What Is Your Experience with SD-IRAs?

Question

Ok, now that I have a number of trustees to research, I'd like to here from or talk with someone who has an SD-IRA. The prevailing wisdom has often been, "don't touch your retirement money to invest in real estate."

As  I get more involved with this world, I'm hearing that redirecting  retirement money is a great way to grow your income and build assets.  It's a scary thought, however.

I understand how SD-IRAs work, so  I'd like to know how you took the leap to moving your retirement funds  from a 'secure' position in a standard investment scenario to  self-directing your retirement funds into real estate.

My sense:  this is a good way to have skin in the game and create a track record,  particularly when I start to invite others to invest with me, while  increasing my return.

Thank you for contributing your thoughts and  ideas, I look forward to hearing about your experience self-directing  your personal IRA funds.

Cheers-Jarid

Brandon G. · Answer

Don't believe the prevailing wisdom "don't touch your retirement money to invest in real estate." that you are being told. Do whats right for your goals, needs, and experience. A stock broker with never tell us to withdraw funds from our account to buy real estate haha. Joking aside, using a SD IRA for real estate can be a great tool if done correctly. You will find lots of threads on BP for more research and references for sure. Here are a few tidbits that I learned from my experience;

1. If I would do it again, I would probably lean towards the "checkbook control" option that you are referencing. I have one without, so I have to instruct the custodian every time a payment needs to be made. Although not necessary in my case (not flipping or making lots of transactions with it), it would be helpful/more convenient. If flipping, I would consider it a must.

2. The custodian matters. Find a safe one that you trust, has fees are reasonable (will be much higher than your standard brokerage account), and has great support-you will need it. If you can find one that has a physical office near you, that would be a nice bonus.

3. Be very careful that you follow the IRS rules. In a lot of cases you will naturally walk a fine line with the rules, especially with the checkbook control. The hardest one for me is the concept of not adding value to your deals (other than basic management). If you were to simply do a repair or something like that, the government could theoretically impose a distribution of your retirement account  and then you would have to pay the tax and possible penalties.

4. Know the "Why". And know that tax pros and cons for a SD IRA for your particular strategy.

Sounds like you are on the right path with your research.

Carl Fischer · Answer

@Jarid S. Johnson

Invest in what you know. Tax deferred and tax free income is great. Invest in what gives you the best return and minimal risk- be that real estate, stocks, mutual funds, precious metals, tax liens, etc.

It was simple for me I knew real estate, my parents and grandparents did real estate-it was a no-Brainer.  I literally felt like I was gambling in the stock market no matter how much I studied it. My conclusion was the stock brokers always win. Real estate owners seem to do well also. It’s not magic and can be figured out in the numbers if it’s good for you.

Alan Johnson · Answer

@Jarid S. Johnson I debated about responding to your post because I wear two hats -- I am employed by a self-directed IRA custodian, but I also have my own SDIRA account as well.  I ultimately decided to respond due to your statement that "it's a scary thought."  Insofar as possible, I will try to contribute from the standpoint of how I made the decision to self-direct a portion of my IRA funds.

As anyone in a customer-facing role on the "custodial side of the table" will tell you, one of the toughest challenges is to provide education and information without it sounding like advice (which we are not permitted to give).  So we fall back on the standard suggestion -- namely, "consult with your attorney, CPA, and/or financial advisor."

But sadly, the professional most likely to be able to give you this advice (your financial advisor) probably can't help you much because he/she either a) doesn't understand self-directed IRAs, and/or b) is limited in what they can offer in the way of investment products.

So self-direction definitely is a scary thought.  It was scary for me.  You see, for me personally, I do understand the stock market better than I understand alternative investments..... (which is to say that on a scale of 0 to 10, my understanding of the stock market is about 2 or 3, but my understanding of alternatives is about a 1 or 2.)  But I decided that if a prospective client asked me if I have a self-directed IRA account (which many have), I wanted to be able to say 'yes.'

I am able to sleep at night with my self-directed investment because it is less than 5% of my overall retirement accounts.  I would suggest, therefore, that you not make an SDIRA investment until you are not scared to do so, either through education, investing only a small amount initially, or both.

As far as education goes, I have a dog-eared copy of Mat Sorensen's book "The Self-Directed IRA Handbook" close at hand on my desk at work.  You can easily find a copy on Amazon.  It is the most thorough book I have personally been able to find on the subject, and as an attorney he provides summaries of many of the key court cases that have helped to shape how the IRS regulations are interpreted and enforced.

Also, there are a number of little bells that go off in my head when reviewing your thread comments and your profile.  When speaking with prospective custodians and TPAs (Third Party Administrators), I suggest you pursue, among other things, some of the following topics:

• You have a background in video production that you wanted to apply to real estate investing.  Were you thinking that you would create videos of the properties owned by your IRA?  If so, have a conversation about whether the custodian believes that might be a prohibited transaction.
• You mentioned fix and flips in your profile.  Have a discussion with the custodian about UBIT as it relates to this strategy if done in your IRA.
• You mentioned your interest in an LLC whose members are all IRA accounts.  Talk with the custodian about how the LLC is going to be managed, and who will be doing it.

Good luck, and I hope that my thoughts are of some help to you.

Jarid S. Johnson · Answer

What I'm Learning about SDIRAs

(thoughts or clarification always welcome)The concept with which I was grappling was how I can use my SDIRA to invest if I can’t invest in my own company. What I learned yesterday really clarified the power of the SDIRA for me.While I cannot use IRA funds to directly invest in my own company, my IRA can purchase real estate. I direct my IRA custodian to make the purchase and the title is held as <‘custodian name’ FBO ‘my name’ client#12345>, essentially the custodian of my IRA is the owner of the property “for the benefit of me”.The property purchase and all expenses/income flow through the IRA. So if I am flipping, then the sale income/profit flows back to the IRA. If I am holding, rent gets paid to the custodian on my behalf and deposited into the IRA.In addition, my IRA can partner with others. Let’s say I have 50k in my IRA and a partner has 50k; both parties are listed on the title. That partner can either contribute cash, or they can direct their IRA to invest. Income or profits are split equally between the partners.

Brian Eastman · Answer

@Jarid S. Johnson

The checkbook IRA trust would be beneficial for an investor with a nexus in California.  For an Oregon investor there is no real difference and the LLC is a little easier to deal with when interfacing with counter-parties like insurance companies, banks, etc.  In Oregon, trusts are required to register and subject to the same state fees as a LLC.

The concept of Checkbook Control in either an IRA-LLC or IRA-Trust is a tremendous advantage for most investors.  The ability to be responsive to opportunities or emergency maintenance needs, elimination of per-transaction fees, and greater overall control are significant benefits.  While such plans cost a bit more to establish on the front end, they will save considerably over time as compared to utilizing the processing services of a 3rd party custodian.

Jarid S. Johnson · Answer

I was originally looking at non-checkbook control if my SD-IRA, but am beginning to see the pros for having checkbook control in the speed and efficiency of doing business. I have done more research and found a company that creates SD_IRA Trusts vs IRA LLCs.

Through an IRA Trust with checkbook control, additional transaction fees are eliminated as well as annual IRA LLC maintenance and filing fees.

Here are two article on IRA Trusts:

http://www.pgiselfdirected.com/2017/10/02/using-an...

https://www.iraservices.com/when-to-consider-ira-trust

Jarid S. Johnson · Answer

Thanks for adding value to the conversation. As I learn more about using my retirement fund for investing, I understand the difference between the concept and self directing my funds and pulling money out of my account   to invest. The former excites me and is really not that scary after all. As I see the stock market rise and fall and all my gains disappear in a day, real estate becomes more appealing. Working in partnership with others and creating a team with which to collaborate is my ultimate goal.

I love the image of "dog-eared" as it elicits images of a well used and useful book. Interesting you should mention this book as the very same day you posted, I received my brand new copy of the second edition of this title. I am excited to start devouring it, marking it and dog-earing it!

What I mean by that statement is there are many parallels between processes in real estate and video production of which I can take advantage: marketing; conceptualizing projects; creating, managing and reconciling budgets; bookkeeping; project management; partnering and collaborating; bringing ideas to fruition. Video production is all about process and workflow and I see that in may aspects of real estate.

I am aware of UBIT. I plan to ensure that everything I do is by the books and will have the proper consultation available.

I had a chat wit Carl Fischer and he outlined the differences between IRA and IRA LLC.

Thanks again Alan.

Jarid S. Johnson · Answer

@Daniel Dietz   (I can't get tagging to work consistently.)

Ah, so you created a SDIRA LLC, between the three of you. Very cool.

Carl Fischer · Answer

@Daniel Dietz

Thanks for the mention

Daniel Dietz · Answer

@Jarid S. Johnson, We each created a SDIRA and SOLO401k that were made up substantially of 'rolled over' funds from our existing IRAs, some Traditional IRAs and some ROTH IRAs (ROTH IRAs can NOT be rolled into a SOLO401K for some arcane reason, there for both kinds of self directed funds).

Each of those new self directed accounts then went into a three way partnership and we chose the LLC format. So technically, none of *us* as individuals are members of those LLC, but instead our *accounts* are the members.

In the SDIRA format a 'custodian' is involved to do transactions 'on the behalf of your account'. You can also chose a 'check book format' which we chose since we have buy and hold rentals and have lost of small bills like minor repairs, lawn mowing, water bill etc.... There is still a custodian 'in the back ground' for big things like buying and selling etc.... One downfall to the SDIRA format is that IF you leverage using non-recourse loans, there is more paperwork than needed in a SOLO401K due to tax laws. We choose to only leverage in the SOLO401K LLCs for right now.

In the SOLO401Ks they are each considered a 'trust', but you are your own 'custodian'. Each of those 'trusts' formed a different 3 way LLC where all 'members' are the 'trusts'. Our plan provider, @Dmitriy Fomichenko from Sense Financial helped us with all the paper work and forms needed for that. In a SOLO401K there is no 'taxable event' by leveraging your funds.

Both operate very similarly on a day to day basis.

We did have legal help setting both of these LLCs up by a specialist in the Self Directed Accounts field, as there are many small things to be aware of in the LLC Operating Agreements.

Right now we are working on forming a couple of new partnerships where we partner our existing 3 way LLC with a Private Money Partner, one of who will be using 'cash' and the other 'self directed funds' also.

I would highly recommend consider using providers on here like Dmitriy or @Carl Fischer, @Brian Eastman or others when doing this. I found in my initial research that they were much more responsive than the 'large firms' out there.

Dan Dietz

What Is Your Experience with SD-IRAs?

Most Popular Reply