Self directed Ira, Equity Trust or Broad Financial?

[Elaine Gee]

I'm in process of setting up self directed Ira acct either with equity trust or broad financial.  Equity Trust charges very high yearly fee plus different fees for different services. So which company is better? Looking for inputs. Thank you!!!

[Brian Eastman]

@Elaine Gee

The two companies you are looking at provide very different types of services.

Equity Trust is a custodian. Think E*Trade with different paperwork. Rather than buying stocks/funds in the IRA, you can use the IRA to purchase real estate, notes, etc. As custodian, they hold the funds, sign every document, cut every check and receive every deposit. For an investment that is static in nature, this works OK. For ownership of real estate or other time-sensitive and transaction intensive investments, it is not the right tool for the job.

Equity Trust is probably one of the more expensive, least customer service friendly institutions in the industry. If your IRA investments will be static in nature, I would recommend just about any other custodian. This is pretty broadly accepted opinion within the business, not just my view.

Broad Financial offers plans that provide checkbook control. An IRA such as that held by ETC (they have their own in-house custodian Madison Trust) will be invested into a single LLC. The IRA owns the LLC and you can be the non-owner manger of the LLC. This provides you with checkbook control, and you get to execute all the affairs of the LLC engage in your investment transactions, without the 3rd party processing paperwork, delays and fees. For more interactive investments or a portfolio with many static investments, this will be much more efficient. They will charge a higher up-front fee for the creation of the legal entity, but the ongoing fees will be minimal.

Broad is one of several such firms that offer the checkbook plans.  

[Dmitriy Fomichenko]

Elaine, as a real estate agent you are considered to be self-employed therefore are eligible for truly self-directed Solo 401k plan. You should consider that instead of plain self-directed IRA. There are several major reasons why Solo 401k is superior to SD IRA:

• No custodian required, means you eliminate custodian and transaction fees and gain checkbook control
• Ability to contribute nearly 10 times more than Traditional IRA
• Loan feature allowing you to access up to $50K of your retirement funds before retirement tax-free and penalties-free
• Exempt from UBIT tax on leveraged real estate
• Ability to make post-tax contributions into Roth sub-account, means you can invest tax-free for the rest of your life, no additional cost for this feature
• Add account for spouse if eligible
• and more!

[Kreighton Reed]

Elaine Gee opening a Solo 401K is a lot cheaper than a self directed IRA. Both Brian and Dmitriy do them. I'd reach out to either of them.

[Tammy Patchin]

@Dmitriy Fomichenko The Solo 401k plan does make better sense.  Can you elaborate on the "exempt from UBIT tax on leveraged real estate" comment?  I read this statement on another site indicating that UBIT is triggered when:

"For example, a real estate development or buying and selling a significant number of short-term real estate flips by an IRA will cause the assets of the IRA to be considered as inventory vs. investment assets. This will result in taxable income."  

If my sole income is real estate gains from flipping, would I then have taxable income ? Or does placing it in the 401k vs. IRA eliminate that as a possibility?

Thanks!

[Dmitriy Fomichenko]

@Tammy Patchin,

If you use Solo 401k to purchase investment property using leverage - the income from debt financed rental property will not be subject to UBIT unlike with IRA.

If you run an active trade or business in your retirement account (regardless if it is an IRA or 401k) - UBIT will apply.

[Brian Eastman]

@Tammy Patchin

If the plan activities are simply a business such as flipping, then the plan will be subject to UBIT taxation. This tax applies to both IRA and 401k plans when these tax-exempt entities start acting like and competing with taxpaying businesses. Passive income such as rentals, hard money lending and the like are not subject to UBIT (Unrelated Business Income Tax - IRS Publication 598).

The confusion a lot of folks run into is with a subset of UBIT called UDFI (Unrelated Debt-Financed Income). This tax applies when a tax-exempt entity uses leverage such as a mortgage, margin on stocks, etc. A Solo 401(k) is exempted from UDFI taxation on acquisition indebtedness associated with real property (not all forms of debt-financing however). So, when planning to purchase rental properties in an IRA/401k and using mortgage financing, it can be more advantageous to do so in a 401k if you are eligible for such a plan. The tax generally is not that bad even in the IRA format - but no taxes are better than small taxes.

[George Blower]

@Tammy Patchin

• UBIT applies to both solo 401k plans and IRAs. 

https://www.irs.gov/charities-non-profits/unrelated-business-income-tax

• UDFI only applies to IRAs.

https://www.irs.gov/irm/part7/irm_07-027-008

[Tammy Patchin]

Thank you all for responding!  I now understand. :-)

[Bernard Reisz]

@Tammy Patchin For additional clarity, both the 401k Plans and IRAs are BOTH subject to UBIT & UDFI. However, qualified retirement plans, a subset of tax-advantaged plans to which 401(k)s belong and IRAs do not, do not generate UDFI from real estate acquisition indebtedness. In other words, the UDFI exemption for 401k plans is for real estate investment debt, only; if a 401k uses leverage for non-real estate investments, UDFI may be applicable. Of course, the asset class that is most easily leveraged is real estate, so the UDFI exemption for the 401k is incredibly valuable.

[Tammy Patchin]

Thank you @Bernard Reisz!