self direct roth IRA

[Aaron Smith]

Hey BPers,

My brother, @Joshua Smith thought of this tax strategy the other day, let me know what you think:

1. create a self direct roth IRA and transfer existing IRA funds to this account

2. use this account as earnest money to get property under contract

3. wholesale these properties. The wholesale fee goes back into the self direct roth IRA.

4. This wholesale fee is tax free, and if you want to take it out, its only 10% fee.

Would this work?

[Brian Eastman]

@Aaron Smith

The amount of "hustle" one needs to put into wholesaling likely makes such an activity a high risk of being considered self-dealing. You are not allowed to provide benefit to an IRA via the provision of goods or services.

Wholesaling is also considered to be a dealer activity, and therefore a trade or business.  When a tax-exempt entity engages in a trade or business on a regular or repeated basis, it is subject to tax on Unrelated Business Taxable Income (UBTI).  Rates can get to be as high as 37%.

So, no, trying to run your own wholesaling business in an IRA does not work.

Providing gap funding to wholesales who are not disqualified parties to the plan can work. In general, lending activities are going to allow one to be more at arm's length as the IRS rules require, and to receive passive interest income, which is wholly tax-sheltered to an IRA.