Which self directed retirement is the best choice? SDIRA? SDIRA Checkbook? SDIRA LLC checkbook?

Question

I have been doing a lot of reading on all the options on self directed IRA investing. There is SO much out there... and everyone seems to be saying different things.

I want to pick the right vehicle to move $$ into my retirement.

Currently have a SIMPLE IRA with 100K to invest in flips/rentals.

My current ( side job :) is Flips and rentals! Been active with both.

Would like to buy the next flip as a retirement investment.

HERE IS THE OPTIONS OUT THERE:

1) Self directed IRA with companies like Equity trust. From what I gather it could cost more, slower option for recovering money(ie Ernst $, closing $, paying contractors), and harder to handle for a flip.

2) SDIRA checkbooks. Not sure which company is a good option here( suggestions please) Are these safe?? Insured? Sounds like a easy way to write checks, but need to manage my involvement, and not sure the steps to get into one and out of one once your done with that type of investing.

3) SDIRA checkbook LLC Okay... not sure if its truly a "check book option" but it seems to have its benefits with low yearly investments with account holder. Can't find info on fees or many companies that offer this. 
[b]
[u]My concerns or needs.

*I would want to GM a rehab project. Is there one better suited for this. Can I do this??

*I read that a flip in an IRA is TAXED 35% is this true for all the vehicles? There is a nice post of this, but it seems silly. If you know how to make money flipping why be penalized for building your retirement.

*Is there the option to move some of the $$ out of the self directed account and into a brokerage mutual fund account in the future to diversify.

*I've read that checkbook IRS are dangerous... may not be legal?

* I'm not a fan of having a fee for each check. If I'm rehabbing a house I'm writing many checks. Also how do you pay for materials if your not using a checkbook product?? It would be nice to have a debit card for those transactions.

Any feed back would be HELPFUL!

I am also planning on flipping a house for my mother and or a rental house.

I am familiar with needing to create distance, but at what point to you stop assisting in your investment? is directing OKAY?

Catherine Wynne · Answer

Let me clear up a few things. (Full disclosure:) I'm president of New Direction IRA, a self-directed IRA provider.

First, you can invest your SIMPLE in real estate. People choose to use Roths, 401Ks, etc. for different reasons, but any IRA can be self-directed.

Second, this means you don't need a Checkbook IRA or Checkbook LLC. For instance, our company handles all the administration, compliance and bookkeeping work for your investments so you don't need to constantly deal with that as you would in a Checkbook IRA. If the IRS suspects wrongdoing and audits you, you need to have a clean paper trail--that responsibility is solely on you in a Checkbook IRA structure.

Additionally, you can only fund your IRA-owned LLC once. That means you need to put enough cash in there for every investment that LLC will purchase for your IRA. With a SIMPLE IRA invested directly in real estate, you direct the self-directed IRA provider when you need something funded.. (purchases, repairs, etc.). Although the Checkbook structure may take slightly less time, our company (again for instance) uses an online client portal so funds are sent quickly.

Also note that Checkbook IRA structures can be as or more expensive than other self-directed IRA structures. (For instance, our company does not charge per check if the request is made online).

And I hope it doesn't seem like I'm beating up on Checkbook IRAs--in fact, we offer them--it's just you need to be extremely diligent and plan everything out regarding your investment if you choose this structure.

One note about UBIT: it is assessed on the debt leveraged portion of your asset. So if you take a loan from a bank to partner with your IRA, the profits will be assessed UBIT, factoring in the percentage that was debt leveraged. It's not a penalty.

And lastly, you can't put sweat equity into the property nor live in it. That said, the IRS does not discourage fix & flips--it's a very common strategy amongst IRA investors.

Steven Hamilton II · Answer

Aman S.,

A huge suggestion is that you own a small percentage of the corp.  That will help if you ever need to personally contribute.

Steven Hamilton II · Answer

It is one thing to flip one or two, but once you get to three and start doing that regularly, you are pushing on the edges of running into an issue of being an active business. You also better be holding other assets in your IRA if that is part of your strategy.

Sweat equity is BAD. Don't do more than fix something small. You cannot provide a benefit to your IRA without it being deemed a contribution.

UBIT is assessed on income from active investments.

UDFI is Unrelated Debt Financed Income.  This is a tax on the portion of your income related to financing.  So if you buy a rental house for 100k and 60k of it is financed. You will pay UDFI on 60% of the profit after depreciation.

-Steven

George Blower · Answer

@Deren Flesher

The reason such investment triggers UBIT is that the franchise is a business that offers goods or services. The UBIT rules are intended to even the playing field between those investors that don't use retirement funds vs those that do to invest in a business that offers goods or services. See the following for more on UBIT.

https://www.irs.gov/charities-non-profits/unrelate...

Another option is to process the investment as a promissory note as UBIT generally does not apply promissory note investments made through an IRA or a solo 401k.

Deren Flesher · Answer

I guess I don’t understand UBIT. How is giving money to the managing partner of a franchise deal (with me as a limited partner) not passive? I literally cannot do anything active with the business (and wouldn’t want to as that’s not my expertise). How is that any different than making money on stocks of companies I also don’t control and cannot influence? Care to educate me, Brian?

I will not be any sort of managing partner and will not draw a salary. I will only receive profit share (with preferred returns) and equity share if we sold the whole enchilada in 20 years or something. I assume what I’m trying to do, Jim, qualifies for using a SDIRA.

Brian Eastman · Answer

@Jim Sims

The original post indicates an interest in a wholly passive investment as a limited partner.  That would be acceptable, though potentially taxable, in an IRA umbrella.  A ROBS plan would not be appropriate for this venture.

Jim Sims · Answer

My understanding is that all the SDIRA options demand passive investments only. That means you can't be the GM and you can't draw a salary. If you want to be the GM and you want to draw a salary there is the Rollover for Business Startups (ROBS) option which is the polar opposite: it must be used for active investments and you may draw a salary. I'm impressed with Frank Selden. I'm considering engaging him to do what you're trying to do, but with a ROBS.

Brian Eastman · Answer

@Deren Flesher

The answer is that you use the right tool for the situation.  For a single private placement, a custodial account should be sufficient and cost effective.  A checkbook IRA LLC is more tool than is required, and you would end up paying for flexibility and control you do not need.

If there were to be multiple such static investments, or if the assets were to be either time-sensitive or transaction intensive, then creating the LLC layer under the umbrella of the IRA starts to make more sense and provides real efficiency.

I would speak with a tax advisor about your intended investment and whether it may be subject to UBIT taxation.  If the franchise you will be investing in is a pass through entity, then expect some pretty steep trust tax rates that likely kill the value of making such an investment with an IRA in the first place.

Deren Flesher · Answer

So I've been reading a lot about SDIRAs after I posted on another investment forum about an opportunity to invest in a franchise as a limited partner.

Do any you have recommendations for a custodian and/or legal advisor for self directed IRAs, specifically one for private placement like this limited partner opportunity? I might eventually also do RE through a SDIRA too, but currently my opportunities lie within franchise investments.I think I'll want checkbook control, even though the transactions will be infrequent and not extremely time sensitive. I just don't like the idea of being nickeled and dimed every time money goes in or out. Any updates on experience with UDirect or others?

Aman S. · Answer

Thanks Steven Hamilton II.

Which self directed retirement is the best choice? SDIRA? SDIRA Checkbook? SDIRA LLC checkbook?

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