All Forum Posts by: Doreen Chaisson

I am in agreement with Brian - if you need to open an IRA by today and make a contribution for tax purposes, go to the local bank and open one. You can then open your Self-Directed IRA at your leisure, and transfer funds from the bank IRA, as well as roll over any funds you may have in other IRAs or old 401(k)s from former employers.

Most, if not all Self-Directed IRA custodians allow Real Estate investment, either by direct purchase by your IRA, or purchase via an IRA-owned entity like a single member LLC, LP or corporation. Requirements vary from custodian to custodian.

There are many different companies to choose from when deciding which IRA provider will help you invest your retirement funds into real estate. What often gets overlooked is the type of company you are choosing. IRA providers can be put into three separate categories: Custodians, Administrators, and Facilitators.

Custodians are the first type of company, and are usually the most common. They're either a bank, credit union, or non-bank custodian approved by the IRS (usually a broker dealer who obtains IRA approval). Custodians are permitted to custody assets held in an IRA under IRC Section 408. They're also subject to strict regulatory oversight at a State or Federal level. Custodians tend to take a more conservative approach when reviewing alternative assets for investment, as they want to avoid the custody of any assets that may be involved in prohibited transactions. Alternative Asset custodians cannot give any tax, legal or investment advice, cannot assist with the structure of an investment, and cannot endorse, promote or align with specific investment sponsors.

Administrators are the next type of company. Essentially anyone can be an administrator, and their main function is to perform administrative functions only. Because of this, they also need to have an identified custodian for the self-directed IRA named in the account disclosure documents. Administrators are only subject to regulation if required due to profession (CPA or attorney), not for role as administrator. This allows administrators to be much more liberal in accepting assets and allows the ability to align with investment sponsors. Review fee schedules carefully – there may be separate charges for whatever 3rd party custodian they are using.

The third company type is a Facilitator. They educate investors on the process of self-directed investing or assist in setting up single-member LLCs for either “check-book control” or to purchase a franchise or ROBS (Roll-Over Business Startup). They may also provide administrative services for the LLC. Like Administrators, Facilitators must have an identified custodian for the self-directed IRA and are only subject to oversight on a professional level. They are also much more liberal in accepting assets and can align with investment sponsors. Again, review fee schedules carefully – there may be separate charges for whatever 3rd party custodian and/or administrator they are using.

So when you're looking for someone who offers a self-directed IRA, make sure you know the type of company you're dealing with. This will help when determining which company best fits your investment scenario. It is advisable to do your due diligence and ask about such things as how long have they been in business, are alternative assets their sole focus, are they BBB accredited and rated, are they a regulated financial institution, have they ever been sanctioned by any regulatory bodies, how many accounts and how much in assets do they administer?

Additionally, it's important to note that many self-directed IRA custodians require that a "special advisor" (generally a licensed CPA or Attorney) be appointed to review any and all transactions of the LLC to make sure no prohibited transactions are taking place. IRA-owned single member LLCs came under heavy regulatory scrutiny back in 2009, due to lack of oversight on how the LLC's (IRA's) money was being spent. Was the check written to pay a legitimate LLC expense or to pay to install a pool in the IRA owner's backyard? Several alternative asset custodians stopped allowing those types of investments at that time, and that remainder that still allow them often have the Special Advisor requirement.

Again, this is a very tricky area. If you plan to invest the IRA funds directly into the company, what you are talking about is a Rollover Business Start Up. Generally an IRA investment has to be an arm's length transaction for the benefit of the IRA and not for personal benefit of the IRA owner.  Many IRA custodians, including the one I work for, will not accept these type of investment structures if you are planning to work for the company and draw a salary.

If you already own 50% or more of the LLC, then further investment by your IRA is prohibited. If you were starting a new LLC from scratch, both your IRA and your personal funds could be involved, but there are limitations on your role. For example, you can be the decision maker and handle the checkbook, but you would not be able to draw a salary or be involved with any of that LLC's assets. For example, if that LLC purchased rental properties, you could not do any work on those properties.

Also, because this would still be considered a single member LLC, most IRA custodians will require that you appoint a special advisor (attorney or CPA) to review every transaction of the LLC to ensure no prohibited transactions are taking place.

In fact your IRA and your wife's IRA could invest together in a rental property or LLC.

It's perfectly legal to set up a Self-Directed IRA and then instruct your custodian to invest the IRA funds in a partnership, LLC or C-corp along with other investors.  Your IRA account doesn't have multiple partners - the IRA is invested in a partnership with its own share of ownership.

There are certainly some prohibited transactions to be aware of - for example, you can't set up an LLC and fund it with an IRA and then pay yourself or your family members a salary. In the example Tony is proposing, he and his friend could certainly form an LLC, with his IRA owning part and his friend owning another part.  However, Tony  would not be allowed to do any of the work in rehabbing the houses that LLC may purchase.  It has to be strictly an arm's length transaction.  Similarly, that LLC would not be able to purchase any properties that Tony has any personal ownership in.

@Verna M. - there is no need to cash out your IRA to invest in property. You'll pay taxes and an early distribution penalty if you do, and also taxes on any revenue generated by that investment property.

Have you considered using a Self-Directed IRA to purchase an investment property with your IRA funds as an IRA asset? The IRA owns the property, any revenue flows back to the IRA tax-deferred until retirement. If you have a Roth IRA, you won't pay any tax on the revenue generated by the property, nor will you pay taxes on any gain on sale of the property later. All expenses for the property - taxes, maintenance and so forth - are paid out of the IRA funds. You, and anyone in your ascending or descending lineage (grandparents, parents, children), can't use the property personally, nor can you make any repairs or do any work yourself. It has to be a strictly arm's length investment, and most self-directed IRA custodians will require that you hire an unrelated 3rd party property manager to ensure it stays this way.

Hi - a few additional issues to consider:

1. If you use your IRA as a down payment and finance the rest, you will need a non-recourse loan. Not all lenders do them, and those that do typically require 35 - 40% down. They are typically 3 - 5 year ARMs, and they have certain property types they will not lend on (mobile homes, raw land, etc). You generally have to demonstrate that the property generates sufficient NOI to cover the mortgage payments; some also require an additional reserve of funds in the IRA in the event tenants move out, etc. If you pursue seller financing, that person's note will also have to be written as a non-recourse loan, meaning the only recourse in the event of a default is that piece of property. They can't go after any other IRA or personal assets to satisfy the debt.

2. The mortgage payments must be paid with IRA funds and not your personal funds.

3. All income generated must flow back to the IRA. Having any proceeds from the property go to you would be construed as a distribution, subjected to taxes, and if you're younger than 59 1/2, you'll also pay an early distribution penalty.

4. When you use leverage to purchase an IRA asset, your IRA is subject to a tax called UBIT- Unrelated Business Income Tax - on the portion of the rent attributable to the leverage. For example, if you put down 40% and finance 60%, roughly 60% of the net income generated would be subject to UBIT tax, which must be paid by the IRA. You'll need a CPA to calculate the potential impact this may have.

I hope this helps clear things up!

With a Self-Directed IRA, if it's a property the IRA is purchasing, the IRA would be able to get a non-recourse loan to either finance purchase or finance rehabbing. The IRA, not the IRA owner, is the borrower and the IRA is responsible for making the monthly loan payments. This could be an issue if it's an unoccupied, non-income producing property.

I just want to clarify that Pat Rice is not associated with PENSCO Trust Company. His book is a good resource for beginner IRA investors, but he is in no way affiliated with or a spokesman for PENSCO. Various staff members including PENSCO's founder, Tom Anderson, provided Mr. Rice with technical guidance when writing the book.