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A Best Kept Secret - Self Directed IRAs?

Updated: Dec 2, 2018

Are the ups and downs of the stock market making you nervous? Do you feel like you have no control of your own retirement future? Do you want to secure your retirement by diversifying your investments beyond the traditional stocks, bonds and mutual funds? If these topics are on your mind, you might want to hear a secret that can help you.

The Secret Is…..

You can use your retirement funds to invest in real estate. Nope, you won’t get fined or penalized by the IRS when you rollover your old 401Ks and IRAs into a self directed IRA (SDIRA).

What is a self-directed IRA?

A self-directed individual retirement account (SDIRA) is an individual retirement account (IRA). As the name implies, it’s an IRA where the investor “directs” the investment decisions. How is it different than your current IRA? A SDIRA is the same as a “regular” IRA, except for the fact that you have an opportunity to invest in assets beyond just stocks and bonds, and YOU direct those investments yourself. Most people don’t know about other IRA options beyond the traditional stocks and mutual funds that firms such as Fidelity and Vanguard offer. But, there is another way…

How it works?

Through a self-directed IRA, you direct how the funds are to be invested, and the options available to you almost limitless. Not only can you invest in stocks, bonds and mutual funds, but you can also invest in real estate, real estate syndications, private placements, notes, metals and much more.

It’s very easy to convert your IRA to a self directed IRA and begin diversifying your portfolio into real estate assets. The SDIRA still offers the tax deferred benefits that an IRA offers. However, 401(k) plans work a little differently; if the individual is still employed by the company that sponsors the 401(k) plan, he or she can't move the money. However, if it's an old 401(k), a rollover is possible. We have had many clients consolidate old 401ks from previous jobs and roll them into a new SDIRA. This is how I started investing in my first apartment syndications as a passive investor. The process was fairly easy and straightforward.

The growth of the investments in your IRA is tax deferred. If you set up a Roth IRA, the growth is tax-free. For example, if you invest a $100,000 in a real estate syndication, and double your money in 5 years, that growth could be tax-free. Through a self-directed IRA, you can invest in commercial real estate syndications, which, like investing in mutual funds, would be entirely passive. You simply choose a syndication or real estate fund you would like to invest in, and direct the custodian of your self-directed IRA account to invest the funds on your behalf. Any returns that you make on the investment goes right back into the self-directed IRA account.

Top 4 Reasons I love investing with my Self Directed IRA:

1. ​Investment Diversity: With a self-directed IRA, you can diversify beyond the market into real assets. You are able to hold “real” real estate, not just mutual funds that hold real estate – meaning you can own the actual property in your retirement account, or invest in real estate syndications like many high net worth individuals do.

2. Investment Control: The account owner makes every single investment decision and ultimately determines how, where, and when to invest the retirement funds.​

3. Tax Benefits: Investing over time in a tax-advantage account, like a self-directed IRA (tax-deferred/tax-free profits, plus the possibility of large tax deductions), can have a tremendous effect on future wealth.​Secure Hard-Earned Assets: Self-directed IRAs are afforded protection under federal bankruptcy laws to ensure assets are secure.​

4. Why haven't I heard of a self-directed IRA before?

​Self-directed IRAs are not new - they were established in 1974. But, mainstream brokerage firms don't offer them, therefore, they aren't widely advertised. The Retirement Industry Trust Association, a self-directed IRA industry trade group, estimates that assets in these types of retirement account only represent 3-% of total assets held in IRAs. The biggest difference when rolling into a self-directed IRA is that you need to a "trustee" or "custodian" of the account. You are the director and decide what to invest in, but the "custodian" provides the IRS regulations of keeping your IRA separate from yourself. Investors looking to open a self directed IRA need to open an account with a specialized firms that offers SDIRAs. There are many custodians who offer self directed IRAs, below are a few that I have come across. As always, do your due diligence when finding the custodian that fits your needs. Midland IRA, Advanta IRA, IRA Services Trust Company, and New Direction IRA.

Be aware of IRS regulations

As with any IRA, you need to be aware of IRS regulations pertaining to real estate investments within SDIRAs. In an SDIRA, the individual investor (not the custodian) is solely responsible for complying with IRS regulations regarding their investments.

You will want to learn all the IRS regulations for real estate investments in SDIRAs, but the top 3 no - no’s are:

1. You cannot purchase property for personal use or for use by a disqualified person. For example, I had an investment property in a ski town that I rented to guests on airbnb, and my family also used it for vacation ski trips. This would not be allowed if the property was purchased in my SDIRA.

2. The investment must be tiled in name of your IRA, not in your personal name. If you invest in commercial real estate syndications, the IRA signs all documents.

3. All expenses must be paid from your IRA, and all income must be paid into your IRA.

Self-directed IRAs are a fantastic vehicle to diversify your retirement accounts and jump into real estate investing. Now that you know this little secret, you can begin directing your own future.

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