Setting Up the Deal

This phase of the process is not much different from investing privately with your non-retirement funds. You have to identify the investment and decide whether you think it’s suitable for you, negotiate the terms, set up any entities through which you will own the asset.

Your SDRA custodian will hold the investment, but it won’t negotiate it, establish the terms, determine the structure of the deal or set up the investment documentation.

  • If you want to purchase a piece of real estate, for example, you have to find the property, hire a lawyer, and negotiate the deal. Your SDRA then signs the purchase and sale agreement.
  • If you plan to make a loan, you have to discuss the loan with the borrower and establish the interest rate, term and security.
  • If you are considering an investment in a private venture being offered by someone else, you have to review the offering and decide whether you think it’s a prudent and suitable investment for you to make.

All of these activities are done on behalf of your SDRA, the ultimate investor.

Proceed with caution. This is an area where many people get themselves into trouble with prohibited transactions or miss key potential tax issues that cost them later.

Here are a few do’s and don’ts:

  • If you are buying a piece of real estate, make sure you have the money in your SDRA to make the initial deposit before you make an offer. Once you’ve negotiated the terms of the deal, it takes a few days at least to give investment instructions to your SDRA’s custodian, have the custodian accept the investment, and tell them where and how to send the money.
    • Make sure you have a clear idea how long it will take for your SDRA custodian to process your request for a check.
    • Make sure that your seller has realistic expectations about how long it will take for you to get the earnest money to them from the custodian.
    • Remember, you may be competing with others not constrained by the inherent delay involved with a SDRA custodian.
    • Don’t make the contract between yourself and the seller. That creates extra problems because eventually the seller has to sign a new contract with your SDRA and you have to get the deposit you gave from your own funds back.
  • Because of the inherent delays involved in having the SDRA custodian process your investment instructions, many people decide to use a “checkbook LLC.”
    • You can set up an LLC in any state. For most states the process takes about 24 hours and can be done online.
    • Your LLC should be established in the state where you plan for your SDRA to own and operate the property. If you plan to rent the property to tenants, you will be doing business in the state, and if you form the LLC in another state, you have to register also in the state where the property is located. That means two filing fees. Filing in the same state as the location of the property avoids that extra expense.
    • In order to have money come from your SDRA, the LLC has to have a bank account open. That means you need a Federal tax identification number. You may be able to one online.
    • If you want control over the LLC’s checkbook so you can write the check for the deposit, you have to be the manager of the LLC.
    • Don’t forget, many custodians don’t allow investment in checkbook LLCs, so be sure to clear that with them before you establish the entity.
    • The custodian has to own the units in the LLC, so that means the custodian has to sign a written operating agreement. Make sure the operating agreement is one that the custodian will be willing to sign.
    • Decide how you want the money to be sent by the custodian. Most will send checks payable to the LLC for deposit, but they charge extra fees for wire transfers and overnight delivery services.
    • Don’t deposit any of your personal (non-SDRA) money into the bank account just to open it. You’ll end up with a technical prohibited transaction. ALL of the money that goes into the LLC’s bank account has to come from your SDRA.
    • Go to the bank with your signed operating agreement and tax id number and open the account. If they money is being wired, some banks will keep the account open for a few days until the money comes in. Make sure that the account will be held open until the money comes in. It’s normal procedure for a bank to close an account overnight if there is no money in it; so when the wire comes in the following day, it bounces back to the custodian.
  • Make sure you are completely clear on the paperwork and documentation the custodian will need to accept the investment directive. It’s frustrating and time consuming to start over again or backtrack because you didn’t submit something they need.