All Forum Posts by: Brian Eastman

@Robert Willard

1) Be sure you have the support on your team to know what you are doing.  Your intended plan provider either forgot to discuss how you use mortgage financing or you did not ask, and you are therefore making several incorrect assumptions.

2) Once you know what you are doing, reach out to a non-recourse lender. When you are working with the right kind of loan for an IRA, it will work, and most of the complications you note will go away.

It will look like this:

The LLC will purchase the property

The LLC will obtain a non-recourse loan for the purchase

The LLC will receive the rents and pay the mortgage and other expenses associated with the property

The net cash flow will be tax-sheltered gains to the IRA

Note that when an IRA uses mortgage financing, the percentage of the income that the IRA receives as a result of that non-IRA money in the deal is taxable as Unrelated Debt-Financed Income (UDFI). The tax amount does not normally add up to much, and the IRA will still very much see the higher cash-on-cash returns that leverage produces. But, you certainly want to be aware in advance of the presence of taxable UDFI and have your CPA lined up to help you with bookkeeping and filing a 990-T for your IRA.

@Robert Willard

The concept of the IRA LLC is not the issue. We setup such plans.

The discussion around lending is where you are way off track and at risk. The loan must be non-recourse. The LLC will be the borrower.

@Robert Willard

!!! STOP !!!

You are heading down the wrong path and could potentially void the tax-sheltered status of your IRA. Speak with your IRA plan provider, your CPA, or a tax attorney before you proceed.

A self-directed IRA is not a means for you to access cash for real estate investments you want to make. Rather, such vehicles are a way that your IRA can be diversified and hold assets such as real estate instead of being limited to investing in the stock market.

To retain the tax-sheltered status of the IRA, yYou may not create any direct or indirect transactions or provision of benefit between the plan and yourself.

An IRA can borrow, but the loan needs to be non-recourse, meaning no personal guarantee from you. As a disqualified person to your IRA, you cannot pledge your assets as security for the IRA's debt. Clearly both you and the lender you are working with are not aware of this restriction.

You absolutely cannot purchase a property in your own name and then transfer that to the IRA or IRA owned LLC.

@Johnny Horner

You cannot do what you propose.

With a self-directed Solo 401(k), there can be no transactions between the plan and yourself.  Either the plan buys the property as an investment or you purchase the property separately without any involvement from the plan.

The plan can purchase the property all cash.  The plan can then refinance with a non-recourse loan and pull some of the cash out of the property.  That cash would go to the Solo 401(K) and would need to be used by the Solo 401(k) for a separate plan investment.

@Anna D.

Investing in real estate with a self-directed IRA is a very popular way to protect and grow retirement savings. The following may help point you in the right direction as you research this opportunity.

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.

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.

@Joe Schultz

You should speak with a CPA or licensed fee-only financial advisor to get an education on how IRA distributions work.

There are general rules and guidelines that apply to all IRA plans, and it is important to understand those as you plan to draw down your IRA in retirement.

As for 1 & 2, yes, you must work with your IRA custodian for processing and reporting of any distribution event.

@Joe Schultz

The only thing that changes with respect to your IRA is that you can now choose to take distributions from the IRA without a 10% penalty for early distribution.

In a tax-deferred SEP IRA, the distributions you take will be considered regular income.

The IRA itself is still tax-sheltered money that you can continue to invest and grow. The tax-sheltering of the income to the IRA means that all the rules against self-dealing and co-mingling of funds still apply.

Most people who own rentals in their IRA will choose to draw some of the cash flow from rents as a distribution from the IRA. Such distributions must be processed and reported through the IRA custodian.

At the end of the day, your IRA is no different than an IRA invested entirely in the stock market when it comes to matters of distributions. The IRA is just invested in something different.

@Elizabeth Conklin

It sounds as if your goal is to use retirement funds to fuel your own real estate investing, such as making a down payment on a property YOU want to purchase as an investment.  If so, that is not possible.

With a self-directed IRA or Solo 401(k), the plan can invest in real estate, but there can be no co-mingling of funds or provision of benefit between the plan and you or close family referred to as disqualified persons. Everything must be done on a stand-alone basis within the envelope of the IRA and exclusively for the benefit of the IRA. The IRA is tax-sheltered, which is why these restrictions apply.

Many investors will choose to establish a self-directed retirement plan and invest in something like a rental property, mortgage note, real estate syndication, etc. as a means to better protect and grow their retirement savings. If you feel you can produce better long-term returns for your IRA in alternative assets like real estate than you can in the stock market, then this is a topic worth exploring.

A plan can use debt-financing such as a mortgage, but that is a more complex strategy. The mortgage must be non-recourse, meaning no personal guarantee from you. The property is qualifying for they loan, not you. The IRA funded portion of the deal is fully tax-sheltered back to the IRA. The portion of the income the IRA receives as a result of the borrowed money is taxable to the IRA. The tax typically does not add up to that much and your IRA will still reap the rewards of a higher, leveraged return, but having to do a tax return for your IRA is not something everyone wants to do... even if the returns are typically better than a comparable all-cash opportunity.

@William Joel Idleman

You are getting caught in a very common trap, but the result is comparing apples and oranges.

An IRA is an IRA. It has the same tax rules and restrictions whether it is invested in shares of Apple or a rental property. It also has the same tax-favored status.

Trying to compare a rental investment done personally with a rental investment done in your IRA is not really relevant. They will always be different.

The better comparison is, "Will an investment in real estate (or a syndication, mortgage note, etc.) provide better principal security and potential for growth over time than something else I might invest the IRA in?"

If you are a real estate expert and know your local market, you can definitely out-perform a conventional stock portfolio with good investments in real estate.

@Brandon Bolinger

The 10% penalty for early distribution applies to a 457 plan when the funds in question were rolled into the plan from a plan other than another 457 plan.

Because the rolled in amount is segregated for reporting, you can distribute prior to age 59 1/2 from true 457 funds and leave the non-457 rolled in funds in the plan.  Not sure that achieves your goal, but that is how it works.

A self-directed IRA may be an option for you, but does not give YOU access to the funds to invest in YOUR real estate deals and draw income from that activity. A self-directed IRA is a means for the IRA to invest in real estate (or other allowable assets) rather than be limited to investing in the stock market. All investments remain under the umbrella of the IRA and must be kept separate from personal finances.

Separately, a SIMPLE IRA needs to have been in place for at least 2 years before it can be rolled over to any plan other than another SIMPLE IRA.