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Self-Directed IRA

Jill

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OK, I'm taking the next step towards my PLAN today. After doing a quite a bit of research, I'm confident that I should be moving at least one of my IRAs into a truly Self-Directed IRA. I'm hoping that one (some) of you with some real life experience can give me some advice and insight.

The two companies that I've heard the most about are Pensco Trust and Equity Trust. Does anyone have any opinions, comparisons or recommendations for another one that may be better?

Thanks!
 

Russ H

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We also use PENSCO, on a referral by Les Gee.

-Russ H.
 

Jill

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Excellent! That's two pretty credible votes of confidence, I would say. I'll give them a call right now!

:hl: Thank you both.

Jill
 

AroundTheWorld

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On the subject of self directed IRA's....

The most challenging thing I have found is the self-dealing issue. It seems to be the one thing that holds me back from taking the plunge.... as many of my investment properties demand my involvement up front.

Anyone with some experience in getting around this issue?
 

andviv

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Bob, I found this in a website:

Unlimited IRA™ (IRA w/ Turn Key LLC)

This structure has become a popular choice for gaining “checkbook control” of an IRA. An IRA is opened and funded at a custodian. A Special Purpose LLC is created, and the account owner directs the custodian to purchase and fund the LLC, which is managed by the IRA owner. The result is that you have a legally allowable (substantiated through case law) method of transacting at the LLC level without needing to involve the custodian. This method is sometimes used to cut down on any wasted time in signing contracts and checks, and it also allows the IRA to not be subjected to transaction-based fees from the custodian.

Added later:

QES 401(k) Plan

This is a special structure that involves the formation of a C Corporation, adoption of a Solo 401(k) Plan, rollover funding of that plan, and the purchase of C Corporation shares by the Solo 401(k) Plan. The ultimate effect is that you have a business that you can work for (and draw a salary from) that is funded by your existing retirement funds. Further, any profits from the business (after you draw your salary) are returned tax-deferred to your 401(k) plan.

This works well for a person who wants to be actively involved in what their 401(k) invests in. Typically, if your 401(k) were to a buy a business, your working for the business would be a prohibited transaction (triggering hefty taxes). In fact, typically for your retirement plan to purchase stock in a company you own would be a prohibited transaction in itself. However, in this “QES 401(k) Plan” arrangement, there is special language allowing for “Qualified Employer Securities” which makes the funding of the C Corp by the 401(k) exempt from prohibited transaction rules.

The QES 401(k) Plan is a great way for a person to fund a new or existing business using their retirement plan while deferring the taxes on much of the businesses profits and gains.
 
Last edited:

Diane Kennedy

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The QES 401(k) is becoming very popular...with people who sell them.

Let's walk through a scenario with using a QES 401(k) versus a Self Directed LLC.

You fund a Solo 401(k) - same with both.

Plan A:
You roll the Solo 401(k) into a QES 401(k). Fees to pay. Need to set up a C Corp & fees to pay there.

Plan B:
You set up a IRA LLC. Fees to pay to set up. Roll the Solo 401(k) funds into the LLC. You can either (1) manage the fund, just not do the work yourself on the project with this plan. (So, less flexibility, but also less initial cost.)

Now here is where I really don't like the QES:

You sell an appreciated property. Let's say you held it for 10 years and a $300,000 property went to $600,000, and you depreciated it by $50,000 in that time.

Plan A: Taxed at ordinary income tax rate inside the corporation. $600,000 - $250,000 = $350,000 taxable income at corporate rate of let's say 35% rate.

Plan B: No tax currently due. (By the way, if you did this with your Solo Roth 401(k), you'd never have tax)

A QES is nothing new, but using them for real estate is a relatively new twist. The problem is that you have turned a capital gains tax rate into an ordinary tax rate.
 

slim_jim

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Besides Pensco and Equity, I've heard Entrust is good. Also, they are based in Houston.

There was a presentation at the Columbus REIA tonight about real estate investing via your IRA. Very interesting, but it will require more investigation and knowledge.
 

phlgirl

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Wow, thanks Russ and Diane for the recommendation on PENSCO. I just got off the phone with a very helpful representative, who walked me through this process. I still have a great deal to learn but feel like I am off to a great start.

We have some potential investors who would like to use a self-directed IRAs to purchase investment properties here in Jacksonville. Add tax free (or substantially less tax) to the list of benefits of RE investing....amazing.

They hooked me up with a few of the experts in the area. Time to network!

Diane - any chance you would care to elaborate of the difference between the two?

Plan B: No tax currently due. (By the way, if you did this with your Solo Roth 401(k), you'd never have tax)
 

AroundTheWorld

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Besides Pensco and Equity, I've heard Entrust is good. Also, they are based in Houston.

There was a presentation at the Columbus REIA tonight about real estate investing via your IRA. Very interesting, but it will require more investigation and knowledge.
Yes, I've heard several good things about Entrust - and spoken with some Entrust people.

I have yet to pull the trigger on self directed.... mainly because of the self dealing issues. Having a hard time figuring that part out.
 

JScott

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Diane - any chance you would care to elaborate of the difference between the two?
Sorry if I'm answering the wrong question (it wasn't completely clear what you were asking), but...

Are you asking the difference between "no tax currently due" and "never have tax"?

In a standard IRA or 401k, contributions are not taxed before they are made, and are only taxed upon removal. In a Roth IRA or 401k, contributions are taxed before they are made, but then are never taxed again.

So, if you self-direct a Roth, the contributions were already taxed, and will never be taxed again, regardless of how much they grow.

Sorry if that wasn't the question you were asking!
 

phlgirl

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I have yet to pull the trigger on self directed.... mainly because of the self dealing issues. Having a hard time figuring that part out.
By self dealing, do you mean the fact that you are not permitted to manage the property yourself?

JScott said:
In a standard IRA or 401k, contributions are not taxed before they are made, and are only taxed upon removal. In a Roth IRA or 401k, contributions are taxed before they are made, but then are never taxed again.

So, if you self-direct a Roth, the contributions were already taxed, and will never be taxed again, regardless of how much they grow.

Sorry if that wasn't the question you were asking!
Actually, I suppose that was the question I was asking (I just didn't know it). So if you are rolling over a Roth, into the custody of one of these 3rd party companies, it still holds all of the Roth associated benefits. That makes sense. Perhaps, it is the IRA LLC which I am unclear about.... it becomes an LLC but is not taxed like one? hmmm
 

JScott

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Actually, I suppose that was the question I was asking (I just didn't know it). So if you are rolling over a Roth, into the custody of one of these 3rd party companies, it still holds all of the Roth associated benefits. That makes sense. Perhaps, it is the IRA LLC which I am unclear about.... it becomes an LLC but is not taxed like one? hmmm
Please don't assume I know anything about self-directed IRAs (I don't :))...I was just inferring from Diane's post that the Roth "status" was maintained if rolled into a self-directed IRA -- she implied that was the case.

I'm not really sure if it is or isn't, though.
 

Edge

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I have yet to pull the trigger on self directed.... mainly because of the self dealing issues. Having a hard time figuring that part out.
This scares the heck out of me too. I don't want to end up paying taxes on the value of my account because the IRS learns that my wife put up a curtain rod in a rehab project...

Here's what i've found on the self-dealing:


IRC § 4975(c) (1), identifies prohibited transactions to include any direct or indirect:
  • Selling, exchanging, or leasing any property between a plan and a disqualified person. For example, your IRA cannot buy property you currently own from you.
  • Lending money or other extension of credit between a plan and a disqualified person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA.
  • Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use personal furniture to furnish your IRAs rental property.
  • Transferring or using, by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a vacation property you or your family intend to use.
  • Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your CPA.
  • Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from your IRAs rental property.
If you participate in a transaction which does not fit SPECIFICALLY within these guidelines, the Department of Labor or the IRS will analyze the specific facts and circumstances in order to decide whether you have engaged in a prohibited transaction. A Retirement Account Facilitator can help educate you regarding how these may apply to investments you are considering.
Another question is dealing with custodian fees. Sounds like the feeling around here is that it is worth paying the custodian fees to a company such as Pensco. The alternative is less expensive "checkbook control" structure that companies such as Guidant sell. I am talking to both companies.
 

ricerocket63

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My education continues.... Thanks all!!! I would give speed ++, but heck I am still parked...:)

I used a new CPA this year and we started talking about strategies, and I have some 401k's, etc that when I mentioned them, he perked right up to talk about this..

I have not gone back to him yet, but after reading some of the info on the Pensco site, my eyes are opening up more and more... :D
 

phlgirl

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Ok, I learned a bit more about the LLC option today. It seems that the LLC is used to prevent incurring some of the extra 'custodial fees', which are otherwise assessed by a company such as PENSCO.

For example:

You buy a SFR with your Self Directed IRA. If PENSCO were to manage the account, you would be charged a transactional fee for the purchase of the property and then every month, as you receive rental income, there would be an additional transactional fee. Likewise, as you incur expenses, each time you need to make a distribution, you would incur a transactional fee.

By creating the LLC, you are permitted to make an investment in the LLC (one transactional fee) and then have the company oversee all of the income & expenses throughout the year. At year end, they transfer one bulk amount to PENSCO (one more transactional fee), thus avoiding the monthly fees in between.

I am told that there are all sorts of companies, wealth managers, etc. who will oversee the LLC operations for you (as I understand it, you are not permitted to do this yourself). Surely, they charge some type of fee as well - apparently, it is less than what you would incur with PENSCO directly (plus, it saves you the headache).

I might be missing some points here.... feel free to add. I am just learning as I go.....
 

kwerner

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I too have been contemplating using a self-directed IRA to fund my existing LLC.

I'm not sure if this is a viable option (thought I'd bounce the idea off of some of the experts), but I'd like to LOAN the money in my IRA to my LLC - the LLC would then pay back the loan, plus interest (obviously), to the IRA.

My reason for doing this would primarily be to fund the LLC and secondly to return a small gain to the IRA. Right now, I'm not too concerned with making money with the IRA - I'd rather get some working capital to start growing the biz. Plus I'd rather the biz pay the interest to me, rather than the bank.

And FYI - the LLC's (taxed as s-corp) primary business is buying properties at discount and flipping. It wouldn't be purchasing any properties I currently own, so from what I seen posted above, I don't see how loaning the money to my LLC would violate any of the guidelines above.

What do you guys think, is this do-able?
 

phlgirl

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I am not an expert but I have been doing a bit of research on this topic lately.

As I understand it, the only way you can direct funds from an IRA into an LLC is if you have Zero operational control over the funds being used. You can create an LLC for yourself, to receive the benefits of an investment (resulting in less transaction fees) but you may not have any ownership in the entity which is putting the funds to use. Otherwise, as ATW mentioned earlier, it is considered 'self-dealing' and there are serious tax penalties.

You will want to check with an expert (anyone at Entrust or Pensco should be able to tell you for sure).
 

melwheeler89

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I have also been reviewing the IRA/LLC set up. It my situation it is a better fit because I will have income coming in and out of my account on a monthly basis. The two companies I have been speaking with are www.selfdirectediragroup.com and www.guidantfinanical.com. Both have seemed to really understand Self Directed IRA's and the different pit falls an investor might face. Both also offer unlimited coaching.

Hope this is helpful and best of luck!

Mel
 

BuffaloBill

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Any updates on Ira/LLC setup from anyone? I am trying to find out all I can about this before I call.

Another big dip in my 401K is just not working for me anymore....
 

tchandy

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Any updates on Ira/LLC setup from anyone? I am trying to find out all I can about this before I call.

Another big dip in my 401K is just not working for me anymore....
I've contacted PENSCO and Guidant. Guidant, though, transfer fees are higher initially, over the long term they would be the more cost effective self-directed IRA. Do your due dilligence and see what company works out best for you.
 

Jill

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I've contacted PENSCO and Guidant. Guidant, though, transfer fees are higher initially, over the long term they would be the more cost effective self-directed IRA. Do your due dilligence and see what company works out best for you.
So what did you end up doing? I actually moved mine from Pensco to Guidant a few months ago because Pensco still wanted a lot of custodial control (i.e. approval of each individual investment) whereas Guidant set me up with an LLC and a new custodian which gives me "checkbook" control. As yo mentioned, it is more expensive to set up (I think it was around $2500). But the annual fee is nominal ($150ish).
 

tchandy

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So what did you end up doing? I actually moved mine from Pensco to Guidant a few months ago because Pensco still wanted a lot of custodial control (i.e. approval of each individual investment) whereas Guidant set me up with an LLC and a new custodian which gives me "checkbook" control. As yo mentioned, it is more expensive to set up (I think it was around $2500). But the annual fee is nominal ($150ish).
I came to the same conclusion. I contacted Pensco, Guidant and Entrust. Pensco cost more up front but over the long term they had the best deal.

It pays to do your research, pick up the phone in this case, than take someone's advice. Everyone has their own reason for setting up a self-directed IRA. Age, long term plan, available money, and others all come into play.
 

andviv

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Jill, how do you like it so far?

I saw this today and was interested on this one, for a small 401(k) I have with around $40K in funds...

"For a limited time, take advantage of our special offer, which gives you $1000 off the price of our iDirect service. But don't delay—this discount is only available through August 31. "

YouTube - ‪Guidant Financial -- iDirect‬‏
 

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