If you are already using a Self-Directed IRA, you know that your choices for investing your retirement savings have been greatly expanded into alternatives such as tax liens, private stock, and precious metals. Well, here is another advantage to these powerful vehicles that might be new to you: you may partner your Self-Directed IRA funds with another IRA to acquire investments that would be out of your reach otherwise.
Partnering Self-Directed IRA funds is nothing new. Since their conception in 1974, Self-Directed IRAs have been considered separate entities, which means they can conduct business with others. And this strategy is often critical when it comes to investing in real estate, which can require larger amounts of funds for its purchase.
If you are not familiar with partnering your Self-Directed IRA funds, here is how it works:
It works like any other partnership
You find and partner with a like-minded individual(s):
- Partner your Self-Directed IRA’s funds with your funds
- Your Self-Directed IRA funds may also partner with someone else’s personal or IRA funds
- You can partner your Self-Directed IRA with more than one IRA
And just like any partnership, you take on a stake in the investment. For example, if your Self-Directed IRA funds 30% of the investment, it pays 30% of the expenses, incurs 30% of the losses, and receives 30% of the income. The other partner or partners make up the rest of the 70%.
What are the benefits of partnering?
As you can see in the previous example, you can invest in potentially lucrative investments by partnering with others who take on a share of any losses and expenses. Of course, your percentage of any gains or income is proportionately reduced, but if your Self-Directed IRA has limited funds, you probably would not have had access to the investment in the first place.
Partnering your Self-Directed IRA funds opens the door to the many possibilities of real-estate investing, including buying the property through direct purchase or investing in a promissory note. Partnering helps increase your purchasing power and gives you the opportunity to participate in purchases that can produce a higher return-on-investment and provide even more capital for future investments.
Also keep in mind that the ability to partner with multiple Self-Directed IRAs gives you increased buying power, so the option of larger investments comes into play. While your gains will still correspond to your Self-Directed IRAs percentage in the investment, you may be able to get onboard some fairly big properties that could end up being game-changers for your retirement portfolio, all the while limiting your liability if the investment turns out to be a washout.
Do not break the “Disqualified Persons” rule
On any new transaction, you can partner with anyone you choose, even those who are on the list of disqualified persons:
- You and your spouse
- Your employer
- Your lineal ascendants and descendants, as well as their spouses (children, parents, etc.)
- Any person providing plan-related services (custodians, advisors, fiduciaries, administrators, etc.)
- Any entity (business, corporation, partnership, etc.) of which you are at least 50 percent owner, whether directly or indirectly
An investment is considered to be a new transaction if you are making the first purchase of the property. In other words, if your Self-Directed IRA is newly buying the property, you are allowed to partner with anyone you want.
If the Self-Directed IRA decides to sell part of the investment and bring in a partner, this would not be considered a new transaction. In this case, the Self-Directed IRA would not be allowed to bring in a disqualified person as a partner.