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Self Directed IRA Partnering

Self Directed IRA Partnering

There are so many reasons why investing with a self directed IRA is such a smart option. Most of you probably already know what a self directed IRA is and the tax benefits that come with a self directed IRA.

What many of you probably don't know is that a self directed IRA can also partner with other self directed IRAs to increase your investing power and invest in higher dollar investments. How does self directed IRA partnering work and who can you partner with?

Why Partner With Another Self Directed IRA

It is fairly simple why partnering with another self directed IRA makes sense. The main reason to partner is if the investment that you would like to purchase with your IRA is more expensive than the money that you have in your IRA. Simply put, you don't have enough money to purchase the investment. Another reason you may want to partner is to limit your risk. You may have enough money in your IRA to purchase the investment of your choosing but maybe you don't want to use all of your IRA to purchase the investment. Maybe you still want to stay diversified in other ways. Partnering can make a lot of sense in this case. Here is an example to help illustrate why you may want to partner with another IRA: You want to purchase a rental property that costs $200,000 and you only have $150,000 in your IRA. In order to pay for the property you need to partner with another IRA. When partnering with another IRA you would get another persons IRA to invest the final $50,000.

A few best practices when doing this

  1. It is best doing this through an LLC. The quick explanation of investing with your retirement accounts through an LLC is that the IRA owns the LLC and the LLC owns the investment. Why is this a good way to do it? If you had a rental property the renter pays the LLC in full. Also all expenses are done through the LLC. If it wasn't done through the LLC the renter would have to pay each IRA individually and the expenses would have to be separated for each IRA. It is much cleaner and easier for the investor having the LLC.

  2. Maintain an an even split. In the case of our example, person A who put in $150,000 owns 75% and person B who put in $50,000 owns 25% of the LLC. It is a best practice to always maintain that ratio. If you have expenses person As' IRA should come up with 75% of the money and person Bs' IRA should come up with 25%. If you sell the rental property the profits would also be split in the same 75/25 ratio.

Partner With Family

If you know about self directed IRAs you know that there are prohibited transactions that clearly state that there are certain people who are "disqualified persons" when doing self directed IRA investing. Check out Disqualified Persons if you aren't sure who or what a disqualified person is.

The great thing about partnering with another IRA is that you can partner with anyone you want, even those who are considered disqualified persons. The thing to note is that when partnering with a disqualified person (yourself, family, ect.) it must be the purchase of a new asset.

Partner With Yourself

The same self partnering rule in regards to self dealing also applies to partnering with yourself. One of the trickiest things that you need to avoid is any self dealing issues. Say you had a Traditional IRA that had $20,000 and a Roth IRA that had $40,000 and there was an investment that you wanted to purchase that cost $60,000 you could partner those two IRA's so that you could purchase your investment.

These are just a few reasons why partnering up self directed IRAs makes sense. If you would like any more specific information about partnering up self directed IRAs or even just general information feel free to contact us today.