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How To Maximize Your Investments Funds with Partnering

Learn how to increase your buying power with an investment strategy that allows you to partner your self-directed accounts with others.

Posted on February 5, 2024


It's no secret that people choose self-directed IRAs because of the many benefits they offer, like reducing taxes and providing options for alternative investments in your retirement portfolio. They are also very powerful accounts for real estate investors, as they allow the possibility for utilizing creative investment strategies. But how do you invest if your account is small? One of the great features of self-directed IRAs is that they don't have to be used on their own. Self-directed IRAs can work together to increase your buying power using a beneficial strategy called “partnering”.

What is Partnering?

Partnering is when one entity (or more) and an IRA come together to put up the funds for an investment. In this strategy, all parties have a vested percentage of ownership in the deal. When doing this, the ownership percentages are decided at the beginning of the investment and must remain the same throughout the life of the investment. This means that any profit the investment receives is returned based on this percentage of ownership. Additionally, the IRA would be responsible for its percentage of any expense associated with the investment, too.

For example, let's say you partnered your IRA with your friend's IRA to purchase a rental property for $200,000. Your IRA invested $150,000 or 75% and your friend's IRA invested $50,000 or 25%. When any expenses occur, 75% of the expense must be paid from your IRA, and 25% will be paid from your friend's IRA. When you earn rental income, your IRA receives 75% of the earnings and your friend's IRA receives 25%.

Partnering doesn't have to be done with just retirement accounts. You can partner with any self-directed account, including Health Savings Accounts (HSA) and Coverdell Education Savings Accounts (ESA). You can also partner any type of alternative assets, such as real estate, notes, and private placements. This is an easy way to leverage your IRA and other people's IRAs to take advantage of more investment opportunities.

Who Could Benefit from Partnering?

Partnering is a great strategy for a variety of people. For investors who are just getting started, partnering allows the chance to participate. Even owning only a small percentage of a total investment allows a small dollar IRA to gradually grow. For example, parents will often partner their child's ESA with their IRAs so they have more investment opportunities.

There are also many occasions when a good deal on an investment property is available, but an investor doesn't have enough money in their IRA to make up the total cost of the purchase. Being able to partner with another IRA account or another money partner provides the ability to purchase the larger investment.

It is also beneficial for account holders that have multiple IRAs. For those who want to utilize all of their accounts at once, this is a great way to have all accounts involved in one deal. Overall, partnering provides more possibilities for accounts to be involved in deals when they may not have been able to before.

Who Can Your IRA Partner with?

You can partner with anyone. You can partner with your spouse, your children, your friends, your business partners and their self-directed accounts. Not only can one or multiple accounts be partnered together, self-directed IRAs can also partner with personal funds. When partnering with personal funds, your IRA has a percentage of ownership and you do, too. This is not the same as doing a transaction with yourself. Keep in mind that when partnering with yourself or other  disqualified persons, the percentage of ownership is decided at the time of purchase and must remain the same throughout the life of the investment.

How is Partnering Different than a Prohibited Transaction?

If you haven't heard about disqualified people and prohibited transactions, it's important to know these terms to better understand how partnering is different. Disqualified parties are certain people or entities that your IRA is not allowed to transact business with. Your IRA cannot buy, sell, loan, trade, or extend a service to or receive a benefit from either directly or indirectly with a disqualified party. How partnering is different is that you are not receiving a personal benefit from the transaction other than the growth of your investment. Your IRA and the other investor's IRA are pooling resources to purchase an investment. As long as you are not purchasing the real estate investment from a disqualified party and you are keeping the ownership percentages the same throughout the life of the investment, it is not a prohibited transaction.

Partnering Dos and Don'ts

  • Do your due diligence - Perform due diligence on both the investment and the person you are partnering with.
  • Do know the rules - While you can partner with a disqualified party, you still cannot violate the prohibited transaction rules.
  • Do check the structure of the partnership - Ensure the ownership percentages stay consistent, including your percentage of expenses. Note: your custodian will automatically split the earnings for you.
  • Don't do business with anyone you don't know and trust - Ensure they are someone you can work with and always do your due diligence.
  • Don't partner on an investment that you already hold title to - You cannot partner with someone on an investment you already own or is owned by a disqualified party.
  • Don't pay expenses on your investment with personal funds - This is no different than any other investment held by your IRA. Your share of the expenses must come from your self-directed account. Your partner's share of the expenses must come from their self-directed account.

Being able to combine funds with other investors and IRAs opens a door to a whole new world of possibilities. Understanding how to partner accounts will allow more investors to grow their retirement savings faster. For more information on partnering or how to maximize all of your self-directed IRAs, give a Quest Trust Company IRA Specialist a call at 855-FUN-IRAS (855-386-4727). To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

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