All Forum Posts by: Brian Eastman

@Chris Fore

An IRA is tax sheltered savings. That tax favored treatment comes with the caveat of keeping the IRA at arm's length. You cannot personally benefit or comingle IRA and personal funds. If you do so, you break the piggy bank, so to speak.

Everything the IRA does must be entirely separate from you, lineal family, and family owned businesses - all of which are considered disqualified parties to the IRA.

@Chris Fore

It depends on how you utilize the Roth.

If you take the contributions as a tax-free distribution to yourself, which you can do, that is now personal money.  If you then invest that personal money in a real estate deal, you will be taxed on the gains unless you deploy a strategy such as a 1031 exchange to push those taxes down the road.

If you transfer the Roth IRA to a self-directed Roth IRA, then the IRA can make the investment into the property. All gains from rents or future sale would be returned to the Roth IRA tax free. If you then wait to take qualified distributions from the Roth IRA, you will never pay taxes on that income.

Keep in mind, it is not you buying the property using Roth money. The Roth IRA is investing in the property instead of something else like mutual funds. All expenses are paid by the IRA and all income flows back to the IRA.

@Kyle Simmons

@Taylor L. is correct. Because an IRA has tax-sheltered status, it cannot be used in any way that produces a transaction or a direct or indirect benefit between the IRA and a disqualified person. That is a list that includes the account holder, their spouse, and lineal family, among others.

Your father could pursue a strategy of lending to real estate investors as a way to diversify his retirement savings, but his IRA could not lend to you or a business you control. Doing so would create a prohibited transaction that voids the entire IRA and makes it taxable.

So, if the real goal is to get you access to more money, that will not happen. If the goal is to use real estate and/or notes to better secure and grow a portion of your father's IRA, there are probably ways you can tap into your expertise and network to find him places he can make investments that fit the IRS definition of "arm's length".

@Justin Summers

What @Dmitriy Fomichenko said is accurate.  

The Solo 401(k) is not subject to state income or capital gains taxes on the sale of an asset.   I would clarify that the plan is not exempted from certain transfer taxes or fees directly associated with the sales transaction.  

You should be able to provide a form W-9 or equivalent that shows the 401(k) as tax exempt.  Contact your plan provider or CPA for specific guidance.  

The transaction may still result in a 1099-S being issued to the plan to report the income.  That is fine.  Income reported to a tax exempt entity is still tax exempt.  You would just keep the 1099 with your plan records and move on.  

@Jonathan McGarrity

You mention that you have an "i401(k)".  If so, then you can upgrade your "stock market only" version of a Solo 401(k) to a truly self-directed Solo 401(k).  You would do this by working with a firm that specializes in crafting such custom plans.  

In essence, your business still has the same Solo 401(k).  Your 401(k) is just built differently to allow for a broader range of investments.  IRS rules allow a 401(k) to invest in anything other than collectibles.  Most financial services firms just sell stocks, bonds, and funds, however, so that is all they design their plans to invest in.

With a truly self-directed Solo 401(k), the plan can invest in things like real estate, syndications, venture capital, cryptocurrency, etc.

In the case of real estate investing, it is not "you buying the property" using plan funds.  Rather, the plan is investing into that property instead of into an ETF.  You can be the "fund manger", so to speak.  You choose the investments, execute the contracts and handle the expense and income transactions associated with putting your plans money to work in something like real estate where you believe you can better protect and grow your tax-sheltered retirement savings.  

The plan receives all income, just like it receives all the income (or losses) in the ETF's it is investing in today.  Because the Solo 401(k) is tax-sheltered retirement savings, everything must be kept entirely separate from your personal finances.

@John Jasko

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 a small portfolio of relatively static and simple investments like a private placement or crowdfund, but can become rather cumbersome and expensive with multiple assets or more time sensitive and transaction intensive assets 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 you qualify for this plan, it will be the best vehicle for investing in syndications since they are almost always debt-financed.

Several of the comments above hinge on price - which is of course important - but is well down the list of the most important things you want out of a self-directed IRA partner. Accessibility, responsiveness, and quality of guidance rank much higher.

So, as you continue your research and get feedback here on BP, think about what type of program will best suit your 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.

@Dawna Willis

Your IRA cannot touch this transaction in any way, shape, or form. Your father, your father's estate, and you are all disqualified persons to your IRA. You cannot change your connections to the property or the note by moving things around.

@Denise Darval-Chang

If you withdrawal funds from an IRA, which it sounds like you did, then you have 60 days during which you can put that back into the same or a different IRA. Once you are past that timeline, you can no longer put that money back into an IRA.

With a self-directed IRA the money stays in the IRA. You just move the IRA from a firm like Edward Jones that only sells stocks, funds, and bonds to a different type of firm that can process investments on behalf of the IRA in non-stock market assets like real estate.

In a self-directed IRA, the money is not being taken out of the IRA for you to make an investment. The IRA is investing in that asset you choose. So, with a note as an example, the IRA would be the lender and fund the note. The borrower would pay the IRA principal in interest, which should produce a nice earning that is tax free inside of the Roth IRA.

@Denise Darval-Chang  

@David Clinton III is right, it would likely be much more beneficial for you to evaluate using a self-directed IRA. In that arrangement, you keep the same tax-sheltered benefits of the Roth IRA, but just open up the possibility of the Roth investing in a syndication or note. The gains from the investment will be tax-sheltered back into the Roth IRA.

Since you are over normal retirement age of 59 1/2, you can choose to take any distributions from the Roth, but it would seem to be better to keep the principal of the Roth and just draw off the income as you need in tax free Roth distributions rather than kill the Roth entirely and then make any gains from future investments taxable to you.

@Robert Karnes

Both an IRA and Solo 401(k) can use debt financing such as a mortgage. The difference is that an IRA is subject to tax on the portion of income the IRA receives from the non-IRA money in the deal and a 401(k) has an exemption from that tax when the debt-financing is used for the acquisition of real property.

The UBIT cost of UDFI does not normally add up to that much in an IRA, and the net effect is a small reduction in the boost of returns that leverage creates, so it is still a net positive strategy.  Of course, if you have the option for a Solo 401(k) and can eliminate both the tax and the headache of a separate tax return for your retirement plan, that is a win.  

The exemption from tax on UDFI in a 401(k) applies whether the funds in the 401(k) are tax-deferred or Roth.

Be advised, UDFI (debt-financed income) is exempted, but UBTI (business income) is not.  Those are two different forms of income that generate an obligation to pay UBIT.