  The companies I have seen that have a good operating agreement for SDIRA LLCs generally charge about $2500, or about half of what you were quoted.  I am happy to introduce you to some to choose from if you PM me.

With your limited funds I would suggest just using a custodian to do a SDIRA and forget about setting up a LLC.  Sure...you lose checkbook control, but you also get to keep about 10% of your funds.  As your account grows you can look at investing in an entity.

Entrust is a good place to start if you are looking at just doing a SDIRA without the LLC.  There will be some overhead hurdles to jump through when you want to invest the money, but they will also keep you compliant with the IRS rules.

Will Barnard · Answer

This is a great strategy for those who still work, want to take a slightly more active approach in the investing but still remain passive.

Will Barnard · Answer

The pro to having a SDIRA is that you do notr have to depend on OTHERS to manage your funds, but you alone are in control. You can still invest in stocks, bonds and mutual funds, but you can also invest in RE notes, RE, tax lien certificates, and much more. With a savings account, all you can get is a lousy interest rate.

Distribute or Rollover?

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