How to Partner Your IRA with Others When Doing Deals

Full Podcast Transcript:

(00:00) how do I use my IRA with my friend or some other investor there’s other structures to do there and frankly it’s simpler so we’ll come to that here in a second cuz the rules are different and if I can make a 20 to 30% return holy crap this is why we do this and we pull our money together and it’s exciting it’s not that complicated we are passionate about this topic today this is exciting this is where we start to really go to the next level with the potential of self-directing we’ve in this series have been explaining every
(00:30) little step along the way and now it’s time to take the top off yeah right let’s get crazy yeah we’re going to get creative today and talk about how your IRA can partner with others in deals your IRA may be the cash partner in a deal and someone else is the work partner in a deal how do we structure that maybe it’s your IRA your traditional IRA your Roth IRA your spouse’s Ira your HSA your kids Roth IRA your Esa maybe I can put all those accounts combine the funds into one LLC to do a type specific dealer trans
(01:00) action so we’re going to go over those rules kind of the options common structures we see and things you can’t do yeah can I start with that yeah I think let’s just come right on to the gate and say this when we say partnering with others it’s not selling your LLC owned by your IRA to a family member it’s it’s coming together I like how Matt said combining co-investing it’s co-investing at the front end of the deal if you’re already in a deal with your retirement account or you’re in a deal personally combining
(01:33) that in a a structure to self-direct is nearly going to be impossible cuz the Train’s already left the station so this is oh there’s a little analogy of metaphor is you’re in the train station now and you’re buying the ticket who am I going to sit by where are we going to go and let’s get let’s get on this train this is going to be awesome and so that’s when you’re having that conversation is when you’re buying the train ticket and then we’re going to all aboard and go if the Train’s already left the station you’ve seen that it’s not pretty
(02:01) people trying to jump on a train after I me you can be exciting you need a stunt man for that yeah there it could be tragic there’s could be some you know prohibited transactions happening there at the train stop so and that’s really what we’re talking about here is you know from the prohibited transaction rules what we’ve talked about and if you haven’t make sure you go back to that episode self-directed Ira rules prived transaction it’s a whole chapter in my book lots of content marking I’ve done on our YouTube on that as well but
(02:25) basically your IRA can’t transact with you personally it can’t buy or sell something so if I have an IRA that owns an LLC 100% now the Train’s moving yeah well that Train’s moving now my IRA owns at 100% now and I’ve already done that I can’t have my spouse’s Ira come in I can’t personally come into that LLC because now I got to buy some of that ownership from my IRA now I’m transacting with my IRA but if my IRA and myself are at the train station at the same time or my IRA my spouse’s Ira are sitting there at the train station
(02:54) we say hey let’s go do this together let’s get on the train together and go do this investment and you’re like all right my IRA will put in 50k my spouse’s Ira puts in 50k let’s set up the LLC from the very beginning 50/50 now that LLC can go out on the train we’re going to go do this deal that’s going to take 100K to do and so that’s a classic example of what’s very common actually is multiple IAS coming at the very beginning they’re not transacting between each other they’re co-investing at the same time taking an allocation of
(03:25) ownership based on the dollars they’re putting in and now we’re going out to do a transaction and sometimes you know I get clients like that they’re like hey Matt we want to do this buy this real estate deal for 300K I’ve got 100K in my IRA my spouse has 200k we can’t do it separate but if we go in together we could do it great onethird to your IRA putting in 100K two3 to your spouse let that LLC go and buy the property for 300 I love it and what you’re going to hear out there is a lot of misinformation people that are like well you can’t you
(03:54) can’t do deals with your IRA you can’t do a deal when the trains already left the station and and they don’t know or they don’t clarify what they’re saying and so what we do is public we hear oh I can’t do deals with my I my IRA can’t do a deal with family or I can’t do this or get well that again that’s on day two but we’re on day one we’re planning we’re coming together and the the law the IRS the cas all of the the rules out here under orisa say it’s okay if you’re planning at the outfront of this so I wanted to say that because you will hear
(04:28) disinformation that’s wrong because they they’re not either explaining it fully or they just don’t know and so when someone says you can’t do a deal with your IRA know that they mean a deal that’s already underway we’re talking about doing deals before the deal is is embarked upon yeah yeah so you got to know at the beginning at the front end you got to know this like Mark said the train can’t leave the station and what we’re talking about here at first is how do I do this with my IRA my family members my spouse’s Ira
(04:59) maybe it’s even my traditional my Roth how do I combine these different buckets of money we might have to go do an actual transaction a lot of people like to co-invest and do this next what I want to talk about though is what if it’s just other people how do I use my IRA with my friend or some other investor there’s other structures to do there and frankly it’s simpler so we’ll come to that here in a second because the rules are different yeah I so let’s just I I’ll give this first piece of advice and that is kind of have in mind
(05:28) a plan before you start embarking on these conversations with either family or friends yeah because you can look dumb you can get twisted around you can waste money you could even set up entities that are in the wrong State you might end up working with the wrong custodian or trust company that doesn’t know what they’re doing so the first thing I like to encourage people when they say I want to deal with do a deal with friends my my spouse has money my kids have money let’s do it let’s get form in an they call it the law firm and
(05:59) go we need an C and we’re like okay what’s the deal well we don’t know yet so at least have where you kind of want to go we do want to do real estate or we want to do crypto or we want to do notes or we want to help we want to all go in on a syndication that has a certain price point or something and we’re all accredited investors or whatever it is so have a general plan so that when you’re collaborating and bringing your people together they they feel like there’s some good leadership there they’re not nervous it makes sense that
(06:30) so let’s go over a few examples here I think it’d be helpful to conceptualize this in like some scenarios because Mark just rattled off some factors to think about and those really end up in being some of the classic examples we see the first one we kind of mentioned a little bit earlier is maybe it’s a real estate deal that’s 300K and I said I said earlier and we need that’s maybe my Roth IRA my traditional IRA my IRA my spouse let’s combine a couple retirement accounts into an LLC to do that deal that’s very common that’s going to be
(06:57) called a multi-member IRA l c this is a little more tricky than a single member IR LLC where your IRA owns at 100% okay so when we’re doing this multi-member irlc where it’s your IRA maybe your spouse’s Ira or some other disqualified family member we’ve got to go in at the same time we break up the ownership based on the dollars invested it’s going to cause a partnership tax return it’s not a single member LLC where there’s no tax return return of the IRS there’s going to be a partnership tax return for this LLC there’s no tax due but you do
(07:27) need to file a partnership tax return to 10 65 and then also when money’s going in and out of that LLC and let’s say it was 13 2/3 when you set it up your IRA put in 100K to that LLC spouse’s Ira put in 200k to the LLC your IRA is going to own a third your spouse’s Ira is going to own a third well let’s say there’s $110,000 of profit you want to get back to the IAS from the LLC 3,333 is going to yours 6,667 6,667 let’s say it’s going to go to your spouses okay it’s going to be broken down based on the dollars invested let’s
(08:00) say you need to put in $10,000 more dollars to the LLC to cover an AC unit that went out you didn’t expect or whatever well you’re going to have to fund that one3 two3 your IRA would put in 3,300 bucks you know spouse would put in the 6600 and change okay so anything going into that LC and out that ownership’s fixed it’s got to go in based on the ownership percentage it’s got to go out based on it okay so that is sometimes a downside so I don’t want you to think of this as technically think I’m going to put money in every
(08:26) year it’s going to come out every year most people and the first example I gave there are saying hey let’s get the money in there we need let’s go make the investment let’s make sure there’s enough in there so we don’t need to put more money in later let’s let that thing cash flow appreciate maybe there’s some income coming to the LLC let’s go make a new investment from the LLC you could go buy a new asset okay or maybe we send it down to the IRAs if we want to do other things with them at the IRA level that’s
(08:51) certainly possible too so that’s option one I like it now uh great concept now I’ll get I’ll put real one other real example I’m in week two of this now I I actually turned on my computer and didn’t plan on talking about this but a Red Angus uh heer came up on my computer screen yeah I was showing some family last night this is what my cows are going to look like in my health savings account so about two weeks ago Patty and are like meeting with a rancher in Hebrew City Utah that said hey I you could if you buy some cows I can put
(09:24) them on my land and I’ll take care of them and graze them and next year you can sell the calves that grow this that are born this year and then we’ll start the process over rinse and repeat you know the and yada y we won’t get into the cattle operation but it was kind of fun we’re like all right and so we thought about it and we had our health savings accounts with enough money that if we combine them yeah we could pull this off and so I so I pulled up this Red Angus picture here and then I also was going to pull up the LLC right here
(09:55) so I just so two weeks ago we cut the deal we had a plan the ranchers like okay you’re going to buy 10 bread heers which would cost about $3,000 a cow that’s already pregnant and in the next month uh they’re going to give birth to 10 Cals so you’re going to have 20 Cals at the end of the process so we put together a budget of how much to buy these that’s $330,000 then we need operational costs to get us through the year and with combining our two hsas see you don’t have to have thousands of thousands of dollars to do this this was
(10:26) fun for us and I’ll show you the business plan here real quick too but by the time time we combined our money mine I’m looking at it right here had 77% in units okay and Patty had 23% cuz it was prata between the money we put into it and we formed the LLC in the state where we’re doing business so the LLC is up and going meanwhile I called up direct at IRA and said hey I need to have my HSA liquid because we’re going to go invest in this LLC and they’re like okay so simultaneously this is the important Point find the account you want to use
(10:58) you’ve got your plan make sure it’s ready to go with the cash your partner your spouse whoever you’re going to get to partner with you they’re pooling their money get them at direct at Ira get them on the chat call whatever open the right account listen to the last you know two or three podcasts here in the train and that’ll teach you how to do that meanwhile you’re getting your LLC going be working on both of these at the same time now I just got my bank packet yesterday so we are opening an LLC and then directed Ira is going to transfer
(11:27) the money over for the two accounts in into this LLC and I was just going to show you so my business plan I actually did a real business plan wow I like this did you like this so 30,000 to go out we think it’s going to be about 12 Grand to maintain these cows throughout the year I did put in a worst case scenario 18 Grand now cows right now this is you know make America healthy again you know grass-fed beef whatever these cows are going to weigh between 800,000 pounds next march they’re selling for about 2500 bucks so if I don’t have any cow
(11:59) die on me you know I’ll have 10 cows to sell one year from now and I’ll have pregnant cows again MH so those 10 cows should sell for about $25,000 now it cost me 12 to 18,000 to maintain them during the year I still have my original moms that are pregnant again so now I’m at a profit margin worst case scenario of about seven Grand 7 Grand divided by original investment of 30 I’m at a 23% Roi 23% worst case scenario and I’ve got some other ideas here that are going to be fun I’m going to pre-sell the cows to my followers
(12:35) that want a cow in advance pre- breed that I’m going to like have a uh a webcam during Roundup and during the year they can come out and pet their cow if they want and then next year they get grass-fed beef in their freezer all year round bam that’s an extra rev man it’s going to be good a value ad value value ad but I’ve got my business plan we pulled our money we’re opening the bank account and we’re going auction in about two weeks okay so but but I’d say I you know We’ve joked about me owning cows in my HSA before well I’m doing it again
(13:07) round two and if I can make a 20 to 30% return holy crap this is why we do this and we pull our money together and it’s exciting it’s not that complicated some of you are doing this with several hundred grand several million or several 10 thousands whatever do what you love Yeah and this is what self-directing is all about you get to choose the Investments now real estate’s going to be the most common right and there’s other assets this keep me crypto you know um so these are the types of things you can do the concept for today of
(13:37) course is how are you partnering Mark and patney are partnering their hsas this could be their Roth IRA their traditional IRA doesn’t matter but we’re combining multiple accounts we break up the ownership you go in at the same time okay and um then when these cows sell to that LLC that you’ve got Mark can keep doing that that LC can keep doing the next deal right and it can keep getting that 20% Roi or whatever he hopes to get um so that’s what this is about and that’s a great example right there let’s talk about the second example that I see
(14:05) that’s common non-f family no I’m say stay with the family for a second then we’ll go the second one I see a lot that I like is hey Matt I’ve got 50,000 in my Roth IRA my spouse has 50,000 in theirs we want to go in 50/50 into an LLC and then every year we want to be dropping in our 7K a year into this LLC as well or maybe it’s brand new four Roth IRA accounts it’s mine my spouses two of my kids they got kids Roth they got income and we’re going to be dropping in 7K a year and reach 25% in that LLC so I do see
(14:41) sometimes families or spouses where they go in at the same amount because they want to do the annual contribution and get it into the LLC now if you’re doing that I want to go over a couple of things one is um that could be a great strategy sometimes I’m like just do your own Investments do your own IR LLC 100% have your spouse do their own you can do your separate Investments anyways some people like no we want to go in together we don’t have enough money to do the deals we want to do but if we combine it’s going to be much more easier better
(15:10) deals better opportunities so when you’re doing that annual contribution each year two things you got to remember one you go in based on dollars invested so if every if you’re 5050 you each need to put in the exact amount if you reach 25% again equal ownership everyone’s putting in the same amount to keep their equal ownership and 7,000 is the annual contribution now if someone’s over 50 and someone’s not they can’t do the 8,000 the other person does s the other thing is you don’t put the money in the LLC you don’t own the LLC
(15:43) the IRA does you make contributions to the IRA and a directed Ira you tell us all right now put the additional money as an additional investment into the LLC so just make sure that’s sometimes a common mistake people like I just put money in the LLC you don’t own it your IRA does well it’s contribution well your LLC is not tracking that are you reporting from your LLC to the IRS your annual contributions to your IRA no you’re not you’ve got to go through the IRA custodian so make sure you get the money to the IRA and then the money goes
(16:12) from the IRA LLC same thing when you take money from the LLC you don’t take money from the LLC you don’t own it it goes back to the IRAs based on their percentage of ownership and then you could take a distribution from the IRA which is of course something you do later on in retirement yeah you got me doing math over here because I’m like all right what’s my project Ed HSA contribution and I have 77% ownership so practically Patty and I are not equal but it’s okay you could you’d have to put in more and she could only put in
(16:39) less because she could only take 23 if she if she put in you know 5,000 and you put in 5,000 that’s going to adjust the ownership because she’s going to be putting in more than her 23% of the LLC and Mark’s HSA wouldn’t have been putting enough which means that the ownership would have to adjust or there’s going to be an imbalance which causes this prohibited transaction issue so she could put in next year 23% of 5,400 which would be her single contribution limit and vice versa when you’re over age 50 sorry everybody you
(17:10) want to have separate hsas because you both get a thousand if you do a family HSA you only get a thousand uh combined combined so you want that’s strategic for us but anyway so that’s good I I like that um that’s a great little tip snuck in there by the way yeah so now I’m going to throw this out to let’s go to the non-family I think with the nonf family it opens up another option and that’s where you have Service Partners yeah which gets really exciting so in our situation with Patty and these cows sticking with that example we can’t go
(17:42) work on the cows we can’t eat the cows we can’t uh we could go pet them maybe but we can work on the ranch with our HSA cows that would be prohibited now we might buy cows from this Rancher that are very similar down the road yada yada but the point is our HSA cows have to be sold to someone else and managed day-to-day by someone else well let’s say the Rancher is like hey I love what you’re doing here guys bring me in for a third and I won’t charge you anything I want to share in the profit by a third and now you can cut down on your
(18:14) operational cost and I’ll just be a working partner you guys pay for the cows I’ll find the land I’ll pay you know I’ll pay for the vet I’ll do everything throughout the year and you know what you guys will make more and I’m excited because I want to be a part of the process I think we could do more because I’m going to be more invested in this whatever and it could be a real estate deal you know someone that’s like hey I’ll do the Fix and Flip labor you guys pay for the house with your retirement accounts and again it allows
(18:41) you to maybe get in a bigger deal because you don’t you didn’t have enough money to capitalize the whole deal without having to pay for someone to work it now you get the worker for free because they’re earning equity on it so but you can’t do that with family so that this opens us this whole new door that you can still work with family on the co-investing but the labor has to be a non-prohibited party and again another aspect that could be a really big win-win win yeah we see a lot of these llc’s we used I had a client that was
(19:11) doing these in California as a lawyer he would he took 50% of the LLC and he’d go buy a Fix and Flip property he’d bring in IRAs that were the cash partner that did the other 50% and they sometimes it’s just one that took that whole 50% or is a couple of them that took that ownership of the other 50% allocated for the cash partners and and they got their percentage based on how much dollarss they put in for that 50% then they go do the deal they get their money back then they split the profits based on their
(19:37) percentage and he probably did 30 or 40 of those llc’s and he still has many of those because they sell a property after he flips them and they’re in California it takes a lot of capital to acquire and do those deals and then it goes and does another one right and so you can be the cash partner in those scenarios with your IRA with someone else who’s the work partner that’s doing the deal that’s getting allocation it doesn’t need to be 50-50 it could they’re getting 10% for the work or 20% frankly it’s whatever you negotiate what the
(20:03) deal is or it could be the business opportunity your IRA could be the Cash Money partner in a business opportunity for example where there’s other people getting ownership for doing the work and actually operating the business so a lot less restrictions there because it’s just other third parties um and by the way that can’t be your son that you’re doing this with with your IRA or your daughter that’s starting a new business or that’s going to go do the real estate deal they can’t get an allocation for services or work because they’re
(20:30) disqualified to your IRA this is Shifting value of your IRA to them they’re a disqualified person so would be the same thing even with you personally you can’t be the work partner in an LLC now one other like variation of this though is you can be a cash partner personally in an LLC with your IRA so you could say well I’ve got 100K of personal cash and you know 50k in my IRA I’ll take 23ds of an LLC in my IRA gets one3 or 5050 or 80 20 whatever it is but we can do that as well where your I is a cash partner with you because
(21:04) we’re breaking up ownership and value solely based on dollars there’s no unfair benefit going one way or the other we’re strictly doing it on the cash but you can’t get ownership for just doing work or finding the deal person yeah I want to repeat that because that that was a big reveal here in this this podcast is Yes you heard it right let’s say it’s Patty and I that are doing this again the cows my HSA puts in money her HSA puts in money I put in money after tax personal money she puts in personal money now we have
(21:34) four Partners but we raised twice as much money now we wanted to do the whole deal in our hsas because we wanted this profit to go back to the hsas and buying more than 10 cows ultimately 20 here in the next month or two that’s a little that’s a that’s a big project for us so we’ll see how it goes next year but we could close down the LLC and start fresh and that could work too but the point is you you can put in money not labor and still be a partner in that LLC last point I’d make here is bringing this maybe full circle is this is not
(22:10) one to be embarked upon lightly this is not you playing around with your software creating the LLC get your partners that you want to work with on a call all together with one of the tax loyers we would represent the entire group you don’t need competing lawyers and expensive partnership agreements and all that crap it’s one LLC one tax lawyer bringing everybody together on a zoom call and answering their questions you look like a superhero because you were smart enough not to play lawyer on TV yeah so you get there bring the team together
(22:44) the lawyer will lay it out on a red carpet boom you’re in business before you know it you start trying to play lawyer you’re going to f it up yeah and our trys at kqs lawyers do this every day they’ve got all the Reps in they’ve been trained by Mark and I they all know what you can do can’t do how to structure this properly we got the right operating agreement that’s got the right Provisions in here whether you’re using directed Ira or any other company you got to make sure it’s got the right Provisions in there and so we’ve of
(23:09) course got a team here that knows how to do this can take care of it there’s other lawyers other professionals that could certainly help you and feel free to use those make sure they know what they’re doing um but we’re certainly a resource and the and the multi-member irlc we charge 1,500 bucks at our La fir plus the state filing fees and then of course you got the IRA account cost too depending on how many accounts you might have they’ll be an annual fee um for those accounts so um that’s frankly a steal $1,500 for a multi-member LLC you
(23:36) can go big city firms they can’t even get their head around this without saying that’s going to be three or five grand and oh my gosh we got to find out if you can do this yeah you’ll you’ll pay at least twice as much at some other place and so um so it might sound if you’ve never used a lawyer before that might sound a little bit high but that’s you know anyway we don’t have to get I feel like I got to sell you on it is like if you want to do it it’s going to take you a little bit of money money if you’re like guys I don’t want to do all
(24:00) that that seems a little complicated let me just do other self-directed Investments I’m not going to partner with my family or everything that’s much simpler it’s a lot easier less expensive you may not even need to talk to a lawyer or CPA okay uh you’re investing in a private company or a private fund or syndication or even crypto you don’t need all that professional help necessarily you might have questions and you might want to engage that but when you’re coming over here we’re going to say it’s likely you’re going to need to
(24:24) talk to a lawyer and almost certain to get it done right cuz um but you know you might use this structure for 10 20 years and it could be the same freaking structure and so this might have a little upfront costs but over time it’ll be a valuable structure you’re going to be using to investing in the assets you know combining these different accounts and resources you might have to have greater opportunities and possibilities so it could be a really huge benefit for you well thanks everybody uh we hope that we are unlocking your American
(24:49) Dream this is an exciting exciting um time where the retirement accounts are more unlocked more clarity on what you can and can’t do than ever before and the theme or slogan has always been invest in what you know and we want to help you do that so this is a great way to pool money get more Capital get more uh create creative and get people in the in the project that you need whether it’s service or their money so we wish you the best we hope that our information is super helpful we’re not going anywhere we’ll be here again next
(25:25) week talking about real strategies and self-direct and we have an entire team uh at the company that can help you at any moment so thanks everyone and we’ll see you next week and thank you everyone for listening a quick disclaimer and reminder this presentation does not constitute an attorney or CPA client relationship and it is always in your best interest to consult competent legal and tax professionals when conducting your own personal transactions we also want to make sure you know this is not investment advice or financial advice
(25:57) we’re just trying to give you education ideas and strategies you can take to your professionals or conduct your own research on we’ll see you next time