Self directed IRA

[emi guy]

I'm contemplating using a Self Directed IRA to buy a rental property which will cash flow in the form of dividends to fund my retirement. Has anyone in the forum done this and, if so, can you share whether it's working out for you? I hear that custodian costs can run high with self directed IRAs. Thanks. Emi-Guy

 

[Scuba]

I have a self- directed IRA where I serve as a private mortgage lender (hard money loans). Custodial fees are a little high although one can shop competitively and minimize them. Still, my net of fees return is good and this cash flow stream is not closely correlated with the financial markets. Diversification is one of the primary reasons I do this. It has worked out very well for us.

 

[emi guy]

Good to hear. I shared my idea of transferring a portion of my OR A from my FA to a self directed account at another firm. To my surprise he said that "it sounds like a logical move, Just be careful to understand the costs". Do you mind sharing which company you are using to hold the self directed funds? I am looking at Broad Financial.

 

[Scuba]

It's called IRA Services, based in CA. Used to be with Pensco but left them as IRA Services fees were less than half of Pensco's. So far I've been happy with them.

Glad to hear your FA was supportive. Sounds like you have a good FA not just looking to maximize his earnings.

 

[jw72]

Hello,
I have a self Directed IRA in Orange county CA and it has worked out. I work with u direct ira and would recommend them. I went with them for the lower fees but stayed with them because they give good service. Kaaran Hall is the president and she does a lot of seminars, very knowledgeable. Good luck.

 

[emi guy]

Thanks jw72! Do you use it for Real Estate?

 

[Scuba]

PS - IRA Services only offers self directed IRA's for real estate. Pensco has stocks/bonds in addition to RE. However since I set mine up specifically for the real estate loans, I'm fine with other options not being available through IRA Services.

 

[neihn]

Interesting topic. I have heard of self directed IRA (Roth IRA) but have no idea how that works.

@Scuba and @jw72 - what kind of fee that I would expect for $200k self directed IRA (invest in realestate or mortgage)

Thanks.

 

[jw72]

Yes, Real Estate. I bought the home for future needs, when we can no longer go up and down the stairs. It is down the street from current home and has the master down.
I think they charge me 275.00? in fees a year. I have a property manager renting it but honestly it is very easy rental, same renter all 4 years.
I paid 430K, rent is 2400.00 property mgr takes 100 bucks a month. It is now worth 600k. I was told to get a property manger and do not touch the money, but others are more risky and do it them self. Good luck.

 

[neihn]

@jw72 - Thanks.

I wonder what happens when you decide to sell the property? Can you put it back to IRA?

 

[emi guy]

I believe the rules are that, if you sell it, the OR A gets the proceeds, no different than selling a mutual fund within an IT A. If you move into it, you would be cashing it out, like a distribution and taxes would be due. That's how I understand it.

 

[emi guy]

Sorry - that should read IRA! - Darn spell check!

 

[kypix]

Equity Trust Co. in Ohio is the custodian for my self directed Roth IRA. I own 4 rental houses inside the IRA. I also own a couple of tracts of vacant land in the IRA. The annual fee is based on the value of the account. Modest fees are charged for the paperwork they have to do when you buy or sell an IRA asset.

I go online and direct payments for repairs, insurance, taxes, etc. They do not charge for routine handling of these payments. If I wanted expedited service there would be additional fees for overnight delivery, etc.

I am buying an option on a home this week through the IRA. I should be able to sell the option for a nice profit and never even go into title.

Just play by the rules. No self dealing. No transactions with prohibited parties. No sweat equity. Use IRA funds for IRA property expenses.

Works for me.

 

[bingybear]

I looked at doing a rental IRA years ago, but decided not to do it. Can it be done? certainly. But understand the rules.
If I recall correctly...
Remember, the IRA will own the property. All expenses, taxes, insurance payments etc must come from the IRA. You can't pay anything with your other assets. Likewise all income (rents) go back to the IRA. You may withdraw them and pay any tax due.
Loans need to be non-recourse loans.
Be careful to keep interactions at arms length. Renting to yourself or a relative could cause problems.
So, I would consider your term dividends a little loose. The other thing to note is that most if not all tax advantages are lost inside an IRA.

 

[kypix]

My understanding is that tenant selection, signing leases, etc. is not considered sweat equity. I do not use a management company. The tenant sends the rent check to me but it is made out to the custodian. I then forward the rent to ETC. If we have to evict, I call the attorney but his fee is paid by the IRA. Same thing for repairs. I make a call. Then I direct the custodian to pay the bill.

Two of the houses are rented Section 8. Their ACH payment goes directly to the custodian.

ACH and certified funds post to the account immediately. Personal checks and MO's take about a week to clear before they are posted.

 

[kypix]

As far as losing tax advantages, I may disagree with the above post. Not starting a war, just pointing out a few things.

There is no tax on the rental income. There is no tax on capital gains realized inside the account. No depreciation recapture at 25%. One home I sold last year cost me 40 grand in recapture alone. If the property had been in the IRA I would still have that money. Being a Roth, there is no tax on distributions. ymmv

 

[Scuba]

The fees from IRA Services vary depending on activity in the account. My fees in Q4 2016 were $55, and in Q1 2017 were $209. I had a lot of transactions in Q1 but even if fees were $200/quarter, that is less than 1% of our account value. We were paying PENSCO over $500/Quarter for a similar amount of activity and account value.

 

[bingybear]

As far as losing tax advantages, I may disagree with the above post. Not starting a war, just pointing out a few things.

There is no tax on the rental income. There is no tax on capital gains realized inside the account. No depreciation recapture at 25%. One home I sold last year cost me 40 grand in recapture alone. If the property had been in the IRA I would still have that money. Being a Roth, there is no tax on distributions. ymmv

No war. Tax advantages- depreciation -- tax disadvantages - depreciation recapture. Both good and bad are gone.

The OP just used the term IRA which I tend to think as TIRA... likely due to my age, that is Roths did not exist until my late 30's when my tax rates were higher.

A Roth would make it better.

 

[kypix]

No war. Tax advantages- depreciation -- tax disadvantages - depreciation recapture. Both good and bad are gone.

The OP just used the term IRA which I tend to think as TIRA... likely due to my age, that is Roths did not exist until my late 30's when my tax rates were higher.

A Roth would make it better.

Good point. I'm not even sure you can do real estate in a traditional IRA. RMD would be very difficult to calculate.

 

[Onward]

There are many, many problems with holding real estate in a self-directed IRA. One misstep and the IRS can declare your entire IRA distributed and taxable.

Do tons of research on the pitfalls before proceeding.

Here's a taste:

U.S. GAO - Retirement Security: Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets

 

[Scuba]

Thanks for this article. It seems that most of the potential pitfalls relate to holding rental property in an IRA. However, I will check into the RMD issue at some point. I'm 14+ years away from RMD's at this point but since I have 100% of my IRA money in unconventional assets, it's worth checking into with my CPA down the road. In the meantime, my IRA is the ideal vehicle to use for my "unconventional" investments. If they were held in a taxable account, the income would taxed as ordinary income rather than being deferred and reinvested.

 

[Luck_Club]

I hold a limited partnership in a non traditional IRA. Besides the investment being a stinker, there is significant annual compliance costs, like $500 bucks or so a year. I also started a company using my 401K, opting to use the Retirement Owned Business "rob" program. The compliance and ongoing cost again are very high. In addition to the difficulty setting these up, I'm finding they are challenging to unwind, as I'm 6 months into trying to shut down the ROB.

In my opinion, the speed, flexibility and ability to leverage, out weigh the potential tax free earnings of having it in an IRA.