Advanced Strategies

For experienced investors seeking to maximize the potential of their retirement funds, there are some advanced strategies that can offer unique opportunities for portfolio growth and diversification. Here are some advanced strategies to consider when investing with a Self-Directed IRA:

Leveraging Non-Recourse Financing:

  • Utilize non-recourse financing to leverage your SDIRA funds and acquire real estate investments. Unlike traditional mortgages, non-recourse loans are secured by the property itself, allowing investors to purchase properties without personal liability.
  • Keep in mind that an IRA holder is not permitted to provide their credit to secure a loan for use in their SDIRA.
  • Non-recourse lenders could be banks, hard money lenders, or even private lenders willing to provide loans.
  • Assess the risks and benefits of non-recourse financing, including loan terms, interest rates, and potential impact on cash flow and investment returns. Conduct thorough due diligence on lenders and loan agreements to mitigate risks.
  • Be sure that you have a complete understanding of the implications of Unrelated Debt Finance Income Tax that can apply when profiting from a non-recourse loan.

Self-Directed Roth IRA Conversion Strategies:

  • Consider converting traditional IRA assets into a Self-Directed Roth IRA to benefit from tax-free growth and distributions. Roth IRA conversions allow investors to lock in tax-free gains and eliminate future tax liabilities on qualified withdrawals.
  • There are certain assets that allow Roth conversions at a discounted rate, mineral rights investments being a popular example. Discounting an asset means that instead of converting cash prior to the conversion, you are converting the value of the asset after it has been purchased. Many assets out there are considered illiquid assets, or have human-related factors that can affect the value. Therefore, it is prudent to do a Roth conversion of the asset at a potentially decreased value instead of cash at cost.
  • You must hire a 3rd party appraiser to provide a proper valuation for a Roth conversion. You cannot use any individual or company that is considered disqualified.
  • Evaluate the tax implications, eligibility requirements, and long-term financial benefits of Roth IRA conversions. Consult with tax professionals or financial advisors to develop a conversion strategy aligned with your retirement goals.

Estate Planning and Beneficiary Designations:

  • Incorporate estate planning strategies into your SDIRA investment approach to optimize wealth transfer and legacy planning. Designate beneficiaries for your SDIRA assets and establish a comprehensive estate plan to ensure seamless distribution of wealth.
  • Review and update beneficiary designations regularly to reflect changes in personal circumstances, family dynamics, and estate planning objectives. Consult with estate planning attorneys or financial planners to develop a customized plan tailored to your needs.
  • Remember that the designated beneficiary to your retirement account will supersede a will or trust.
  • Since IRAs are exempt from the death tax, leaving assets in an IRA for your heirs can have tremendous benefits. Keep in mind that certain assets are easier to transfer than others once the account holder has passed, so be sure that beneficiaries are aware of the steps required for transferring them.
  • Consider the 10-year rule for inherited IRAs to help build wealth for generations to come. Generally, this rule applies to non-spouse beneficiaries, and states that all assets from an inherited IRA must be withdrawn by the end of the 10th year following the death of the original account holder.

Investing in Private Placements and Startups:

  • Explore opportunities to invest in private placements, venture capital, and startup companies within your SDIRA. Private placements offer the potential for significant returns but often require a higher level of due diligence and risk assessment.
  • Evaluate the business models, management teams, and growth prospects of private companies before committing funds. Consider partnering with experienced investors or venture capital firms to access high-quality investment opportunities.
  • When investing in startups, be aware that UBTI can apply when running a business inside an IRA. To avoid UBTI, certain deals can be structured as convertible notes. This means that you would be considered a lender to the startup rather than an investor, but the loan can convert to a private or public stock after a certain amount of time has elapsed.
  • Do not become involved in any of the startup’s day-to-day operations, as that could be considered a prohibited transaction.

Joint Venture Investments:

  • Remember, a joint venture is just a contract. Ultimately, it is the outline of a specific investment and how the IRA will get paid from that investment.
  • Your IRA can only contribute cash, not time. This means that using your IRA to fund a JV is acceptable, but you personally cannot contribute your own time as sweat equity. This also holds true for any non-disqualified person.
  • Be careful that your IRA is not involved in a JV where the funds are being used for any investments that are considered prohibited. Prohibited investments include things like antiques, alcohol, life insurance policies, certain precious metals, and more. (See list under IRS Rev. Code 408 Section m.
  • At the end of the day, you must do your own due diligence on these investments and it is highly recommended that you seek out the advice of a professional attorney.

Active Real Estate Investing:

  • Active real estate investing (i.e. fix and flips, wholesaling, options, etc.) is very common, but when using a SDIRA you must be able to separate yourself from the overall investment.
  • All expenses associated with conducting any type of renovations on a property must come out of the SDIRA.
  • The utilization of non-recourse lenders for these investments is very common, but always remember that UDFI may apply.
  • If doing a wholesale or an option contract, make sure that the contract is in the name of your SDIRA.
  • Your SDIRA cannot receive a profit for nothing, meaning that the IRA must fund some portion of the overall deal.
  • You cannot use your own personal funds to market the contract for sale.
  • Some ERISA attorneys will say that flipping houses, wholesaling, or options can bring on UBTI. This is a debatable topic in the SDIRA industry, so it is always best to get information from an ERISA expert on this topic.
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