IRA strategy - checkbook control, flips, then 72t?

Question

We had a conversation with our CPA today and in the course of that a few 'new' ideas came up.

I'm wondering for those that have utilized checkbook control for a business under a self directed IRA, then for instance done a flip, within an IRA -

The CPA walked us through tax obligations for a flip, in the 'outside IRA' world, and it isn't pretty. Seems after the gains tax and then the self employment tax we were up nearly at 45+ % !!!

I'm nearly certain people that flip properties do much better, but here's what crossed my mind:

Why not get checkbook control, flip something within the IRA, then do a 72t to start drawing income early out of the IRA which let's you not have the early withdrawal penalty? The main advantage as I see it would be then that the income is taxed at your marginal income rate which will depend on where someone is, but is much lower than that 45% etc.

Am I missing something? I doubt we'd get into this world as at least as of now, we're mostly doing buy and holds.

On a somewhat related note, as well - I'm wondering if there's some way to do a 72-t from income (ie an existing cash flow) within a self directed IRA? Instead of withdrawing from a cash balance? Meaning, if there's an existing cash flow (say rental income) that can be counted on, can a 72t be done there?

Carl Fischer · Answer

@Jim Goebel

Flips are taxable UBIT that gets to a 37% in a hurry fed tax. State tax TBD?

Buy and holds and 72t works if you are under 59.5. Checkbook control or directly with the custodian/administrator.

Carl Fischer · Answer

Traditional you pay tax because you never did pay any but no penalty.

Roth is no tax or penalty.

Steven Hamilton II · Answer

72T is not terrible; however, there are requirement to be met. In addition to that you have to look at the possibility of UBIT if you continue to flip. You cannot do anything to benefit your IRA personally nor can it benefit you either. So you must be very careful or you could be running even higher rates.

Now, I'm not familiar with your situation; however, I think that 45% might be rather off if your personal income includes wages to get you to the 30% area. Possibly between Fed and State; however, you are probably capped at the Social Security Max. Keep in mind the QBI deduction would give you 10% assuming you qualify.

Nicholas Fazio · Answer

@Jim Goebel interesting, following should more definition be found, thanks

Nicholas Fazio · Answer

@Jim Goebel

If I’ve read correctly, this would not work because once you start to implement the 72t, the original balance cannot be added to (I’d assume cash flow would be adding) or subtracted from other than the draws themselves...if that makes sense...please correct me if I’m wrong.

Jim Goebel · Answer

@Nicholas Fazio

@Carl Fischer

I've had a brief conversation and my understanding is that there may be a mechanism to essentially add something to the 72t balance over time, thus increasing the payment / distribution (which by the way is taxed at marginal income amount). I could be wrong on that, but that's the one data point I have.

By the way I was also informed to be careful about flipping houses under the IRA. Makes sense, and that's fine with us as we don't do much of that anyways.

Jim Goebel · Answer

@Carl Fischer

Hi Carl, thanks! I'm wondering when you say buy and holds with 72t works, do you mean we'd just evaluate getting some of our growing cash balance amount out in the 72t, or is there some way to directly convert that income (ie rent payments into the IRA) into payments? I guess if there was some mechanism to commit future rent payments and get the balance in line with the discounted future cash flows, and then use that to 72t - if that makes sense. Not sure if some mechanism like that exists?

IRA strategy - checkbook control, flips, then 72t?

IRA strategy - checkbook control, flips, then 72t?

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