22 Nov CREPN #171 – Checkbook IRA with Bernard ReiszTraditional Individual Retirement Account, aka IRA, requires a custodian to hold your retirement account.
The typical custodian has investment models to follow and limited products available for you based on your risk profile. Investments that are eligible to be held in your IRA are limited only in that you cannot invest in life insurance nor collectibles.
Notice that real estate is not prohibited? What if you could select higher performing investments beyond your custodians limited options?
Bernard Reisz with 401kcheckbook.com provides the education, structure and tools to help investors who are looking to take control of their investment strategy using a checkbook ira.
There are two types of government sponsored tax deferred retirement accounts; Individual Retirement Account; and 401k. The IRA is for is a non employer sponsored plan while the 401k is an employer sponsored account. In this post, we focus on IRA’s.
There are two types of IRA’s:
Traditional IRA; You receive a current income deduction for contributions. The account grows tax deferred and is taxed at ordinary income tax rates when withdrawn.
Roth IRA: You receive no income deduction. Contributions are after tax, but grow forever tax free. There is no tax due when withdrawn.
Take control with a Checkbook IRA
Now you can take control of your IRA by using a Self Directed IRA, aka SDRIA. SDIRA custodians allow your to invest in alternative investments, including real estate. This keeps the investment inside the tax deferred account, including all income and expenses, as required. The manager of the account is you, the IRA account owner, or someone you choose.
The traditional SDIRA custodian can be fairly expensive. They charge fees on assets under management and per transaction. The checkbook IRA provided through 401kcheekbook simplifies and minimizes the cost to administer your SDIRA.
To do this, you will need move your funds to a SDIRA. The SDIRA creates an LLC that is owned by your IRA. To maintain the tax deferred benefits, the investment, returns and expenses must be contained inside the SDIRA.
Alternative Investment Options
Now that you have your checkbook IRA set up, let’s take a look at two real estate investment options; equity and debt.
Equity, ownership is an option to you. To do so, make certain the real estate is titled to the LLC your SDIRA owns. The funds for the investment come from your IRA.
Issues to be aware of when using your Self Directed IRA to invest in real estate.
- Leverage: Your SDIRA can use leverage, however, the loan must be “non recourse”.
- Unrelated debt financed income UDFI: As an equity owner of the leveraged investment, your SDIRA is subject to UDFI. This is the percentage gains associated with leverage, your return on leverage, and is subject to tax. Your SDIRA will have its own tax return, and will pay tax based on the UDFI.
- If sold while you have a loan, your self directed IRA will have capital gains tax. However, if the loan is paid off twelve months before sale, there will be no capital gains tax!
Debt, a loan with your SDIRA LLC recorded on title, are an exceptional opportunity for significant returns. As a debt instrument instead of equity investor, the SDIRA is not subject to UDFI. All gains are tax free. So, if you are able to make an interest only, hard money loan secured by real estate at 20%, the entire gain is free from tax.
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