All Forum Posts by: Brian Eastman

@Victor Hoffman

A self-directed IRA would be a means to diversify some of your retirement savings into real estate. If you feel you can better secure and grow some of that money in real estate rentals, private lending, etc. you could consider such a plan. You would not have access to the money personally.

Since you will be self-employed as a realtor, you could look at a Solo 401(k). This is an owner-only version of a 401(K) plan with high contribution limits and the same capacity as a self-directed IRA to invest in non-traded assets like real estate. One nice thing about the Solo 401(k) is that you can borrow up to $50K from the plan and pay that back over 5 years. If that will bridge your transition period, it might eliminate needing to take a taxable distribution from the current IRA.

Another option is a Rollover as Business Startup.  I'm not sure it fits your needs, but that is a program that allows you to invest your retirement savings into your own active business.  I don't think it makes sense for being a realtor as the cost of startup is so low.  We don't usually recommend the ROBS plan for less than $100K of business capitalization.  It would perhaps make sense if you wanted to become a real estate developer and build or flip houses.  This plan must be linked to an active business, so is not a means to acquire passive rentals.

Lastly, you may be able to take a distribution from an IRA and avoid the 10% penalty if you qualify for a hardship distribution. Check with your CPA. Being laid off probably qualifies depending on other aspects of your personal/family income situation.

@Jonathan Winkler

There are two ways you can put retirement money in an IRA or 401(k) to work in real estate.

With a self-directed IRA, the IRA can invest in real estate instead of being limited to conventional stocks & funds. This is a way to diversify your tax sheltered savings, and not what I would call funding a business. All expenses are paid by the IRA and all income accrues back to the IRA tax free. You are limited to being an investment manager, and cannot personally benefit by using the property or drawing income. This tool is good for passive investments like rentals, syndications, notes, private real estate funds, etc.

With a Rollover as Business Startup (ROBS) plan, you can use existing retirement funds to capitalize a business that you operate.  You can be hands on and draw a salary. There are not taxes or penalties, but the business itself will be taxed.  This does not work for passive investments like rentals, and must be applied in an active business like real estate construction, flipping, or a services business like a resort, hotel, adult care facility, etc.

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 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.

@Austin Talbert

There are a number of specialty firms that provide services around investing tax-sheltered IRA or 401(k) money into alternative assets like notes, real estate, etc.

The big firms focus on what they do, which is publicly traded assets like stocks and funds.  

The unique nature of non-traditional investments require a different type of servicing model.

As @Jeff Nash indicates, there are rules that need to be followed, namely around keeping things at arm's length and exclusively for the benefit of the IRA. Your IRA cannot lend in a way that provides a direct or indirect benefit to you or close family.

There are a lot of forum posts here on BP on the topic, and you will see several of the firms that are active and supporting the BP community involved. Reach out to a few of us and you will quickly learn a lot about this unique way to take more control of your IRA.

@Ira Bloomfield

The IRS prohibits any direct or indirect transactions or benefit between an IRA/Solo 401(k) and a disqualified person.

You are a disqualified person to your Solo 401(k).

If your Solo 401(k) is being used to salvage a transaction that you have engaged in personally, could the IRS not view that as an indirect benefit?  They very well could. 

@David Garcia

The operating agreement for a checkbook IRA is specifically tailored to the idea of the IRA being the member.

No self-directed IRA custodian will accept a LLC as an investment of the IRA unless the operating agreement is properly structured and references certain restrictions based on IRS rules. Some custodians will go so far as to reject a LLC that was not prepared by a professional provider or attorney, as they do not want the liability of supporting an untrained investor going the DIY route.

So, yes, the LLC operating agreement is necessary and critical to proper implementation of a checkbook IRA.

@David Newfang

There are a number of self-directed plan formats offered by different types of providers that suit the needs of various portfolio types.

A custodian like Entrust is simply the base administrative/processing layer. You can just house an account with a self-directed custodian and have them process your transactions. This is not what is referred to as checkbook control, but for one or two relatively static assets like a private fund or REIT can be effective.

For more dynamic portfolios with multiple assets or certain investments like rental property that generate a lot of transaction activity, relying on a 3rd party custodian as your processor becomes unusable and expensive. Upgrading to a Checkbook IRA where the IRA held by a specialty custodian like Entrust or Solera owns a LLC or Trust that you can manage and use to control the IRA capital becomes more effective.

The checkbook IRA is kind of like having a conventional IRA invest into a "fund" (the LLC/Trust) where you get to be the fund manager, and the "fund" can invest in anything the IRS rules allow for.

If you are self-employed with no full time employees, a self-directed Solo 401(k) is a particularly elegant solution that provides checkbook control and has other advantages like high contribution limits, Roth sub-accounts, and the ability to borrow from your plan.

There are several quality providers such as @Dmitriy Fomichenko active on Bigger Pockets.  

Do a bit of reading and then get on the phone with a few of us. It is a pretty broad and intimidating field when you first start, but once you chat with an expert or two, you can narrow down how a self-directed IRA fits into your specific goals and find a partner who can support you in those efforts.

@Eric E.

You should check with the attorney or provider that setup your IRA trust.

It is appropriate for the issuer of income to request a W-9.  They must report income on a 1099 or K-1, regardless of what the recipient's tax filing obligation is.

If the trust is the only layer with an EIN, then the income is treated as being received by the trust. The trust must therefore file a return with the IRS using form 1041. You can illustrate that the trust beneficiary is the IRA and therefore not taxable, but the trust must file a return.

The superior approach is if the IRA has its own EIN. In that case, you can have income directly reported to the IRA and effectively look through the trust.

This is not DIY territory.  Get a professional on your team who knows this stuff.

@Account Closed

There are dozens of companies that offer truly self-directed IRA and 401(k) retirement plans capable of investing in non-traded assets like real estate. Several including mine are active here on Bigger Pockets.

Mainstream banks and brokerages do not provide services for alternative asset investing as it is very specialized.  

There are also different types of service offerings.  

Trust companies act as custodian and processor, so they hold the funds, sign every document, issue payment, receive deposits, etc.  Think E*Trade or Vanguard, but just with people pushing paper instead of computers doing stock trades.  This type of 3rd party processing works OK for singular, static investments like private placements.

Other companies offer Checkbook IRA and Solo 401(k) programs that put you in direct control of the funds under the umbrella of the retirement plan. An example would be an IRA with a specialized trust company like above, but the IRA just makes one investment into a LLC that the IRA owns but you manage on behalf of the IRA. That takes the custodian out of the processing loop, which is much more nimble and cost effective for more dynamic assets like rental property, short term private lending, etc.

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.

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.  A big part of deciding what type of plan and what provider are best will hinge upon how you intend to use the account.

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.