The Real Estate Investor’s Resource

Turning Intentions into Action

Self-Directed IRAs

This is a recent newsletter article from my friend, Gus Nassif, at Insurian Services.   Self -Directed IRAs are a great tool for real estate investors.   

 

Self-Directed IRAs (SDIRA) allow you to diversify beyond the so called “traditional assets,” such as CDs, annuities, stocks, bonds, options and
funds, and in such “non-traditional assets,” as real estate (land, residential & commercial), a business, notes, boats, planes and everything
else deemed “asset eligible” by the IRS. Diversifying in the assets you like, best understand, and in the ones best positioned for growth is
what the Self-Directed IRA is all about; self-control! Without a self-directed IRA, you’re restricted to traditional asset diversification only,
and that’s due to IRS plan guidelines, as well as, asset choice limitations by the custodian of the IRA you choose.

In summary, if you haven’t already diversified in a self-directed IRA, now may very well be the time to evaluate doing so!

Now, one thing to remember is that a Self-Directed IRA is a term and not exactly an investment platform. It still needs to be associated with
the IRA or solo 401k it has selected, and therefore must adhere to that platform’s IRS’ guidelines, as for example, maximum contribution. Once
set up, it’ll allow you to diversify in both “traditional” and “non-traditional” assets. The IRAs in question come in many different flavors, from
the individual type plans as a traditional IRA (and Solo 401k), a Roth IRA, a SEP IRA, an Annuity, to the Rollover IRA. Additionally, there are the
Coverdell Education Savings Account and the Health Savings Account (HSA) which technically can be converted to a retirement plan if gone
unused on education. 

On the otherhand, a group 401k like plan can be restricted by the plan sponsor and plan’s custodian as well, allowing diversification in only
pre-selected, and sometimes limited, mutual funds or group variable annuity sub-accounts. A group SIMPLE IRA, unlike group 401k, may give participants more flexibility. A group plan participant who is no longer employed, may transfer the full balance to a “rollover IRA” and diversify
the money in a self-directed IRA. However, if the participant is still employed, then only a portion of the balance can be transferred, and only
if the employer’s “plan document” did include the “Non-Hardship In-Service Withdrawal” provision.

Let’s use a real estate based self-directed IRA as an example to illustrate its mechanics:

1.) A custodian or administrator is selected to help set up the self-directed IRA. Custodians assist with all paperwork and transactions
     within the Self-Directed IRA. Custodians are fee-based.

2.) A cash flow positive real estate investment property is located; that’s only if you’re financing the purchase.

3.) Selecting a lender, only if you need financing, and applying for what is known as a “Non-Recourse Loan” comes next. This is a loan
     that does not hold you personally liable in case of default. Again, it’s the IRA that owns the property and not you the account holder.
     The lender has only recourse to the property held by the IRA. The lender loans the IRA a portion of the value of the property, usually
     a maximum of 70% of the purchase price, with the remaining 30% coming through the IRA itself in the form of a down payment.
     Ratios are lender-dependent.

4.) The property is purchased, then placed within the self-directed IRA and held in its name. Again, the IRA and not you owns the property!
      It’s an “arms’ length” transaction, in that you can’t personally profit from it, but your IRA does until you’re 59 and 1/2 or older, where
      you can begin taking distributions taxed as ordinary income, or for that matter, no taxation if the money was held in a Roth.

5.) You may be able to set up an IRA in an LLC for reasons of both asset protection and self-management. The latter would give you, the
     IRA account holder, “checkbook control” in becoming the IRA LLC Manager. In this capacity, you simply write a check for all of the
     transactions. Additionally, this type of control allows you to diversify in other assets as well, besides real estate. In this type of
     scenario, you no longer have to direct the custodian to handle those transactions for you, doing so yourself. Now, do keep in mind,
     that whenever an IRA uses any type of financing, as is the case here with the non-recourse loan, an “Unrelated Business Income Tax
     (UBIT)” on the investment would have to be paid. There are both legal and tax aspects to this type of transaction requiring you to
     consult with both an attorney and a CPA respectively.

Gus Nassif
770.232.0677
grnassif@insurian.com

 

 

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April 14, 2009 Posted by | IRA, Real Estate Investing, real estate investors, Self-Directed IRAs, Uncategorized | Leave a comment