Self Directed IRA in Washington state?

Question

Hi BP,

The company I work for was just bought out and I have a chance to roll my 401K into a self directed IRA. Im looking for a host that offers IRAs that can hold real estate, rental properties and syndication. Is there a company, bank or Financial counselor you could recommend in Washington state?

Thanks!

Brian Eastman · Answer

As a plan provider, I cannot make a specific recommendation as to a company to work with per BP guidelines. What I can help you do, however, is refine your question. Self-directed IRA's come in several formats offered by different types of companies. The type of self-directed IRA that will best suit your situation and goals will drive the process of identifying the right firm to work with.Geography is not likely going to be a major factor as these are very specialized services with only a few quality providers. Experience, accessibility and quality of education and support should weigh much more heavily than firm location. A self-directed IRA custodian is a processing entity. Think E*Trade or Fidelity with different paperwork. All IRA based plans are required to have a custodian to administer and report on the account. What makes a self-directed IRA custodian different is that they are not purely connected to the public exchanges and limited to investing in stocks, bonds and funds, but rather have the staff training and paperwork to document the IRA's investment in the more individualized transactions that occur when investing in real estate, notes and other non-traditional assets. Such custodians will hold funds, sign documents, issue expenses and receive income on behalf of your IRA and act as your processing layer. This works OK for relatively static and simple investments like a private placement or crowdfund, but can become rather cumbersome and expensive with a more time sensitive and transaction intensive asset such as a rental property. You also need to be aware that custodians are passive in nature and simply process transactions at your direction. They do not provide meaningful oversight or guidance with respect to tax code compliance. A checkbook IRA LLC is an enhancement on the above structure that is generally more time and cost efficient for investors with a more diverse portfolio. It starts with a self-directed IRA held by a custodian, but the IRA simply makes one investment into a specially designed LLC entity. The IRA owns the LLC, but you can be the non-owner manager of the LLC and have signing authority. This allows you to directly manage transactions via the LLC and eliminates the paperwork, processing delays and per-transaction fees of the custodian. These plans typically cost a bit more to establish due to the legal work, but in most cases will save you considerably over the long term. With a quality provider, such plans also come bundled with meaningful consulting guidance to help you get the most out of the program while staying inside the IRS guidelines. A similar checkbook program is a Solo 401(k). Such plans are available to those who have some form of self-employment and no full time employees. As an owner-only business retirement plan, the Solo 401(k) has higher contribution limits, allowing you to build your savings on the front end as well as providing investment flexibility. The Solo 401(k) also has the advantage of being more favorable for real estate investments using debt-financing such as a mortgage - as the 401(k) is exempted from a small tax called UDFI that an IRA would pay on the percentage of income derived from the borrowed money. So, as you continue your research and get feedback here on BP, think about what type of program will best suit you needs and be sure to ask questions along that line. Get on the phone and speak with a few of the providers that are active here on BP. You will pretty quickly be able to tell who is just selling something and who can become a valuable member of your team.

Carl Fischer · Answer

@Amanda DallmanThe “ Real trust group” is located in Washington. They can handle your self direction in WA. However as others mentioned it is not necessary, in most cases, to be in the same state as the SD provider.

Jordan Archer · Answer

@Justin Windham and @Brian EastmanThank you for your response. I ask because I'm going to be syndicating some deals using partners with IRA accounts, and I want to be as knowledgable as possible with advising them on how to invest their money in to my real estate deals. I appreciate you giving me your insights. Are there any other Do's and Don'ts you know of for people using their SDIRA's for real estate investing?

Justin Windham · Answer

@Jordan Archer The fees that you'd incur without checkbook control will vary from one custodian to another. Some charge per asset held in the IRA, per asset value, per transaction, or all three. We've had clients switch over who were paying over $2,000 per year for an IRA. Since the fee schedules can vary so much, the best thing to do is to look at a few prospective custodians' fees and see what it would likely cost for your situation. You'll also want to read reviews on transaction speed and other customer service issues since you'd be subject to the custodian's processing timelines without checkbook control. For most situations, it is less expensive in the long run to have checkbook control so that makes a decision easier. For your situation, that's a call you'll have to make based on what you're working with and what you intend to do with the account.

Brian Eastman · Answer

@Jordan ArcherThe fees will vary somewhat depending on who you work with, how the plan is configured, what type and frequency of investments you are engaging in, etc. So, no quick answer.We find for most rental real estate investors they can save about 40% on fees in a 5 year window and 80% over 10 years with a checkbook style plan as compared to using a custodian as processor.

Justin Windham · Answer

@Amanda DallmanIn order to hold those assets in an IRA, you'll need a self-directed IRA. Self-directed IRAs typically come with a fairly low account setup fee from the custodian, but higher ongoing costs depending on the IRA asset value and transaction volume. Two common complaints among those who have these custodial accounts are: 1. The fee schedules are fairly comprehensive and fees add up quickly for higher value accounts or those with transaction-heavy real estate investments.2. It is inconvenient to have to make requests to the custodian when a transaction needs to be processed and the wait times can negatively affect the acquisition or management of investments. Adding an LLC to the self-directed IRA is a popular strategy to alleviate both complaints. A specially formed IRA LLC gives “checkbook control” to the IRA accountholder. This means that instead of having to instruct the custodian to process a transaction, the accountholder can simply write a check or initiate a wire transfer on their own, without any waiting. This also reduces the ongoing fees to the custodian, but will come with a larger setup fee to a facilitator, a company that forms these special LLCs and drafts the accompanying paperwork. The LLC will also generally involve formation and annual fees to one or more Secretaries of State. If a Solo 401k is not suitable for your situation, the self-directed IRA LLC is an excellent way to get direct control of your retirement funds.

Justin Windham · Answer

@Jordan ArcherUnderstanding the prohibited transaction rules is always high on the "Do's" list. With a self-directed IRA especially, a prohibited transaction results in disqualification of the IRA. PTs in a Solo 401k are not quite as severe, but it's still the #1 thing to avoid in my opinion.Another factor with syndications is being aware of the possibility for UDFI tax. This is something a prospective investor should discuss with a syndicator and/or the syndication's accountant as well as the investor's tax advisor.

Jordan Archer · Answer

@Brian Eastman and @Justin WindhamYou both mention that an IRA LLC gives more control and reduces the transaction fees associated with Real Estate Investments. You also mention that the set up fees are higher.Can you give an example of what the transaction fees would look like without an IRA LLC and an example of what the set up fees would look like when using an IRA LLC?

Nghi Le · Answer

Check out Wealthflex out of Bellevue. A lot of the local investors use them for their SDIRA. Lower fees and ability to have checkbook access without going the LLC route (they use a trust).

Justin Windham · Answer

@Amanda Dallman There are a few factors that should be considered when deciding who to work with for a self-directed IRA or 401k. Since these specialty firms operate in a niche industry, it's not likely that the right provider for you will also happen to be the one located closest to you. A good provider will be equipped to handle your needs regardless of any location differences.