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Updated over 5 years ago, 05/10/2019
Does anyone have a suggestion for a good self directed IRA?
I have money in an E*Trade IRA and want to transfer it to a self directed IRA for a down payment on a rental SFR. Any suggestions on best way to go? Thanks!
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.
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.
If your intention is to have the retirement plan invest in leveraged rental property, I can pretty much guarantee you will find either of the checkbook plans to be much better tools.
If you have qualification for the Solo 401(k), the exemption from UDFI on a leveraged property investment will be a nice benefit. Even in an IRA where there is a minor tax liability, you still very much get the benefits of leverage and a higher cash-on-cash return.
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.
@Lane Donatelli, leveraging real estate via an ira is harder than buying on your own. Ltv is around 65% max, reserve requirements, and goofy tax (ubit) filings.
Thanks for the heads up Alan
I am not a plan provider, and I had a great experience last year with uDirect IRA. They're very well discussed all over BP, so I think it would be close to a consensus view. Have not heard anything bad.
There are other great providers (maybe even in this thread), that's just the one I know.
Welcome to BP!
I suggest that you interview a few providers and as you do so here are some issues to consider:
1. In order to have checkbook control, the IRA account will need to be at a trust company that will allow the IRA to invest in an LLC (where you will be the manager and your IRA will be member - an as manager you will have checkbook access to the LLC bank account). Therefore, you will want to confirm that the trust company allows for investing in an LLC and the associated fees and minimim balance that applies to the IRA account.
2. Confirm that the IRA LLC provider will prepare all of the documents needed to not only form the LLC (articles of organization, SS-4 to obtain an EIN) but also the documents needed by the trust company to process the investment of IRA funds in the LLC.
3. Confirm that the provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).
4. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).
5. In addition, if you are self-employed with no full-time employees you may wish to consider opening a Solo 401k instead of a self-directed IRA as it has several advantages over an IRA LLC such as much higher contribution limits, direct checkbook control (i.e. no need to have the account at a speciality trust company), ability to take a 401k loan, exclusion from unrelated debt finance income tax with respect to investment in real estate acquired with non-recourse financing, etc.
Excellent advice George. Thank you very much!
Thanks for the feedback Trevor!
A self-directed IRA can be a great way to invest retirement funds into real estate. A Solo 401k is another structure that may provide additional benefits if you are self-employed. With either account type, there are prohibited transaction rules to understand. If the retirement funds will provide a down payment for a property, you'll need a non-recourse loan for the remainder. In this scenario, the retirement account would own the property and would receive the income from it. The IRA would generally be subject to taxes in this case, but the Solo 401k would not.
A couple of decisions that can be helpful to make early in your due diligence process is which structure will work best for you and whether or not you would like checkbook control. I'd recommend reaching out to a few providers to get a better idea of your options.
Thanks Justin! More excellent advice from the BP Family. I love it
@Lane Donatelli
Lane, I set up a self directed IRA LLC and have bought multiple properties in the last 3 years. Solo 401k would be better if you are self employed but if not then this way works very nicely. PM me with any questions and I'll be glad to answer. I've done private lending, cash deals, taken non-recourse loans and a transition in kind so I have a little experience.
Excellent Mike. I’ll be reaching out in a couple days, when I am sure what direction i will need to go. Interesting you mention private lending as well... are you still doing any lending?
@Lane Donatelli
I didn’t like having my money tied up for 12 months in someone else’s deal. I felt like if they failed I would be stuck with an unfinished project. It wasn’t worth 10% to me. I was glad when it was over and I won’t do it again.
Understood