Has anyone set up a self directed IRA, and if so, who did you select, why, and would you recommend them? Also, if you have established a self-directed IRA, did you go with the standard custodian account, or did you set up a checkbook IRA (IRA LLC)?
In general, just looking for any custodians that you would recommend and any tips you picked up through the process. My preference is to go with the checkbook LLC, but again, interested in hearing what others have to say.
Don’t do it. Just liquidate the thing, take the tax hit, and remove the handcuffs from your money. Most people won’t be honest with you on this subject, but that’s what I did to get into my first two deals. Then, I quit my day job 6 months later because of the cash flow my money was achieving. 32 years old and I blaze my own trail every morning. A hell of a lot better than having a bunch of nonsense rules on MY money. The taxes are the price of admission for doing something ignorant before you knew any better. When you have a bad deal you exit immediately, take your losses, and go hunting.
Realized I didn’t answer your question though. I use this list to market to private equity and hard money lenders. I search deed records using these names to find folks who have SDIRA’s. Equity Trust is the most popular in areas I focus on which is the SE. List of Self Directed IRA Custodians
Check out Pensco.com. Their website is loaded with info. Their SDIRA is pretty much turn key simple. I have a self directed IRA with them which funds an investment in a hard money fund (arixa capital) and also holds a rental house. One of my colleagues holds 4 rental houses in his SDIRA with Pensco. Another friend has an apartment building with Pensco.
There are some tax implications to consider. You loose the advantage of depreciation offsetting NOI to reduce taxable income since all assets in a Self Directed IRA will eventually result in taxation as income.
On the other hand if you have already sheltered the money in an IRA that more or less offsets the loss of benefit of the depreciation/NOI taxable income reduction.
To explain with an example. You are able to maximally fund a retirement each year to $50,000. You can put $50,000 into a self directed IRA., or You have to option of paying taxes (approximately 40% +/-) and having 30,000 (more or less) left over to invest post tax. The money in the SDIRA has lost the advantage of depreciation offsetting NOI to reduce taxes. However, you have more money to invest by keeping it in the SDIRA. When you run the numbers you basically have ~60% more to invest if you keep it in a SDIRA but you will be paying taxes on those assets at income rates (40%). If you don’t shelter the money in a SDIRA you will have 40% less to invest but the returns on that investment will be at Capital gains rates (20%) or (0%) if you 1031. With a 1031 you defer but at some point the government catches up with you.
Obviously, one should run the numbers both ways and maybe check with an accountant. I would disagree with the assertion to “liquidate the thing, take the tax hit”. You can control the money without the government taking a big chunk of it.
This is great but there are two things you forgot.
If you are competent at finding deals then aside from the numbers above, it is much more valuable to free up your time than it is to worry about a few bucks here or there. Ridding yourself of a job to focus on scaling your business will ultimately make you exponentially more wealthy. It will usually make most people exponentially more happy. It’s probably a personal preference thing but it’s something to think about.
You’ll now only be able to do non-recourse deals or all cash deals. This is probably the most damning handcuff of all since most transactions in this business require recourse. Yes, even seller finance deals usually require personal recourse. Most sellers are going to involve their lawyer and their lawyer is going to push for you to sign personally on the note. You’ll miss opportunities left and right with this little nugget. The inability to use leverage properly is pretty compelling if you ask me.
Your strategy to use a SD-IRA involves much more than just worrying about a 10%, 20%, 30%, etc. of that money going to the government. The opportunity cost is massive in this structure and with a SD-IRA, you give up the opportunity to be completely nimble. As I said, exit a bad deal before it has an opportunity to damage you further.
What about ROBS (RollOver as Business Start-up)? Basically form a C-Corp, sponsor a QRP, rollover the funds from your retirement account into the newly formed plan and then use those funds to purchase shares in the company. Now your company has capital to work with without the limitations of self directed IRA’s or 401K’s and while avoiding the 10% penalty and taxes for taking an early disbursement.
This is clearly a very simplistic overview, as with any free advice, it’s worth what you paid for it!
As far as more information, I have found the recommendation from CharlesD to be a good one about a go to source:
I am still looking into this but have not decided one way or another which direction I’ll pursue.
Actually there are more than 2 things I forgot. I agree regarding opportunity, recourse, leverage and control but one also needs to consider UDFI (unrelated debt financed income) /UBTI( unrelated business taxable income)/UBIT (unrelated business income tax). If a SDIRA borrows money to buy some asset the income attributable to the borrowed money (the UDFI) is not sheltered by the SDIRA and has a tax liability (the UBIT).
The SDIRA is probably better for simple investments, passive investments or limited partner type deals. I have a rental house and Arixa fund in my SDIRA-both of which are fairly simple investments. My mobile home park investing is outside my retirement in mhpfunds AHCF6. I can see where buying a MHP is an entirely different equation.
The ROBS-C-Corp-QRP looks interesting and worth some research.
Regarding liquidation:
I have actually given consideration to liquidating the account, however based on my current income, a $60k IRA would result in $37k after taxes and penalties. I have access to enough capital to buy 1-2 parks, so I don’t necessarily need to liquidate; I’m just new to the space and still learning how to find and buy parks. Also, since I’m in oil & gas, I figure if I get laid off, I could liquidate later when my tax bracket would be significantly lower.
Also, I would actually like to use this money to invest with other operators to build experience; understanding the limitations regarding recourse etc. So, I figure a bigger number is more attractive than a smaller number.
Finally, I have spoken with several people that are unhappy with the performance of their IRA and are interested in investing in real estate. A friend and I are looking to syndicate IRA funds and invest them into others mobile home parks and other real estate. So I’m doing this research for both my personal IRA as well as to make sure I can educate others on the process.
Regarding depreciation:
On the Gene Trowbridge call regarding raising investment funds (which I highly recommend!), he mentions the ability to segregate investor classes (class A vs class B for example) to account for tax advantaged accounts. Gene said you could have the IRA forego depreciation in exchange for higher returns.
This also leads me to believe that other operators would find value in partnering with IRA investors, especially if you have more passive income than current tax shield. You get to keep all of the depreciation for a couple% higher return to IRA investors; it’s a win/win.
here’s the link to the call: An Interview With Gene Trowbridge On Raising Private Money - Mobile Home University
I had about the same amount in mine when I liquidated. Mine was split between roth and traditional though so my tax hit during that event was a little lower and probably a little easier to stomach. The deals I was going into were also not your typical deals so I decided to push as much as I could get my hands on into them because the math worked out to a scenario where I could quit my job almost immediately. Early “retirement” > having a few extra digits on my Transamerica account
I had other assets that could have been disposed of but our diligence period was 17 days on the deal where it really mattered. I didn’t have a choice and looking back, I’m glad I paid the taxes on the money. The value of that piece of equity ($~45k) is probably worth $250k today. I would have been unable to do that deal in a SDIRA for various reasons. Most of our best deals these days always seem to be the ones where we need to be the most nimble. They always seem like they have 10x the extra hoops and 5x less time to complete.
I went through the process of setting up an Roth SDIRA (Checkbook) last year to invest in a mobile home partnership that was accepting IRA funds. I use IRA Financial Group www.irafinancialgroup.com to setup the SDIRA and they used IRA Services Trust Company www.iraservicestrust.com for the custodian. The process was not relatively simple, just lots of pieces to setup the LLC that we use. It was actually harder to find a local bank that could setup the SDIRA checking account.
I did run into the UBTI issue with our investment but I am well under the $1000 threshold for UBTI so it should not be an issue. The investment had been in the stock market and this gave me diversification, so far the Partnership has been great, could not be more pleased! As kismetsdad pointed out I believe this is a good way to use a SDIRA, as long as that UBTI doesn’t bit you!
UBTI reporting is a big pain in the ass.