Thread: Self Directed IRAs

Quick question for anyone who might have some experience with self-directed IRAs...

Let's say I have $100K in my IRA. And let's say that a friend of mine also has $100K in his IRA.

Is there anything that would pose regulatory/legal problems with my lending him $100K out of my IRA (at nominal interest) for his investing purposes and in return, his lending me $100K out of his IRA (also at nominal interest) for my investing purposes?

In this way, I could get access to cash that can generate profits outside my IRA (because if I used my own IRA money, the profits would have to go back in), and my friend would get the same benefit? (let's ignore the risk of loss if either of us were to make bad investing decisions)

I'm not aware of any regulations that would prohibit this, but thought others might have more experience and expertise in this area...

Thanks!

JScott-

We'd heard that some people are doing this.

You will find ALL of the info on how to do this on the PENSCO site.

Note that PENSCO will tell you that you *can't* do it, if you ask them. But if you then tell them what you're going to do (based on the info on their site), they tell you "great, no problem".

Due diligence, I guess.

-Russ H.

Thanks Russ!

-RH

hmmm, what an interesting idea.

I've been talking to a few guys about working together for this very purpose. If you have 3 or 4 people making loans amongst themselves, it makes things much cleaner than just lending money back and forth between yourself and a friend.

By the way, if you have money in a traditional IRA you may want to think about converting to a Roth IRA on January 1. The income limits for Roth conversions go away in 2010 so people making more than $100k will be eligible to convert.

Do you think taxes will go up or down in the future? This is a huge opportunity!

Of course, rolling over from conventional to Roth means you must pay ordinary income taxes on the converted amount, but for rollovers done in 2010 *and only in 2010* you can defer taxes and pay 50% in 2011 and 50% in 2012. Since you don't pay your 2012 taxes until April of 2013, you effectively have 3 years to grow this money tax free before the full taxes are due.

If you're in the 30% tax bracket, this means you must grow the money at 10% annually to cover your tax burden....pretty easy when investing in RE. You can either take an early withdrawl and pay a 10% penalty to pay the taxes, or pay them in cash. In any case, the funds will grow totally tax free from that point forward.

Without getting too deep into politics, this is simply another strategy the government is using to "delay the pain." They're taking in a lot of money NOW in the form of taxes due on conversions, but forgoing much more money LATER in the form of taxes on the amounts withdrawn in retirement.

I am definitely doing a rollover on January 1 to take advantage of this great opportunity.

Rep speed for that one, Montexan.

Boy, can we use this next year!!!

-Russ H.

Originally Posted by StreetsofSilver

If you want to purchase real estate, one option is to setup an account with an independent IRA custodian that allows you to purchase real estate within your Roth IRA. Most banks and brokerages do not allow this (they deal more with stocks, mutual funds, etc.) so you will have to shop around to find one that does. It is legal and it allows you to purchase real estate and make real estate loans with tax-defered money. The transition is pretty simple to transfer funds from one IRA to another, but you will have to pay a fee.

This is definitely one option I've been considering, but was hoping to go the other route, which would allow me to earn additional profits in my business (as opposed to my retirement account)...

Thanks for the feedback!

My dad has his self directed roth through this company

Self Directed IRA, Real Estate IRA, and Allowable Investments at Equity Trust Company

He has bought real estate and I believe he has loaned money through it to a couple of the home vestors franchises. Unfortunately I think the ones he loaned the money to went broke. Can't be for sure if he loaned the money that way or not as he was talking about writing it off through the corporation.

Originally Posted by LagunaLauren

Jscott-You're thinking the right way with your objectives. Setting up a self-directed IRA LLC gives you total control to loan to your friend $ and vice-versa. You have more freedom and can do more with the money you borrow as opposed to doing bigger downs on non-conforming loans directly through your own IRA. So long as you can pay back the principal and agreed-upon interest back into his IRA, you're good to go. You can call guidant financial if you want to get more info and ask a bunch of questions. They have a lot of general info on their site too, if I remember correctly.

I have a meeting set up with a financial advisor from Guidant later this week...

One other area I want to explore is leveraging my IRA to offset some costs in my business. For example, what if I could use my IRA funds to loan my full-time employee money to do a couple of his own flips each year (under my guidance), which he repays to my IRA with interest at the end of the year. I then pay him a smaller salary from the business.

He makes more money than he would otherwise (for example, he might be able to do two flips per year with the money, and net a total of $40K in profit for himself); the IRA makes money (say, 10% interest on the loan); and my business saves money (perhaps paying him $20K less in salary each year).

I could imagine the IRS determining that the money is technically being used to benefit me personally, but if I structure both the business and loan correctly, I wonder if I can stay within the rules and do something like this... (I'm not looking to break any rules)

I'll let you know what the advisor has to say...

JScott-

General rule of thumb is you can have NO control of administration of the funds.

So you could NOT assist, or direct him/her in any way.

He/she would have to invest your $$$ independently.

The minute you get involved, on any level short of getting quarterly reports, you are in danger of getting the whole thing boo-foo'd.

I know you are a guy that takes calculated risks, but you really have to ask yourself:

Is it really worth losing 60%+ of your entire IRA if the IRS rules you had some control?

Instead, why not structure it better-- so you use someone else's money, the way YOU see fit, and they can use YOURS, the way THEY see fit?

That way, each of you owes the other agreed upon interest-- but that's it. The use of the money is yours.

Not that hard, if you find the right people to do it with.

-Russ H.

Russ -

Have you checked out Guidant Financial's Self-Directed Real Estate IRA?

It's very interesting the way it's structured...basically, they get around the "you can't control the money" aspect by structuring the IRA as such:

- You set up a C-Corporation
- You create a retirement plan for the employees of the C-Corp (you being the primary and perhaps only employee)
- You fund your retirement plan from your existing retirement funds or your existing SDI
- You use the funded retirement plan to purchase a controlling interest in the C-Corp
- You can also have personal funds mingled into C-Corp to supplement the investing leverage of your retirement funds.

According to Guidant (and I don't yet have all the details), you now how a controlling interest in a company that is funded by your own retirement funds, and are free to participate in the day-to-day guidance of that company and those funds, without running afoul of the IRS guidelines.

Again, I haven't talked in-depth with my attorney or a Guidant financial counselor, but this is the way it works in theory. If it works that way in practice, it opens up a whole new realm of possibility for using retirement funds as part of a more comprehensive investment strategy.

I'm with andviv-- please keep us apprised, if you can, JScott.

Rep speed for this thread-- for taking it "out of the closet"!

-Russ H.