It happens to the best of us— a few miscalculations, and suddenly your self-directed IRA is looking a little cash poor.
Investing in assets that have bills to pay takes a little more navigating than the typical stock or bond. Though real estate, private equity, and other alternative assets can be excellent investments with outlandish returns, they also come with expenses your IRA needs to pay— and that can cause issues if you don’t have the liquidity to cover those expenses.
But you’re not totally sunk if you find yourself low on funds— there are some things you can do:
Get More Funds into Your IRA
What choices do you have if your IRA doesn’t have enough cash? The easiest options are contributing to your IRA directly or move funds (through a transfer or rollover) from another IRA or qualified plan. If you haven’t maxed out your contributions for the year, that’s often the easiest option with little paperwork. If you already have money in another retirement account (at IRAR or somewhere else), it’s not hard to do either— you can move those to your self-directed IRA with no penalty.
If neither of those are an option, all is not lost. You could also get a non-recourse loan, partner with another investor, or sell all or part of an asset to meet your obligation.
One option is to contribute to your IRA. If you haven’t already maxed out your contributions for the active tax year(s), this is the easiest way to get more funds into your IRA. As long as you have earned income this year (and are not at Required Minimum Distribution age for non-Roth account holders), you’re eligible to contribute. Limits change every year, and they vary by account type and age.
TIP: Sometimes you’re able to contribute for TWO tax years at the same time. After December 31st of the previous year, contributions can still be made until the tax deadline (usually April 15th). During that time, contributions for the new year can also be made (until April of the following year).
Transfer or Rollover from Another Retirement Account
You can move other funds from another institution to your self-directed account, either through a transfer or a rollover to cover your IRA expenses.
You can do an unlimited number of IRA transfers each year, unlike rollovers, and these aren’t taxable or reportable to the IRS. If you want to keep some stock in your Merrill Lynch account, you can do that— and if you run into a bind in your self-directed IRA, that stock can be liquidated and transferred to cover those costs.
TIP: Transfers can take a while. If your paperwork is complete, IRAR sends the request within 2-3 business days— but some other custodians can take as long as two weeks to process a request and send your funds to us. Keep that in mind.
If you’re in a time-crunch, a rollover is another option. You need to initiate this process with the provider where the funds are located (using their forms), otherwise nothing will happen. Just note— you’re only allowed to do one rollover per 12-month period for all your retirement accounts (unless coming from an employer plan), and these are reported to the IRS— so watch out, because a bonus rollover could mean the funds count as an excess contribution (which comes with a 6% annual penalty until withdrawn) and can’t be deposited back into your IRA.
TIP: This process tends to be a little faster than a transfer (since there’s no back and forth between custodians), but it’s essential you start the process with the correct institution (the one holding your funds to be moved) or else the transaction won’t occur.
If you’re still not sure what option is right for you, our blog on the differences between IRA transfers and rollovers has more information.
Get a Non-Recourse Loan
Your IRA can also get a loan if in a crunch, but it must be a non-recourse loan— a type of financing where the asset is the only collateral. With IRA investments, you can’t personally be obligated to pay debt for the IRA (that would be a prohibited transaction).
TIP: if your IRA borrowed money to purchase the asset, this new debt-financing is also subject to Unrelated Business Income Tax (UBIT).
If you IRA already has a loan, non-recourse loans can be refinanced just like a traditional loan. Reach out to loan providers to get more information about their process and rates.
Bring in a Partner
To avoid taking out a loan, your IRA can partner with others. You effectively sell a portion of the asset to your partner, giving your IRA access to a cash influx.
Your IRA and your new partner then need to split all income and expenses based on ownership percentage, making your IRA’s monthly payments lower.
For example, say IRA investor Erika Johnson owns a property worth $100,000 in her self-directed IRA. She decides to sell 20% of it for $20,000 to a friend of hers, Donna Garcia. She’ll need to re-register the deed to show the new ownership percentage:
IRAR Trust Co FBO Erika Johnson IRA 80%, Donna Garcia 20% as to an undivided interest
Now that they’re partners, Erika’s IRA gets 80% of all income, and needs to pay 80% of all expenses— so everything from rental checks, utility payments, to insurance invoices. Donna personally owns the other 20%, so she personally gets 20% of the income and pays 20% of all expenses.
TIP: After the original purchase, you or any other disqualified persons cannot partner with your IRA. Donna is a friend of Erika’s, so this is okay— but if Donna was Erika’s mother or daughter, that would be a prohibited transaction.
Sell an Asset
Of course, you can always sell another asset in your plan. This is an easy way to raise funds. You’ll need to find a willing buyer (one who isn’t a disqualified person), but after that point it’s simple.
Submit an IRAR sell direction letter and a contract reflecting the terms of your agreement. Our team will go over your documents to ensure correctness and IRS compliance, but we will not vet the deal for you— that is something you must do yourself beforehand. We’ll reach out if we need any additional paperwork from you.
Depending on the type and location of your asset, their may be additional local or industry-related requirements. To prevent any headaches, do your due diligence before selling any assets.
Tips to Avoid a Cashflow Crunch
Do the Math
Before investing, consider the long-term viability of your investment. What’s the cashflow? What are the expenses each month, each year, what’s the anticipated income? What happens if something goes wrong? If you keep these things in mind, you’re less likely to run into crunch.
Compare the Costs
Check the cost of your IRA provider to make sure you aren’t paying more than you expect. Do you have enough in your IRA but fees are eating your savings alive? Even a difference of 1% in plan fees can make a dramatic difference in how much you pay and save.
Keep Cash on Hand
Especially for real estate investors, it’s a good idea to leave a little liquidity in your account in case of unexpected expenses. How much of a safety net did you leave yourself? You can’t plan for every cost, but you can give yourself a little cushion in case of any complications.
No IRA investor likes when their account runs dry— but luckily, there are ways to solve this (and now luckily, you know them too!)
If you’ve already maxed out your contributions, looking to funds from other retirement accounts is always an excellent option. Otherwise, you can always find a partner, look for a loan, or sell some or all of your asset to get the funds you need to pay your bills.
Do you have any questions? IRAR would love to help. Contact us and one of our IRA experts would be happy to assist.