Using a Self-Directed IRA to Purchase Real Estate

Written by Posted On Monday, 18 December 2017 08:15

If you have retirement funds in an IRA, you may want to consider rolling your funds into a self-directed IRA in order to buy real estate. However, funding investments this way needs to be done carefully to make sure that you are following all the IRS rules.

IRS Allows Real Estate Investments

When self-directed IRAs first became popular, there were issues with whether real estate could be included as investments. Now, however, the IRS states that you can use these funds to purchase investment properties as long as:

· You or a member of your family does not live on the property

· All money connected with the investments flow through the IRA

· You don’t sell the property to a disqualified person such as a spouse, parents, grandparents, great-grandparents, children and their spouses, grandchildren, or great-grandchildren.

· All property is titled through the IRA

As long as you follow the IRS rules, then using your self-directed IRA is a great way to increase your retirement funds. However, not following the rules will be a nightmare.

Why A Self-Directed IRA

When the IRA was first created, it was to be a fund managed by investors to help your savings grow. However, many people did not like the idea of someone else making decisions about their retirement funds. Thus, the self-directed IRA was formed.

With this retirement investment vehicle, you have more control over your investments. Although the investments are owned by your IRA, you have the ability to buy and sell property to create a higher ROI within your IRA.

How to Avoid Issues

The IRS states that self-directed IRAs can own property, but that the ownership cannot directly benefit the owner of the IRA, just the IRA itself. Of course, as the owner of the IRA, you will benefit when you begin taking your money at retirement, but you have to be careful that you don’t benefit before that time. If the IRS feels that you are receiving benefits as an individual rather than the IRA owner, you will be penalized and taxed for money invested with the IRA.

This means you should always use a self-directed IRA custodian that knows the right way to set up the IRA and understands IRS rules. Without proper management, you could end up losing money rather than making it.

Opening a Self-Directed IRA

Opening a self-directed IRA is not a difficult process. You simply need to find an independent administrator to serve as a trustee or custodian, who can walk you through the steps of setting up a self-directed IRA.

There are a few ways to fund your new IRA account:

• New money. However, with this option, you will only be able to add the maximum IRA contribution each year.

• Rollover an existing IRA through a direct trustee-to-trustee transfer

• Rollover an existing 401(k) as long as you are not currently working for the company holding that account.

Once you have the IRA account funded, you can begin investing.

Finding the Right Custodian

All self-directed IRAs must be held by a custodian that is licensed and regulated. These can include banks, credit unions, trust companies, or non-bank custodians. Most brokerage houses handle traditional IRA accounts, but very few will handle a self-directed IRA. Make sure you take the time to interview the custodian you will be working with. Ask as many questions as you can regarding how you will work together. Knowing upfront what your custodian's responsibility is and how you can manage your account effectively will make the relationship run smoothly.

In addition to making sure they are appropriately licensed, here are some things to look for in a good custodian:

• Does the custodian have good customer service? Ask for references as a good way to determine how they do for other investors.

• Is the custodian financially sound? Ask to see their financial statements and most recent audit report.

• Is the custodian insured by the FDIC, SPIC, or both?

• Does the custodian carry errors-and-omissions insurance to pay for any penalties or taxes incurred by their own errors?

• Is the custodian available via many communication sources, i.e., email, telephone, fax?

• Are the fees reasonable? Ask to see a fee schedule for all charges you might encounter when investing with your self-directed IRA.

• Does the custodian understand the IRS’ rules and regulations regarding real estate investments?

• Do you feel comfortable talking with them about all aspects of your portfolio?

Investing in real estate using a self-directed IRA can be a great way to grow your retirement wealth. However, it is imperative that you do it correctly, following all IRS guidelines. For more information about using retirement funds for investing, give me a call. I’d be happy to discuss your investing needs.

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John Trautman

John Trautman has spent his entire adult life in real estate. Purchasing his first property at 23, he learned the process of flipping and real estate holding from the ground up. Real estate continue to be his passion while he spent eight years as an account executive and later a vice President for Washington Mutual in the mortgage division. Holding the position of President’s Council and several years of President’s Club, he learned the lending business from the mortgage office perspective and lender perspective. Throughout his life he has also been a small business owner, commercial real estate holder, property designer, and house flipper.

During the downturn, John followed the deal to Detroit, Michigan, where he invested in single family rentals and multi-family dwellings. Once his returns were realized, he moved quickly to Arizona to invest in another distressed market.

His passion for making a deal and real estate has lead him to create a hands-on real estate investment mentoring club called Real Estate Knowledge Institute

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