All Forum Posts by: Brian Eastman

@Sam Peterson

You are correct.  When you change jobs, you have the option to leave your 401k with your former employer or move it to a different plan of your choosing.

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.

@Alexander Szikla

While your point is not technically incorrect, you are asking the wrong question.  We see this line of questioning a lot.

Turn it around. Why invest an IRA in stocks when you can invest in an asset like a rental where you have better principal protection and more control over the outcomes?

Comparing an IRA investment to a personal investment is apples and oranges.

All that matters to the IRA is the best mix of securing and growing the value of the account.  Whether an asset may or may not have different advantages in the taxable world is neither her nor there.  

When evaluating the best investments for an IRA, you have to compare to other things that can be done with the IRA. For many retirement savers, real estate is a vastly superior option to conventional IRA investments.

@Collin Parody

There are a handful of lenders that specialize in non-recourse loans and are familiar with IRS guidelines.  Not all will lend in New York.

First Western Federal Savings

North American Savings Bank

Solera National Bank

Titan Bank

Be sure to check with your plan provider and tax professional to understand how leverage works in an IRA. The portion of income attributable to the borrowed funds in the deal is taxable as Unrelated Debt-Financed Income. You will want to understand both the tax impact and the administrative requirements surrounding reporting and your IRA paying the tax.

The net result is that your IRA gets to use leverage and create higher cash-on-cash returns as a result. The tax on UDFI will put a dent in the boost that leverage provides, but will not come close to canceling out the benefits of investing using other people's money.

@John McKee

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. It will also determine the operations of the account, as outlined below.

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.

@Stephen Grindle

Whether you should perform a Roth conversion or not is not a question that an internet forum can answer.  Please discuss the matter with licensed tax counsel.  There are just too many variables to consider.

Your IRA can invest in a short term rental, but there are challenges. You may administer your IRA, but may not benefit from or provide services to your IRA. As such, for a high-interaction asset like STR, you will need a property manager. You also want to ensure the STR activity is able to be considered passive rental income and not looked at as a business like a hotel. The presence of additional services or amenities in addition to a place to stay can be differentiating factors between passive/active tax treatment. An IRA is subject to tax on Unrelated Business Income when it engages in a trade or business on a regular or repeated basis.

With an interactive asset like a STR, having the checkbook control provided by an IRA owned LLC can be a big advantage. You will find it to be much more nimble and cost-effective than relying on a 3rd party custodian to process every transaction related to the IRA's investments.

@Paul Malandrinos

A self-directed IRA would give you the capacity to potentially invest in something where you can have more control over the outcomes. That may be real estate, private lending, private REITS or funds backed by real estate, etc. If you can find a way to better secure and grow your retirement savings, that is a win.

With proper education and guidance, a self-directed IRA does not need to be cumbersome.

To withdrawal the Roth basis is bad math.  Your post-tax return on investment will need to outperform your current returns, ... compounded for a lot of years until you retire.  Another way to look at is is that your new investments will need to be better than your current investments by the amount of your marginal tax rate.  

@Bob Sanders

Your IRA could be configured as self-directed and that would allow the IRA to invest in real estate. By investing the IRA in an asset class you know and understand, you can hopefully better protect and grow your tax-sheltered savings.

You cannot personally benefit from or provide benefit to the IRA. Not only can you not receive a commission when the IRA buys or sells real estate, you should avoid being the realtor for IRA transactions. For you to gift your licensed and insured professional services to the IRA could be viewed by the IRS as a self-dealing prohibited transaction that has severe tax consequences.

Solera National Bank, CO

First Western Federal Savings, SD

North American Savings Bank, MO

Titan Bank, TX

They all do non-recourse loans suitable for IRA and 401k borrowers

@Huiping S.

Ashish is correct.

Self-directing a HSA has many problems, including limited funding and a potential need for liquidity that may not align with alternative assets.

Partnering into a LLC any two different retirement accounts, whether IRA/HSA, Traditional/Roth, Husband/Wife, etc. is {technically} possible and offered by some providers, but it creates a logistical nightmare for several reasons, including the need to create a partnership tax return, limits on adding new funds, complications distributing funds, and a need to always keep the fractional ownership identical to the initial percentages.

@Alex Olson

The issue here is really one of perspective. Frankly, you are outlining your difficulties with an IRA from a point of view that does not really align with the intended purpose of an IRA, so it makes sense that you would not find a good fit. When you look at it differently, it very well can make sense.

You are asking, "Is an IRA a good funding source for deals?" For the type of deals you are seeing, and with active hands on investors, the answer is generally no. An IRA is not intended to be a source for an individual to use to build their personal real estate enterprise, and cannot be co-mingled with personal funds or used in any other way where there is a benefit being exchanged between the IRA and the account holder.

The better question about an IRA is really quite different: "What is the best way to protect and grow the tax-sheltered IRA or 401(k) that I have?" In that case, looking at placing a self-directed IRA into real estate - whether a rental or a syndication - or notes, or something else where you can be diversified away from the volatility of the stock market and have more control over the outcomes can be a great option.

In an IRA you don't care about not taking advantage of depreciation, because the gains are not taxed in the first place. The exception would be when leverage like mortgage financing is used. In that case, the leveraged fraction of the gains is taxable to the IRA, and the IRA can use depreciation and other normal deductions to offset that taxable income.

And you do not need to have a high 6-figure IRA to take advantage of these strategies. Most of the investors we work with are putting between $100K and $400K into a self-directed plan. They may or may not have more savings allocated elsewhere. The bottom line is that if you can put long term, tax-favored savings into a stable asset that performs consistently over time, you can really accumulate a nice retirement nest egg while also feeling less exposed to market risk.