Self-Directed IRA Questions

Here are some of my more recent questions/answer sessions from my blog and clients about using a Self-Directed IRA (SDIRA) to invest in real estate. This is a VERY tax efficient way to invest in your deals, but you have to do your homework first.

QUESTION 1

"I recently did a hard money loan where I combined multiple self directed IRA accounts and money from my company as well. Basically my self directed Roth, my wife's IRA, and the balance was from my LLC. My administrator (APS) didn't have a problem with the loan, but I recently went to lunch with a friend who claims that the IRS frowns upon this. His argument was that I was personally benefiting so the IRS could ultimately unwind the deal. Even though each investor will have equal profits proportional to the % interest contributed to the loan.

I plan on doing a lot more deals like this in the future so I want to make sure that I can "top off" loans with my own money when necessary. Anyone have experience with this? Again, my administrator claims that it is fine. Is my friend just being ultra safe?"

My Answer:

Prohibited Transactions. ?Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.?Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).?The following are examples of prohibited transactions with a traditional IRA:

• Borrowing money from it.

• Selling property to it.

• Receiving unreasonable compensation for managing it.

• Using it as security for a loan.

• Buying property for personal use (present or future) with IRA funds.

Your IRA may not buy an investment from or sell an investment to a disqualified person as defined by Internal Revenue Code Section 4975. To do so is known as "self dealing."

QUESTION 2

"I am looking at going with the SD 401K, mostly because I am working Fix and flips and want to have flexibility on deals by borrowing 50K from the 401K. Has anyone compared the SD 401k to the SD IRA? Are there any pitfalls I am missing on the SD 401k? Thanks for your help."

My Answer:

Well if we are talking about the solo 401k, there are a lot less restrictions with a solo 401k than with a SDIRA. The solo 401k does not incur the UDFI (Unrelated Debt Financed Income), allows you to invest in a lot more than the SDIRA.

QUESTION 3

"What I've found is the fees, to start, may be small but then I've been told that some charge for every check written too. That could get expensive. Am I wrong"?

After consulting with Self-Directed IRA Consultant, Satchie Carvounis, here is answer:

That is true of some custodians. Every custodian or administrator is different. This is where Security Trust excels - we decided to charge a quarterly fee for management, which cancels all transaction fees, checks included and ACH batching to transfer funds. We also provide legal counsel if and when needed at no additional fee.

We saw a lot of companies that were initially inexpensive to set up an account but then the fees came into play.If they have under $50k, it's $74 a quarter, over $50k its .245% per quarter or .98% a year. If they have roughly $390k and above, they're paying less than .98%, because we have an upper limit charge per quarter. The lower minimum is low because people may open a Roth or a Traditional with us.

I compared this to my old UBS account and they charged me 1.6% a year and either front loaded or back loaded 4-5% as well. I see clients paying even more fees than that on brokerage accounts. Here's what that quarterly fee covers:

• Quarterly Statement of Profit & Loss and a Balance Sheet and online access

• Unlimited calls to our office for questions

• No additional transaction fees at all

• Legal counsel, if needed

• Bookkeeping and recordkeeping

• State filings for the LLC

• Custodial fees paid

• Asset transfers, purchasing or selling an asset, or taking a distribution

• Annual valuation of the IRA assets

• Filing IRS forms (Form 5498)

• Custodian holds the membership interests of the LLC

• Funds transferred from the account within hours of receipt of the request ('checkbook' control)

QUESTION 4

"Let's imagine the following scenario: come across a person who wants to sell his retail store. Let's say he sells widgets. So, my SD-Roth IRA buys the LLC (Widgets, LLC). I know that in this type of setup, I cannot run the business, so I hire the current store manager to be the required 3rd party manager. Widgets, LLC makes $1000 in gross sales. ?-$500 for rent ?-$300 for payroll ?-$100 for utilities, inventory, etc. That leaves $100, which the manager then sends to the SD-Roth IRA.In this scenario, would that mean that the LLC itself shows 0 profit, and at the end of the year, is only liable for the $800 annual fee and payroll taxes on the one employee/manager? Or am I missing something?"

My Answer:

UBIT (Unrelated Business Taxable Income) applies even in a ROTH IRA. The governing factor is that the IRA is now engaged in a business that does not fit with its tax exempt purpose. A 35% rate so this needs to be planned carefully.

You can watch my detailed webinar on investing with a SDIRA HERE