IRA Financial’s Adam Bergman explains how he used his Self-Directed IRA to help a friend buy a house. Discover the unique benefits of the Self-Directed IRA and help someone out!
Adam Bergman, IRA Financial President, recently had an opportunity to help a friend out. In this podcast, he explains how he used his Self-Directed IRA to help his friend purchase a home for his family. He discusses the legality of the process and what you can do to help a friend of family member in need.
What is a Self-Directed IRA?
A Self-Directed IRA, or SDIRA, is a special type of Individual Retirement Account, where you are in control of all investment decisions. You are no longer limited by what most major financial institutions offer. These investments include stocks, bonds, and mutual funds, but little else. With an IRA Financial SDIRA, you are not limited to these “traditional” investments. Instead, the entire spectrum of alternative investments are open to you. These may include real estate, business funding, cryptocurrencies and hard money loans.
Instead of hopping online, Googling Self-Directed IRA and choosing the first bank you recognize, it pays to look a little deeper. Banks and other financial institutions may offer SDIRAs, however, they usually require consent for every investment you want to make. IRA Financial is unique in that it offers you “checkbook control” of your IRA funds. This means you can make any type of investment you want, without permission from us. This includes helping out a friend, family member or neighbor with your Self-Directed IRA. These are some of the benefits of Self-Directed IRA plans.
The Legality
When it comes to using retirement funds for investment purposes, only a handful are prohibited by the IRS. These include life insurance, most collectibles and any transaction involving a disqualified person. That last one is a biggie! If any investment involves a disqualified person, your IRA will be immediately distributed to you. You lose the tax advantages of the account, will pay a penalty if under age 59 1/2 and a hefty tax bill will follow.
What constitutes a disqualified person?
- A Fiduciary (the IRA holder, participant, or person having authority over making IRA investments)
- Someone who provides services to the plan (trustee or custodian)
- A family member of the IRA holder, trustee or custodian (parents, grandparents, children, grandchildren, spouse’s of the fiduciary’s children, etc.)
- Entities of which a disqualified person owns 50%
Note: brothers, sisters, aunts, uncles, cousins, step-brothers, step-sisters, and friends are NOT treated as “Disqualified Persons”.
As long as your Self-Directed IRA transaction doesn’t include one of these people, you are good to go.
Unique Benefits of the Self-Directed IRA
What makes a Self-Directed IRA so unique is the ability to help a friend in need. Since you are not limited in your investment opportunities, you can now grow your nest egg AND help someone out. Here, we’ll talk about a few examples to help someone in need:
Buying a Home
In the podcast, Adam Bergman retells the story about helping his friend buy a house. He did it with Self-Directed IRA funds sitting in his account. The friend was short $40,000 and all other avenues were explored. Mr. Bergman had a brilliant idea to help his buddy and make some money as well. He offered a loan for the amount needed. Not only is this allowed, but it’s also a great way to have a steady stream of money flowing back into the SDIRA.
You control the entire process instead of a bank or other lending institution. You can set a fair interest rate and the length of the loan. Further, you can mutually agree on a payment schedule, both the amount and the frequency. It’s a win-win for each of you. Your friend gets the house of his dreams and you get to make some money on the loan.
Fund a Business
In this example, we’ll use our fictional sister, Rose, who wants to open her own “Sip & Paint” business. However, she doesn’t have enough capital to get it started. This is where you and your Self-Directed IRA come in. You have two choices: 1) Do as above and loan Rose the money or 2) Invest in the business yourself. If you choose option two, there are some things to consider.
Make sure the business will succeed, which, of course, is hard. You don’t want to put your retirement in jeopardy. Just as important, is to know what type of business it is. A C Corporation is your best bet since it is not subject to the complicated UBTI rules. Together, you and your sister can reap all the benefits of the business.
Pay Off Debt
Our last example is helping someone pay off debt. This can be any kind of debt someone has, such as credit cards, medical bills and student loans, among others. It’s nice to help out a family member get out of a pile of debt. However, this is one time you might want to consider collateral as part of the process.
This all depends on the type of person you’re lending money too and the type of debt it is. If your friend or family member can’t pay you back, you put your own future at risk. Protect yourself and your family by having the borrower put something up of value to facilitate the loan. That way, at least you’ll get something in return in case of default.
Conclusion
It’s great that you put the needs of others ahead of your own. However, make sure you know the exact situation you are getting involved in. Your retirement funds are there to help you and your loved ones. If the correct situation presents itself, don’t hesitate to step in and help!
Get in Touch
If you want more info about using a Self-Directed IRA to help your loved ones, contact IRA Financial Group at 800-472-0646. You can also fill out the form above or on our contact page. We look forward to hearing from you!
