As you plan for your financial future, there are many investment strategies out there. Employer-matched retirement accounts are the easiest way for many people to prepare for their futures. However, there are a vast number of different options to help you reach your goals. Traditional and Roth IRA’s are popular options for individual contributions, set at a $6,000 per year cap. For those looking for a way to reach multiple financial goals or diversify their portfolio into nontraditional assets, a self-directed IRA may be a better option.
What Is A Self-Directed IRA?
Unlike an IRA that your employer offers, you can control what is invested in a self-directed IRA. With a self-directed IRA, you can invest in alternative asset classes, which include real estate. Anyone can set up a self-directed as long as you meet the income requirements and have the right person set it up. So what’s the difference between a self-directed IRA and other IRA accounts?
- You have more options for investments when you use a self-directed IRA.
- Self-directed IRA benefits include mitigating risk while staying invested in assets that can generate profits long-term.
- Congress allows taxpayers to take early distributions from Self-Directed IRAs to fund various expenses ranging from education expenses, down payments, or a series of early withdrawals for retirees.
Restrictions To Be Aware Of:
- Material Benefit Restrictions
- You cannot live in a property owned by your self-directed IRA. Additionally, if you’re a real estate agent and buy a property to put in your IRA, you cannot take a commission.
- Material Participation Restrictions
- You cannot maintain the rental property in your IRA. If you get caught, your IRA may lose its status.
- To do any maintenance work, you will have to pay someone else to do the job. Many forms must be filled out and the time involved in receiving the payments.
- Custodian Requirements
- You cannot use just any bank to open your bank account. You must have a custodian open your account. These custodians will hold title to property your IRA buys for your benefit.
- Depreciation Benefit Loss
- If you hold real estate in your IRA, you lose the benefits of depreciation. You do, however, get the benefit of tax-free income and offset of any IRA contributions.
There are a few cons to self-regulated IRAs that you should be aware of before you leap. The SEC heavily monitors and regulates retirement accounts. Additionally, there is a lot of paperwork and fees involved with a self-directed IRA. Before you open your IRA, you should be aware of the rules and regulations associated with the account.
Using IRA To Invest In Real Estate
You can invest in a Real Estate IRA, which is just a self-directed IRA that holds the property. Often, a ‘Real Estate IRA’ contains the deeds to properties themselves. You can apply real estate IRA’s to the following investments:
- Residential Homes
- Multi-family housing
- Condos
- Commercial Properties
- Foreign Real Estate
- Raw Land
- Farms & Ranches
When using your IRA to fund a mortgage, there are some guidelines you must follow. If you support a mortgage with a Self-Directed IRA investment, it must be on a basis. This means any lending has to be secured by property within the self-directed IRA. Investors can buy, sell, or flip properties as well as move funds between projects while maintaining the tax-deferral status of the IRA.
If you’re looking to reinvest retirement money in different accounts or diversify your portfolio, a self-directed IRA may be a good option for you. To get more information on whether a self-directed IRA is right for you, ask your financial advisor or head over to https://americanira.com/self-directed-iras/#resources for more details.
