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Self Directed IRA Investing - Part 2 | By: Jeffrey Watson



In the previous article, I discussed five of my top ten recommendations for retirement account holders who are doing self-directed investing. Let’s continue with that list.

6. Do small-dollar deal until you get really comfortable with doing all the due diligence, underwriting and documentation that goes along with self-directed investing.

If you do a small-dollar deal (remembers, all accounts started out small) and something goes wrong, you only lose small dollars. If you do a large-dollar deal, particularly at the beginning if your investing career, and something goes wrong, if could be fatal. As your confidence and experience grows, you can do large-dollar deals.

7. Dealing and acting like a business owner inside a self-directed retirement account is not a good idea.

Many people will tell you that UBIT can be your friend, and I would agree that in certain circumstances, UBIT or UDFI are potential allies to your retirement account; but acting like a dealer or owning a business inside your self-directed retirement account is not wise. Not only does it create a higher risk of liability and lawsuits, but there is a greater likelihood that it will attract the attention of the IRS. You will also have to file a more complex tax return because the debt or business Activity Income inside your self-directed retirement account is not tax-free.

I’ve had people say to me, “But, Jeff. I’ve been told that in order to have a truly self-directed retirement account, I must have checkbook control.” Checkbook controls comes when the IRA owns an entity, such as an LLC or trust that is funded with IRA dollars, and the checkbook is in the control of the account holder. My response to that is that IRA-owned entities can either be awesome or awful. You had better know when, which and why.

It’s a rule of practice in my office that I will not assist a self-directed retirement account holder in setting up a single-member LLC to be owned by an IRA wherein the account holder insists on being the manager (person in charge of the funds), I insist that they have an independent, non-disqualified third party as the manager of that LLC or the trustee of that trust.

8. Open a Roth account

Many investors who are getting up in years have lamented that they only have traditional accounts, and they don’t think there is any way they can get a Roth account. My response to that is that anyone with a pulse and a way to earn and report active, earned income can have a Roth account, and they need to get one NOW! There are simply no excuses. Once you have learned the definition of what constitutes active, ordinary, earned income (income that is subject to income tax or self-employment tax such as W-2, paycheck, 1099 or Schedule C income), you will understand the importance of getting some of that money into a Roth IRA or Solo 401(k) with Roth component. The magic of the Roth is absolutely crucial. Not only does the money get to grow tax free, but under the right circumstances, it can be withdrawn from the account in the form of a qualified distribution tax free.

9. Make sure you double check the beneficiary designations for the accounts you have established.

This rule actually applies to every type of retirement account, investment account, or bank account you have. You need to double check your beneficiaries. Is that money going to go to the person you want it to go to in the event of your death? Is the beneficiary designation consistent with your overall estate plan?

Jeffery S. Watson serves as general Counsel for National REIA and practices law at the Jeffrey S. Watson Law Firm, LTD located in Conneaut, Ohio.

10. Become creative and learn how to play nicely with financial friends.

Self-directed retirement account investing is a team sport. It is not a solo activity, Anyone who understands the prohibited transaction and disqualified investment rules understands that you cannot take money from your self-directed retirement account and use it for you own investments or put some of you current assets into those accounts, so you must learn how to work with other individuals in a cooperative manner, You need to find individuals by networking with them at your local REIAs to determine if their business standards are the same as yours, if their objectives are similar to yours, and if they seem like the right kind of person to put on your investing team.

When you play nicely with financial friends all of you prosper and benefit. Avoid doing a deal with someone who believes they alone need to be the one who profits and benefits from the transaction. If the investment is not mutually beneficial, it shouldn’t be done by a group of financial friends. One of the benefits of developing a group of financial friends is that you can do repeated deals with them as various situations and opportunities arise.

This was originally published in the RE Journal from National REIA Winter 2016.
Read Part 1: https://mareimember.com/Article.aspx?ID=Self-Directed-IRA-Investing-Part-1

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