EP 20 – IRA Partnering With Individuals or Other Accounts
Partnering in your IRA and other retirement accounts can be a powerful strategy that can open the doors to more investment opportunities. But, buyer beware, there are some unique rules that come with these types of partnerships. Mat and Mark break down all the rules to help you stay up to date with these industry-leading strategies. Take control of your retirement by investing in what you know.
Mark Kohler: Welcome to the directed IRA podcast. Oh, my gosh, that was dorky. Now, some of you may be wondering why we would ever do that in unison. Yes, because we’re here together. Yeah.
Mat Sorensen: Mark is in Phoenix.
Mark Kohler: We are live in Phoenix. And I really feel uncomfortable about the social distancing. So I’m going to put on a mask
Mat Sorensen: And, you know, thank you. I have the vaccine. So you’re OK. I volunteered got the vaccine now.
Mark Kohler: Such a good Citizen. I’m going to get my vaccine and be sterile, so. OK, all right.
Mat Sorensen: I thought you already were.
Mark Kohler: Well, we’re going to make sure. OK, yeah. Several people have said make sure that you nailed the coffin and that we don’t need any mini Mark’s out there, you know, but I’m here. I’m here in Phoenix with my amazing co-host, Mat Sorensen. My name is Mark Kohler. Welcome if you haven’t been to the podcast before it’s also on YouTube, Spotify, iTunes, Stitcher. Yeah.
Mat Sorensen: Wherever you consume podcasts, we are and all on YouTube. You can see us in person together. This is rare. Yeah. So it’s good to be here. So it might be a little more jovial than you’re used to just because of the more awkward.
Mark Kohler: Yeah. I’m now touching Mat in a very inappropriate way.
Mat Sorensen: We are business partners, right. Yeah. But just you know, we are tax lawyers. Marks also got the extra nerdy distinction of being a CPA as well. So but we love the topic of self-directed IRAs, how they can be invested in a real estate, crypto, private companies, any of the cool things you want to do, which is what our clients do here at directed IRA and Mark wearing his Swag his Directed IRA.
Mark Kohler: I’m representing today. If those on YouTube, I’ve got the logo shirt of Directed IRA I’m representing. I’m excited to be here. I left this cold Idaho tundra to get on a flight to Phoenix this morning at 4:30 a.m. and I had a sweatshirt, a beanie, and I got on the plane and there’s guys and. Flip flops and shorts, I’m like, this is a whole other world, it’s weird.
Mat Sorensen: This is the sweet time in Phoenix, of course. OK, well today we’re going to talk about how your IRA can partner with other people or other accounts. Sometimes you got money in an IRA and you want to make an investment, but you don’t have enough to pull off the investment. How can I bring in other resources to do it? A partner, another retirement account of maybe mine or a family member. So we’re going to walk through the ways you do that, some of the landmines or some landmines.
Mark Kohler: Yeah, but a lot of people are shocked that there’s a lot if there’s an area that is open for creativity without a lot of problems. This is really there’s a lot of great ways to partner in an LLC with IRAs. And I’ll give one quick example. I’ve been really harping some of you’re going to get sick of it. Mat, like, told me to back off a little bit. I’m a big fan of the Coverdell, which is the education savings account. Now, on the first blush, everybody’s like, you can only put in two grand, you know, and what can I do for college for a kid with two grand? Well, I’m like, hey, if you start when they’re under age five, six, seven, eight years old and and you partner that Coverdale and other projects with your other IRAs, your exponential rate of return could really turn that into something special. And people are, oh, I can partner my Coverdale with other my other IRA. Yes. See, so now the Coverdale looks a little more sexy. Yeah, but it does
Mat Sorensen: It can come along for the ride now because otherwise what you can do with two thousand bucks, you know, I mean maybe buy a little bitcoin with it but
Mark Kohler: I don’t know. The Coverdell is in the back seat. Are we there yet.
Mat Sorensen: Yeah.
Mark Kohler: Really let it do its job.
Mat Sorensen: Yeah. Someone’s got to be in the front seat driving it with all the money and that’s maybe your traditional IRA to a Roth IRA. All right. Well, let’s I think it’d be helpful to go over some examples just to illustrate it, maybe at first and then before we get into, like, rules and things like that. Well, let me say this, though.
Mark Kohler: I think the first rule as we go through these examples, can your IRA partner with individuals. Yes. Can partner with you. Yes. Can partner with other IRAs or retirement accounts in your family or your own. Yes. I mean, yeah. So, yeah. And then the example start, I mean, it gets to be pretty cool really.
Mat Sorensen: So here’s the I guess this is the first principle. Off of that point, your IRA cannot transact with you, right? I can’t have my IRA and go buy a piece of real estate from my IRA or I can’t have my IRA own real estate and lease it to me personally. Right. That’s my IRA transacting with me. I’m a disqualified person, which is prohibited. If you’re not familiar with that, go back to the earlier episodes where we go over IRA rules. But when I’m partnering in an investment with my IRA, we’re not investing between each other. We’re co-investing into the same thing. So we’re not transacting. Remember, it’s the prohibitive transaction rules. The IRS is concerned with your IRA buying something from you or your IRA transaction with your spouse’s IRA and doing something unfair for tax purposes. But you can co-invest into something.
Mark Kohler: I like it. Another way to say this, there’s prohibited transaction rules, but there’s not prohibited partnering rules.
Mat Sorensen: I see what you did there.
Mark Kohler: Can I have a drink of your Diet Coke here. Now that we’re here together, I’m just going to drink Mat’s drink, too.
Mat Sorensen: I’m such a bad host.
Mark Kohler: Well, no, it’s OK. And, you know,
Mat Sorensen: There are some in the fridge
Mark Kohler: Back in the studio in Idaho. I can have the producer, like, make me look more tan than Mat now. It’s now it’s like really the real color test comes out. I might still have you.
Mat Sorensen: What’s hilarious, actually, is I, I just did this like a day a day ago. I got this little island of the sun self-tanning drops. Yeah. And you put it in a moisturizer and then I put it on my face. So I think that’s helping too.
Mark Kohler: Yeah, you look good. You look like an umpa lumpa you’re not orange you look good. OK. So you give the first example. Let’s do our favorite examples, because really people I think this really does, like you said, exemplify what’s possible is just examples.
Mat Sorensen: Ok, here’s the first one. And I love this one because it’s the most common that I’ve helped clients with over the years. Let’s say your IRA’s got one hundred grand in it and you’re looking at a piece of real estate that’s worth one hundred and fifty I could get at maybe I get a non-recourse loan and I buy it. What you can do, you go back to the real estate with that. Sometimes people are like, you know what, I want to buy the thing outright. My spouse has seventy-five grand over and an old employer for one. Okay. Can we put those two accounts together and go buy the real estate? Yes. So we would take the spouses of employer 401K to a self-directed IRA for him or her. Take your own account. And now those two IRAs partner into a new LLC that LLC is going to go out and buy the property. So now I’m able and real estate the most common one, because it’s one of those things where it’s like, let’s say you want to buy Amazon stock, like I only have enough to buy ten shares and just buy ten. I want to buy more shares, have your spouse’s account, go buy ten shares with their account. OK, well, real estate’s not like that, right. You got to buy the whole thing. We need a bank account. Yeah. So how do we accomplish that? And the LLC is perfect because it solves a number of issues. First, of course, like any LLC in real estate, you’re getting asset protection. Something happens on the property. They have to sue the LLC. They can’t come after you or the IRAs. But more importantly, for the IRAs rules, we’re going to break up the ownership in that LLC. So let’s say your account put in one hundred grand, your spouse’s account put in fifty grand. Your account is going to own 66%, one-third. And are your accounts going to own sixty-six, one-third spouse’s account, two-thirds to thirty times.
Mark Kohler: That’s what you’re going to read. This is a lot of pressure.
Mat Sorensen: I mean I’m not a CPA, guys. I never wanted to be. You know what I’m saying here? Your accounts got put in one hundred thousand of one hundred fifty. So you got two-thirds ownership. Your spouse’s account puts in fifty. Spouse has one third ownership. Now you’ve got one fifty in LLC. You go by the property K rental income comes in. How do you what do you do with that? He’s going to pay expenses. The cash flow is going to come down two-thirds to your account, one-third to your spouse’s. So we’re always breaking up the ownership, the cash flow, the income based on the dollars invested.
Mark Kohler: Ok, now I’m going to add a couple of distinctions or some additions to Mat example. When Mat said we’re going to do it together or we’re going to remember you still have two separate IRAs. Everybody a lot of people think, oh, I can bring my spouse’s IRA and combine it with my IRA, not at the IRA level. You’re going to combine it at the LLC level. So keep that in mind, everybody. You still have two separate IRAs
Mat Sorensen: And these LLCs, as we call them, multimember IRA/LLCs. We do in the law firm KKOS Lawyers. And there’s a whole chapter in my book on the multimember IRA,
Mark Kohler: And we’ve been doing it for fifteen plus years. We really feel like we’ve been the thought leader on the LLC in the country and some other attorneys may take issue with that, but. They’re not here to defend themselves, right? That is what it is. Yes, the second thing I would say that I would clarify that Mat said at the very end of his example is when that rental car rental income is received, it goes to the LLC, the LLC bank account, and it stays there. Heck, you might just pool it there for years and years and go buy other rental property with that same LLC. You may say, hey, we got 10 grand sitting there. Let’s go buy some stock out of that LLC or let’s go do some crypto or go buy some cows or buy another smaller project or loan it to someone so that LLC can keep doing business. In the end, when it’s dissolved or you’re ready to spit out some profit, then it’ll go two-thirds, one-third to the IRA, not to the individual. It’s got to make a pit stop at the IRA.
Mat Sorensen: Yeah, OK. Yeah, that’s called the Multimember LLC, which is probably the number one tool to use when partnering with other people or with other IRA accounts as we go through this. So that’s one to know, multimember IRA/LLC.
Mark Kohler: I want to move to another cool example, but I think we need to stay with this just one example and build on it. OK, so let’s say the rental property is two hundred grand. You had a hundred in your IRA, your spouse or business partner, friend, brother, sister, kid. Remember that we probably could add that variable. It doesn’t. It could be anybody, anybody, family or not, has 50 grand. Let’s say it’s mom. Mom has 50 grand sitting around in an old IRA. But you’re short 50, so you got the one hundred, you got the 50, but the rental properties, two hundred. In this example, can you put in 50 grand of your own money? Yes. So now you still have a multimember LLC, but now there’s three partners you’re and has to be pro-rata, which means ownership is reflective of how much money each person put in. So you put in your IRA, put in a hundred grand, 50 percent, your mom’s Roth put in or IRA put in. Twenty-five grand, sorry, 50 grand. So she’s twenty-five percent kind of hard work man. He’s smart as a fifth-grader. OK, so much better. Yeah. You’re, you’re vindicated and then you put it in your own money of 50 grand. You personally get twenty five percent. Now is that prohibited? No. Because you didn’t buy anything from your IRA, you didn’t sell your IRA a property. You’re not going to go do the work. You’re going to have a third party property manager. So you’re you want to go back and listen to the podcast of ours, of what’s prohibited once the property’s purchased. But you have an LLC and you’ve got three partners now and you get to be a partner too.
Mat Sorensen: Yeah, yeah. Now, this LLC is a partnership for tax purposes, as was the first example, because there are multiple owners. So a lot of times in a single-member LLC or sometimes called a checkbook IRA, IRA LLC which is one IRA owns the LLC 100% no tax return required to the IRS. But here we’ve got multiple partners. Even if it’s two IRAs that don’t pay tax, the IRS still wants a partnership tax return. That’s a form 1065 to say, here’s the income, here are the expenses. Here’s a K1 that says how much profit this IRA gets, how it’s lost. This one gets now in Mark’s example where we’ve got your IRA, Moms’ IRA, and you personally, let’s say you had ten thousand of profit after all the expenses in this LLC, will, your IRA is going to get a K1 for five thousand bucks of income, does nothing with it because it doesn’t pay tax on rental income or capital gain. Whatever the income you had from the rental mom’s IRA gets a K one for twenty-five hundred bucks and twenty for the twenty-five percent
Mark Kohler: We’re in now. We’re dealing with it.
Mat Sorensen: Go out and then you got a K1 for twenty five hundred bucks for your twenty five percent stake that’s going on your 1040. That was not retirement money so that you will put that on the back on your taxes of course. So.
Mark Kohler: And it’s your money. Yeah. And you can spend it right now. Yeah. Now if you do a distribution now see that’s the K1. This is called phantom income. The K1 is going to tell the IRS how much profit there was, but that you may have left the ten thousand in the bank account, which you can do that you can do, but you get a K1 for twenty five hundred bucks. You’re like, well I got to pay taxes on twenty five hundred dollars but no one gave me twenty five hundred dollars. It’s stuck in that LLC over there. That’s OK. It’s called Phantom Income. Pay the tax. Don’t cry about it. You’ve got profit now that’s been taxed sitting in this LLC someday you won’t have to pay tax on it again. Now if you do a distribution that also has to be pro-rata. So if you distributed well, see, now we want now let’s say you leave nine thousand in the account and you distribute a thousand dollars, OK, then you’d send five hundred dollars to your IRA account, at Directed IRA. Two hundred and fifty dollars to Moms’ Roth IRA at directed IRA and you would get a check in the mail for two hundred and fifty dollars. So distributions are separate from k one net loss or net income and have to follow the same percentages. Yeah.
Mat Sorensen: No, no. Now remember you’re, you can be the manager of this LLC, so you can be the manager of the LLC. You don’t get to take a salary or take any compensation, but you’re the one actually cutting the checks. You know, you’re sending the check to the IRA. If you’re if you’re just throwing money out, as Mark said earlier, you don’t have to let it just all build up in the LLC, just grow this as an investment account, reinvested in whatever next investment you want to do. OK, now.
Mark Kohler: Please be careful if you see out on the Web. Oh, I don’t have to do a tax return because my IRA doesn’t owe taxes. Now, on the face of it, you’re right. The IRA doesn’t owe taxes, but the IRS doesn’t know that your IRA is an owner. The IRS is in the dark and they’re going to get pissed because they see that there’s a tax ID number. There might be 1099s being issued to that tax ID number. There could be a HUD statement and escrow state. So there’s going to be business going on and you’re thinking, well, I don’t owe taxes anyway, so why do I have to do a tax return? Well. The IRS has to be kept in the loop, and when you don’t do a tax return, the penalty for a 1065 is $295 per partner per month, up to six months, I think. So in a situation like you and your wife or you and your husband’s IRAs doing the hundred and fifty thousand dollar deal, there’s no person in it. So you’re saying there’s no taxes, but the 1065 still required and the penalty sucks. So do it. We can help you here. We got the accounting firm that can do that, but do your extension, which is a good note that the extension for those losses is due back on March 15. The little May 17th extension, some you are thinking about was for your 1040, not for 1065s, so your penalty might already be ratcheted up. So if you’re sitting driving down the road or on a treadmill and your heart’s just skipped, this is get that 1065 down.
Mat Sorensen: And this is for any L.L.C.. That’s a partnership. So.
Mark Kohler: Ok, another fun example.
Mat Sorensen: Ok, what do you think you want to build on this one. You want to change lanes.
Mark Kohler: Do you have one to build on it?
Mat Sorensen: Yeah, OK, go ahead. Let’s throw another variable in there. Let’s say that let’s take the same two hundred thousand dollar piece of real estate. Let’s say that you’ve still got one hundred thousand in your IRA. Mom’s got fifty thousand in her IRA, you’re going to throw in 50 grand personally, but this needs a rehab.
Mark Kohler: Ok, good variable. And I was wondering where you were going. OK. All right.
Mat Sorensen: Now it’s properties rehab. And you’ve got a friend that happens to be a contractor, not a disqualified person that says, you know what, I’ll do the rehab, but I want two percent of the profits in the deal. In fact, I want half.
Mark Kohler: Oh, OK. Oh, my gosh. All right. Now, this guy’s a Yahoo!
Mat Sorensen: I picked half because I can do the math on this easier. You know whatever.
Mark Kohler: You probably kick him out, but you want to punch him in the face.
Mat Sorensen: For example, purposes I like. I like including half because I can run math. All right. OK, so we got two hundred grand of cash coming in. I got someone putting in 50 percent ownership. That’s going to be worth the same as that Two hundred thousand of cash. So I really got value here of four hundred grand, if you think about it. Yeah. OK, now if you have a work partner coming in, I’m going to break down the things here. But when you have a work partner coming in, that can’t be you. It can’t be anyone disqualified your IRA or your mom’s IRA work partner has to be a non-disqualified person. So this is just a friend that’s a contractor or just some professional contractor. Rule number one, I love it. OK, now let’s break down the ownership, the properties. Two hundred. The total value is four hundred because 50 percent of its ownership is getting allocated to the contractor for services. So if I’m putting in one hundred, I’m going to get 25% ownership for my IRA. My mom is putting in 50 her IRAs going to get. Twelve and a half percent owner said, I’m personally putting in the other 50 how to get 12 and a half percent ownership. So now between my IRA, Mom’s IRA and me personally, I’ve got 50 percent ownership. The other 50 percent is getting allocated to the work partner.
Mark Kohler: And there’s two ways to go at that and skin the apple. That’s why I didn’t jump into your rescue there for a minute because I was like, OK, how I usually go at it is I take that what Mat did is the capitalization ratio. He said, OK, if this guy is at 50 percent and they put in two hundred, then we have a four hundred total cap value. That’s a way to finance people would look at it. Another way to look at it kind of down and dirty. Is you say, you work backwards, you say, well, how much does the work partner want? They want 50% or they and let’s do another example, they want 10% and a lot of times if the contractor is not putting money in, they’re just going to oversee it.
Mat Sorensen: We’ve got don’t give them 50.
Mark Kohler: Yeah, you’re going to give them, they say, 10%, which is going to bring me the variable I wanted to come to in a moment. Let’s say we give them 10%, then you take the remaining 90 and divide that up pro-rata 50% to your IRA. 25% of 90%. So you take point five times ninety point two, five times ninety point two, and that gets you your 90 percent. So you kind of carve out the work partner first and then divide up the rest pro-rata. You end up in the same spot. But but again, whatever makes sense to you. Tomato, tomato. Here’s my variable. The contractor, let’s start with the 10 percent contractor says I want 10 percent to supervise it, that’s cool. But what’s the rehab going to cost? Oh, it’s going to cost 50 grand, the round number there like that. Well, we don’t want to go put fifty thousand dollars more into the LLC. Can the LLC go get a loan? Yes. Now, this is very common where you hear the term some of you in real estate is hard money. See, the property’s paid for. You already bought the property. It’s free and clear of hard money lenders. They’re like salivating over that because they’re like, well, I’ll give you 50 grand and you probably pay two points and 10 percent per annum at least. Sometimes they can be highway robbery. Sometimes you can get a better deal.
Mat Sorensen: It’s a little more competitive now. You might get seven or eight percent. Rates are pretty good and the hard money lenders even got to compete.
Mark Kohler: Yeah. Now, when we say hard money, what it means is they’re not looking for a personal guarantee from anyone and they’re taking a lien. Sometimes they won’t want to, but they can’t get it from you. The IRA people, they’ve got to get it from the contractor. Yeah, but let’s say you get no there’s no personal guarantee they’re going to take a plane. They’re going to take a fifty grand, give it to the LLC. They’re going to take a lein against property. Now, when there’s that much equity involved, I think you have a better argument of not getting personal, personal.
Mat Sorensen: And if you’ve got a track record of doing these before even personally, you have more negotiating power. This is your first deal and there’s hardly any equity in it. Yeah, they’re going to need a personal guarantee.
Mark Kohler: Now, does the hard money lender get ownership? No. Is the hard money lender loaning you your IRA or the contractor money? No, it’s loaning the LLC. They’re going to take a first trustee lean against the LLC and the property owned by the LLC. And frankly, what they’re wishing is you default. I mean, they just want to come in and take that property. So you’re highly motivated to move quickly. You want to pay the least amount of interest, borrow from the hard money lender, do your rehab, the contractor oversees it, and then you go to sell the property for maybe three hundred. And then at that point you pay off the loan, you split the profit pro rata, blah, blah, blah. So but the point I’m just trying to get at is you can have a loan involved. Yeah.
Mat Sorensen: Let me go through the example I gave up the partner, get the work partner getting fifty percent ownership. Let’s say you bought the property for two hundred that the work partner maybe put in there their supplies and materials and they did all the work and just fix it up so you can have any cost to keep it simple. Let’s say you sold the property then for three hundred. OK, let’s walk through how that money goes back. This is typically how you want to structure this in a partnership deal like this. First, the cash partners should get paid back their money. So if there was three hundred dollars, sell $300,000 sell that two hundred thousand is going to get paid back first. So you’re free to put in. One hundred grand is going to get one hundred grand back at your mom’s diary to put in fifty. Gets her, gets the fifty grand, the fifty you put in personally during get that fifty grand back personally now we’ve got one hundred thousand in profit. This is where the contractor is going to get after the ownership. Half the profit here. Fifty thousand. And then your IRA is going to get its twenty five thousand twenty five percent. Twenty five thousand. Your mom’s going to get twelve five and you get twelve. Fine. So just keep in mind, generally, when you’re partnering and you bring in a work partner, you want the operating agreement to say the people put in the cash, get the cash back. Then we split the profits based on the percentages
Mark Kohler: And this can be really tricky. We could spend the rest of the hour going through what’s the basis, how much improvements were completed? Was there a loan, is there interest? How much profit would be split up? But that’s not the purpose here. The purpose of the show is to say you can have debt, you can have a service partner. So let me add another variable that’s out. A whole new idea. Whole new idea. OK, so this was our text earlier today. We had one of our attorneys say he’s got two clients with IRAs and we kind of threw this around. We have like a kind of a collaborative text group amongst all of us tax attorneys trying to make sure you get the best result, whatever it is, whatever we’re kind of like in a new you know, like, oh, this is an interesting one. We’ll throw it around because we want all of our tax attorneys to learn from it. So this guy, they are our attorney in the office, had two clients with IRAs and they wanted to do crypto mining. And some I.T. guy said, well, I can do all that I.T. work and get you a sweet rig, set it up, monitor it and get us a kick-butt return. But I want 50% and the two IRAs are going to buy the rig. So it’s not real estate, but it’s still the same concept. Just like Mats example, you have a contractor in this situation. It’s an IT guy. So you can plug and play whatever it could be. Import-Export, it could be it could be a restaurant. I’m an importer exporter. To be Vandelay Industries, all you go
Mat Sorensen: Z2 with businesses, he’s in the imports, just imports or does he do export importer Exporter.
Mark Kohler: Could be an architectural firm too, you know. Yeah, so am I.
Mat Sorensen: Have I had a good one even this morning when I looked at was LLC of multiple people investing their IRA’s into one LLC is a group of about five to 10 and the reason they were pooling into an LLC is that LLC was investing in a venture capital deal. This was a startup pre-IPO deal and they wouldn’t let just one person in at a time at fifty thousand bucks. They are like the minimum investment was about half a million. And so for them to get to that minimum, this group of people which compose of some IRAs some individuals through into a Multimember LLC, that LLC then went and made this investment that had a minimum set on it. So that’s another reason to do the Multimember IRA/LLC.
Mark Kohler: And you know what’s funny is right here, if you’re watching on YouTube, I’ve had to multitask. I’m moving around money in kind of some family matters. But that’s my next example. I think a lot of people, again, feel like Self-directings not for them because they don’t have enough capital, just like this hedge fund type deal where they needed a certain amount to play pay to play. Well, I think what’s fun and this has been my biggest kind of hobby horse or whatever you call it, I’m kind of riding this off into the sunset lately, is I want families investing together more. I think it’s a great opportunity to teach family about money, teach financial literacy and get some great tax write offs in the mix. So if you’re paying your family members, your kids, your spouse, parents, I’ve done all those in over the years in different scenarios. Why not let them create a retirement account and invest with you there in a lower tax bracket. So paying them to invest with you could save you taxes. And then you’re also passing on a legacy that gets to be a point where you’re you’re like, I’ve made enough money. Now I need to teach my family how to do it. So I’ve created in our family a little LLC that has eight partners, eight different Roth IRAs. Cool. We have a little board meeting. What are we going to do? Are we going to invest in stocks or are we going to invest in real estate? Are we going to give a loan or are we going to buy into a little hair salon or a little restaurant? And that can be a fun experience where you have this family, LLC, where you’re not doing sweat equity, but you can certainly make decisions together and meet together. Can’t pay for a trip to Cabo, but you can make the decision in Cabo, just not let the LLC pay for the trip. OK, so but I think that’s fun too.
Mat Sorensen: Yeah, that’s a good one. I’ve always loved the clients over the years that I’ve seen that are doing this cool deal. And like the kids, Roth IRAs and their kid doesn’t even know that he or she has it. And it owns 1% of this LLC that owns this rental or an apartment building or something like that. That’s cool. So, all right. Now I want to give we talked about, OK, pros, let’s say hit the pros. I can partner multiple accounts and people into one investment generally using a multimember LLC. That’s the common way to do it. The con to that is I’ve got a partnership tax return can get novel people in there and I’ve got to do that anyways. If Mark and I just partnered in something personally in an LLC we’re going to a partnership, tax return. That’s just how it has been partnering. OK, the second con, though, is a little unique for retirement accounts. And that is let’s go back to that example of your IRA, your mom’s IRA and you personally. Let’s just keep it simple enough. And your IRAs got 50 percent. Your mom’s IRAs got twenty five percent. Twenty five. Now, let’s say you put in the top two hundred grand to do that deal. You need ten thousand bucks.
Mark Kohler: I knew you were going here.
Mat Sorensen: You need more money.
Mark Kohler: But that never happens in business. I never need more money. This is we’re going to make profit.
Mat Sorensen: The AC unit kaput. You bought the property one month later, AC unit and it’s not even lease the tenant left.
Mark Kohler: I don’t want to partner with partners that think this negatively.
Mat Sorensen: Yeah, I mean, prepare be prepared. Yeah. So how do I get I need more money in how do I get the ten thousand in.
Mark Kohler: Well mom’s IRA can do the whole thing.
Mat Sorensen: Oh no. That’s where they screw it up. This is where it can be a little clunky and this is one of the things you need to know when you’re doing this multimember partnership IRA/LLC. If you have these disqualified people in this LLC, you personally, your IRA, your mom’s IRA, these are all disqualified. So if I need ten grand, I’ve got to follow the same ownership percentages I had when I set the thing up. So I’m going to put in five thousand personally because I don’t know IRA. IRA, sorry, IRA is going to put in five thousand because it owns fifty percent. I’m personally going to put in twenty five hundred on the other twenty five percent and my mom’s IRA is going to put in the remaining twenty five hundred because her IRA owns twenty five percent. You have to follow those ownership percentages. When money going into the LLC, more money later. And as it’s coming out and you’re taking money out at the end.
Mark Kohler: Now some of you may go well this sucks, I can’t do it because what happens if we need more money than the annual contribution allows? So let’s say you need fifty grand and Mom’s got to put in twenty five percent, which is twelve five, and she can only put in seven grand assuming she’s over age fifty. So you’re like, well I’m setting myself up for failure. No. Can Mom roll in other IRA money from another location into the same IRA account and then contribute. Yes. So if you have other IRA accounts you could move money around if the IRA level to get where you need to be. I will
Mat Sorensen: Go ahead. I say yeah on that point too. I have some clients that do kind of like they do wholesaling and some options on real estate and they’ve got husband and wife account and kids Roth IRA and they each on one third and and they’re like, hey, every year we’re just going to throw in the six grand a year. Everyone’s accounts going to get six grand contribution or equal one third. We’re going to just throw in six grand a year. It works. We we’re going to make money and grow it off the investments that we’re making as we go. Plus, we get a pop in eighteen grand every year from six from each of us. And and they’re kind of like off to the races on that. So sometimes if you think it through and you’re planning to put more money in every year, think through how much can you contribute if you can kind of lay out a good structure and plan to.
Mark Kohler: Now some of you may be thinking, what happens if I have an LLC and we don’t have enough IRA money? That’s another podcast we’d like to do in the next two to three podcasts, a show about what happens when my Multimember LLC or my single-member IRA LLC is cash strapped. And Mat has researched this to the Nth Degree. There are some Department of Labor rulings that do allow for some unique solutions, but that’s a podcast for another day. So don’t worry about that. Just say we can make contributions now. Another one that I kind of like, that’s kind of a backdoor strategy. Let’s say your IRAs. In this L.L.C. need more than six or seven thousand, you don’t have other IRA money to throw in from another different IRA, could I create a solo 401k, make a contribution there and then roll that out to an IRA? That would be tricky.
Mat Sorensen: Probably not because your retirement age because you can’t throw it into a 401k and it can’t get rolled out in an IRA
Mark Kohler: Now. And the reason I bring this up is I want people thinking through this. Where could I find the money? Well, let’s say you have an old 401k. You may say, well, that’s not an IRA or if you’re not working there currently and it’s an old 401K, you could roll out a portion of that to an IRA to help make an additional contribution.
Mat Sorensen: Yeah. The other thing to consider is and I’ve had clients do this is just get a third party loan, you know, just to have a third party. If it’s a temporary expense, you need, you know, a brother or sister or someone else loan the L.L.C. money, they’ll get interest on it and then the LLC recovers. Whatever the issue was, they would just pay the loan off these get an unsecured. They could even secure it, bring in some debt to cover an unexpected expense. What I like to tell clients, particularly on real estate, because this is common real estate, when they’re buying an asset is like we’re buying the two hundred thousand property. Don’t actually fund it with two hundred thousand. I know that was the example I just gave, but like, you know, if it really is two hundred total, like you should be funding it with two 20 percent cushion there so that if something happens, tenants are out of unexpected repair. Come, you’re not having to scramble to get more money in it. Now, if the LLC starts doing well and you’re like, I’ve got plenty of cash flow, I just got money sitting there, remember, that’s good for your next deal. Or once it’s stabilized, you feel safe to just it out to send it back then to the IRAs that you personally or
Mark Kohler: Pay a big legal bill. You can pay big legal bill with it
Mat Sorensen: Yeah, just send us a big retainer.
Mark Kohler: Yeah, I’m not opposed to that. I’m trying I’m trying to think of other cons and right now, not really none come to mind. But let’s talk procedure now in these Multimember LLC ideas. This ain’t happening on Legal Zoom. And a lot of times the parties involved have a lot of questions. And you don’t want to play lawyer on TV and you don’t want to be accused of screwing over someone’s IRA, mom, dads, brothers, sisters or friends, whatever it is. And this is where directed IRA and KKOS lawyers have really worked in concert over the years, so. Plan on probably a two step process. I’m going to say this simultaneously, one option is. Have everybody start moving their IRA accounts or the IRA money they want to use for the project, start opening accounts at Directed IRA getting the money there. Sometimes I can take a couple of weeks or more, depending on who the broker dealer is that the money’s coming from. Meanwhile, you’re making an appointment with one of the attorneys. Our attorneys are going to be about one to two weeks. We always try to expedite that when there’s a transaction pending or a group. So don’t stress if you call us up and because you guys are out two weeks, that’s because we’re good. That’s not a bad thing. You want to be like, hey, these guys know what they’re doing there. That busy. But if you have a transaction,
Mat Sorensen: It’s like walking into the restaurant and there’s no one in it and you can get served immediately and like you think the food is good. Nope it’s not.
Mark Kohler: You’ve all had that experience. Oh, all the tables are open. Let’s leave so on. But be patient. We’ve had some clients lately, like you can’t get me in for two weeks. I’m out of here and we’re like, well, is there a transaction pending? No. Well, then what’s the hurry? Get it done right rather than fast sometimes. Now we know when there’s an urgent matter, let us know. But set up a consult with the attorney as you start the process of moving money and then. ahhh all comes together.
Mat Sorensen: You get the IRA accounts going, get the transfers going. At the same time you’re getting your appointment and we get the LLC docs going and we can get clients in usually within a few days that the law firm, we do have a little special calendar for directed IRA clients
Mark Kohler: And some clients don’t call up and say that we don’t want you to like. So if you are a directed IRA client, make sure you throw that down on the phone because the team members, male and female, that make appointments are like, oh, they’re directed IRA clients, they get red carpet,
Mat Sorensen: You get special treatment. So and we do have an intake sheet also at DirectedIRA.com that gets the accounts going and it gets the info for the LLC. So you go to directory dot com and the LLC page, you’ll be able to find that info. Also got a video on the multimember ILC. So yeah, that’s
Mark Kohler: A couple of thoughts you can pay for the legal work out with your own money. See, some clients are like, I don’t want to deplete my retirement account to pay the legal bill to set up the LLC. And you might be out a couple of grand by the time you do legal fees and all that. But to really pull together a project of money, that’s OK. It could be a little less than that. If it’s a single-member LLC, it could be more because we’re going to ask you, do you have your family trust completed? Let’s get all this done at once. I don’t know what the fees are exactly going to be, but you can pay for those individuals and let your IRA money be exclusively used on the project so you get a better end result. So don’t feel like you’ve got to deplete IRA funds.
Mat Sorensen: Yeah, and we charge just for an IRA LLC or the IRA owns one hundred percent. Eight hundred bucks plus the state filing fee multimember is fifteen hundred bucks plus the state filing fee. So it can be affordable and there is a prohibitive transaction exemption. Like Mark said, it’s 4975 D10 for the geeks out there through for that, legal fees are exempt from the prohibitive transaction rules so it works in this instance.
Mark Kohler: And we’ve seen clients pay twice that or more, three times that. So, you know, if you’re here gathering data, please note this is an infomercial, but it’s to let you know what’s out there. Yeah, it can be a jungle out there. I have something else. What do you have?
Mat Sorensen: Don’t I have one last comment here and we got to wrap up is there are ways some people can partner in deals without an LLC, the only one that I’ve seen that works is a tenant in common on deed to property, where let’s say Mark’s IRA owns, puts in half the money and it owns 50 percent tenant in common interest on the deed, My IRA puts in 50 percent of the money it owns. A 50 percent tenant commented on the deed. That’s fine. Here’s the problems, though, that I see with that. Let’s say it’s a rental property. What how’s the rental check going to get cuck is the tenant going to send half to mark and a half to me. What happens when there’s a bill paid? Am I going to send half the money? And Mark’s IRA is going to send half the money so it can get a little clunky sometimes. Like if it was raw land, you got to cut a property tax bill once a year maybe. But I think for rentals and stuff like that, it can be dicey. Maybe you get a property manager in the mix that can help solve that issue. The other thing that doesn’t work, though, is joint venture agreements. Joint venture agreements do not work with IRAs. There’s a few sophisticated ones. If you’ve had a lawyer prepare it and spent thousands of dollars, that’s more complicated than just doing an multimember IRA/LLC.
Mark Kohler: Yeah just do the IRA/LLC.
Mat Sorensen: The Multimember LLC is built. It works for this. If you want to do a joint venture, it’s going to be way more complicated and expensive and it may not get funded. There’s not many IRA custodians. I know that have done them. I think I’ve maybe allowed five here and these are super sophisticated structures with lawyers that signed off on them, not our firm. Other outside lawyers.
Mark Kohler: I remember what I was going to say, OK, so let’s talk about bringing these partnerships together. From a practical standpoint, I alluded to this a little bit about timing, but it’s more than that. Let’s say that you’re talking to your mom or your spouse or partner or family and saying, let’s do this. Maybe everybody’s not bought in at first and they’re not ready to open accounts yet. You can always start with a consult. You can always start with the consultation which we apply towards the LLC. If it comes together within a few week period where the consultation can knock out the same process on the front end rather than everybody being on board on the backend. So what I’m saying.
Mat Sorensen: The consult with KKOS Lawyers
Mark Kohler: Oh yeah. That’s the consult with the lawyers. So we’re not going to charge fifteen hundred dollars for the first appointment. If you just say I just want to have a partnership, call everybody on Zoom whatever and have the attorney explain how this is going to work, answer everybody’s questions and then if everybody’s like Oh yeah, I’m on board team go you know go team then that’s when the attorney can then start gathering data for the LLC and everybody can go be working under Directed IRA accounts. And I would add in this concert of parts coming together, if you’re doing cryptocurrency, be thinking about where am I going to have the wallet with these LLCs. You’ve got to apply for a wallet, sometimes three to four weeks out. It’s not as fast as getting a personal wallet at Coinbase or somewhere. Also, if you’ve got a real estate transaction going on, make sure you communicate with the realtor, the broker, the seller, the buyer, get an extension, or get a contingency that we’ve got to bring this LLC together. So the more you can help communicate with everybody, it’s OK. You know, it doesn’t have to happen overnight. A lot of people call up stressed out. They’ve got to do it tomorrow. And we get it sometimes you do. But also know there’s a lot of moving parts that you can start going. So they’re simultaneously coming together at one point rather than doing A, B, C, D, that could take you two months. But if you start acting at once, might take you two weeks. Yeah.
Mat Sorensen: Good call. Love it. And this is I got a chapter 14. This is my own copy of my own.
Mark Kohler: That’s the way you want me to sign up for you.
Mat Sorensen: Let’s not ruin it.
Mark Kohler: Oh my word. Oh that hurt. Hey, you’re in there. That’s true. Yeah, I cover the cover.
Mat Sorensen: I gave a good plug in the acknowledgements right before you even get into the book.
Mark Kohler: Read the acknowledgment section. It’s real. It’s really nice. Really. Well, straight is a Pulitzer Prize. Yeah. Yeah.
Mat Sorensen: Ok, well do you have anything else on this. No.
Mark Kohler: Get out and partner. You know, we tell people by one rental a year and they think, oh, I’ve got to have hundreds of thousands of no find two other suckers and go do it. I mean, starting by two other partners. Yeah. You don’t have to do every deal by yourself. Partner with others.
Mat Sorensen: Yeah. I mean I own real estate by myself, Mark and I own real estate together. I’m the sucker.
Mark Kohler: No, I’m just saying, you know. OK, all
Mat Sorensen: Right. Well, thanks, everybody. I want to give one last plug here. This is nothing important, OK? I’m sorry about that. I was just trying to like, you know, bring it into the show, pretend like it was planned for
Mark Kohler: President Biden’s on the phone. Wanting to Self-direct.
Mat Sorensen: Ok? Yes. Is the Self-directed IRA Summit.
Mark Kohler: Oh, oh. Oh my
Mat Sorensen: Gosh. Self-directed IRA Summit. April 23-24, you go to SDIRASummit.com, SDIRASummit.com, you can learn more about it. It’s a day and a half. We’re going to be up together again in Rexburg, out of the studio where Mark’s out, just bringing some awesome self-direct education. We’re actually going over today. Some of the content we’re planning for. It will be awesome.
Mark Kohler: Sounds like a Sonny and Cher reunion. It’s going to be good. So and we’re going to do breakout groups. We really want people to collaborate, network a little bit on this as well, but really just get some hardcore content because it’s hard on a podcast or a webinar in one hour to just vet everything. You can’t do it. And so the summit is extremely affordable. Sorry you cannot attend in person. The one in the fall, you know, tentatively is going to be here in beautiful Phoenix, a little charity golf tournament involved, lots of good Mexican food. Can we do that? We will put in my hat right now for some good Mexican food. I’m up in Idaho. There’s not, you know, meat and potatoes. I mean, you want a good rib eye? Come up to Idaho and a baked potato like a baked potato salad and baked potato. We got that down, but not the enchilada with green sauce, you come to Phoenix.
Mat Sorensen: Yeah. Yeah. So, so. All right. OK, thanks, everybody. Week.