One of the most common problems we have heard from clients recently is, “My IRA is losing money.” Well, mortgage note investing is THE solution to a failing retirement account! You can turn your basic IRA into a self-directed IRA (SDIRA) and take control of your finances.
Self-Directed IRA Facts
There is roughly $35 trillion in retirement accounts in America. Many people may have an IRA (either Roth or Traditional) with funds distributed in stocks or mutual funds.
They are unaware of the fact that they can use that money in the retirement account to buy and sell notes, thus generating substantial cash flow, without having to pay taxes.
According to the Internal Revenue Service (IRS), the only prohibited investments in IRAs are life insurance or collectibles (artwork, rugs, antiques, metals – with exceptions for certain kinds of bullion, gems, stamps, certain coins, alcoholic beverages, and certain other tangible personal property). However, mortgage note investing is allowable!
When you sell notes and acquire gains on notes within a Roth SDIRA, you will not have to pay any taxes on them as you would if you were to not utilize your retirement account.
In some instances, despite IRA accounts being retirement accounts, the profits generated from note investing can still be accessed prior to retirement age.
Self-Directed IRA Companies
Self-directed IRA companies are the ideal source for using such accounts for leveraging purposes to avoid taxes and access the profit immediately. Self-directed simply means that the IRA can invest in any asset allowed by law.
There are quite a few self-directed IRA companies to choose from. Some popular choices include Directed IRA, Equity Trust Company, NuView Trust, and Quest Trust Company. Therefore, if your IRA is not with one of these custodians which allows for self-direction, you will have to roll it over to one that does. There is no tax or fee charged to make this transfer.
Buying Notes in an IRA
Purchasing mortgage notes through an SDIRA is straightforward. When buying a note with these funds, you must notify the custodian and have the proper note documentation. The custodian will be responsible for sending the money out.
The IRA would be the lender on the note (written as follows: IRA Company Name FBO John Doe IRA). The IRA will receive the payments.
A third-party servicer company may process the payments for you and send them out to the IRA. When you want to make a new note, simply call the custodian, fill out a direction of investment, send them the note documentation and the name of the party who you are buying the note from so the note can be properly funded.
SDIRA Through an LLC
If you are only doing one or two notes per year, then it would be reasonable to simply do it through the IRA. But, if you are doing a lot of short-term notes or non-performing notes which requires more work, using a limited liability corporation (LLC) would be the preferred method.
Rather than having the IRA directly on the note, the IRA owns an LLC, while you are the manager of the LLC. As manager of the LLC, you are authorized to sign documents, have a checking account in the LLC name, wire funds, sell notes, etc. At companies such as Direct IRA, the LLC would simply be shown as the asset. The LLC can in turn own multiple notes.
There are some rules regarding the LLC. The manager of the LLC cannot collect a salary. The manager cannot have use of assets or benefits of assets. The IRA LLC is a single member LLC, which means there is no tax return. You are required to pay an annual fee to the state which usually ranges from $50-$100.
There is also a multi-member LLC. Here, you can partner multiple IRAs into one LLC to buy a greater asset which would enable you to buy a large volume of notes. However, if two individuals of the same family both have an IRA in one LLC, they may coinvest between the accounts, but not transact between them.
They are only allowed so if they are not related. However, multiple IRAs in one LLC establishes a partnership and will require a 1065 partnership tax return.
Become A Capital Partner
Another option for turning a losing IRA into a profitable financial vehicle is by becoming a capital partner. This is perfect for those looking for a more passive approach to investing in notes.
Use the funds in your IRA to achieve more stable returns than can be found in the stock market. We are always looking for those to join our investor network.
You May Also Want to See:
- CFD vs. Mortgage/Deed of Trust – What’s the Difference?
- Unlocking Cash Flow: Harness Mortgage Note Investing and Be Your Own Bank
- Demystifying Mortgage Note Investing: How to Get Started Now!
- 8 Ways to Make Money with Real Estate Note Investing
- Struggling Wholesalers to Thriving Note Investors – Our Story
