• Shares of stock in S-corporations Traditional and Roth SDIRAs
To avoid the above scenarios, have your LLC owned by your traditional or Roth SDIRA. Then, you as the manager of the LLC can buy and sell real estate, collect rents and pay expenses, including foreclosure, through the LLC account without the custodian’s approval or its transaction fees, since your LLC, not the custodian, holds title. All the IRS rules associated with an IRA still apply, so it is important that the books and records of the LLC are maintained by a CPA or another individual with knowledge of these regulations to avoid prohibited transactions. Remember, when it comes time to sell, there will be no taxes on the gain in a Roth IRA. • The administrative fees for a SDIRA are more than for a traditional IRA. • The only way a SDIRA can finance real estate is with a non-recourse note, which means that if the SDIRA defaults, the lender cannot come after the owner for the arrearages. The SDIRA must pay for that status with 40 to 50 percent down when it buys the property. To avoid this, have your SDIRA buy a partial interest in the property with the funds it has. The residual would be purchased by a “financial friend” who would share in the income, expenses, and appreciation. CUSTODIANS AND ADMINISTRATORS The Employee Retirement Income Security Act (ERISA) of 1974 created what we know today
as the IRA. All IRAs are required to be set up and managed by licensed custodians. They ensure investments submitted by the IRA owner are legally permitted, hold title to the investments, and fulfill IRS tax reporting requirements. (This is the only business I know of in which the custodians are in charge). All custodians are regulated, and they must maintain comprehensive Errors and Omission (E&O) insurance and are subject to periodic external audits. Administrators are companies that perform a subset of functions that a custodian does including marketing and customer service departments. Administrators cannot hold IRA funds in pooled accounts or hold title to assets in their name. Because of this, they are not directly regulated but are overseen by a custodian. Having an administrator is optional; having a custodian is not. It makes little difference whether you choose to have both or just a custodian, so choose the company that you feel most comfortable with. If you have an administrator, you will also have the administrator’s custodian, which will hold title to the assets in your IRA (including your LLC), so investigate its financial health. If you are a sophisticated investor, your LLC will hold title to your real estate, which provides more flexibility in your SDIRA. •
are the most common types. The principal advantage of a traditional SDIRA is that contributions are tax-deductible. The principal disadvantage is that investment gains are taxed at ordinary income rates when distributed from the IRA (but not at the time you sell the investment). Real estate sold within your IRA can be invested in other real estate or investments without taking a distribution. You are required to start taking distributions at age 72. The principal advantage of a Roth SDIRA is that investment gains are not taxed when distributed. The principal disadvantage is that contributions are not tax-deductible. Monies can be withdrawn at any time tax-free and penalty-free once the account has been funded for five years and provided you are age 59½. You are not required to start taking distributions at any age. DRAWBACKS OF A SDIRA • When a SDIRA buys real estate it holds the title, receives all the income and incurs all the expenses, so it must have sufficient funds. The SDIRA owner cannot pay bills from personal funds. • If a SDIRA owns a property in default and cannot pay the costs of foreclosure, the SDIRA owner is not permitted to use personal funds.
• A SDIRA owner cannot lend money to the SDIRA (or any other type of retirement account).
W. J. Mencarow is president of The Paper Source, an educational resource for real estate note investors. www. PaperSourceOnline.com ”
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