A self directed IRA may seem to be the perfect vehicle for many of you to add to your retirement savings plan, even if you have an established 401k. In fact, it may be perfect because you have an established, existing retirement account. And if you find yourself in that group of people past age 50 who have nothing set aside for retirement, then self directed investing is certainly worth checking out.
Far too many people are under the mistaken belief that job sponsored retirement savings plans and mutual funds are the only options for them. If you check out the actual performance and fees associated with that performance in many mutual fund plans, you'll see that the company is garnering part of the money from any growth.
Another misconception is that a self directed IRA is too narrow in terms of investment vehicles. We'll dispel that notion in this page. You'll see a wide range of choices. Here are just some of the allowable self directed investing possibilities...
Real estate, (both residential and commercial)
Real estate notes or deed of trust
Tax lien certificates
Oil and gas investments
Judgements or settlements
Precious metals in the form of silver or gold coins along with some other metal options
I'll give you a few examples. Did you know your self directed IRA can purchase an investment property? Yes, it can do this. You can improve the property and rent it out for positive monthly passive income. That rental money goes directly into your self directed IRA. It isn't considered a yearly contribution so there isn't a dollar ceiling. It just adds to your account value. Your IRA also gets the incredible tax benefits of owning residential real estate.
If you decide to sell the property, as long as you follow the rules, there will be no tax on the profit while the money is growing in the IRA account. You are not limited to just one property at a time, so multiple rentals are an option. As I type this, there are rules about how many actual house sales are allowed in a calendar year before the IRS could consider your IRA a business.
How about if you a have a decent sum of money in that retirement account, but don't want to be involved in the actual real estate holding business? Maybe you'd like to be the bank? You read that right. Your IRA can lend money to someone looking to buy property. You set the interest rates and the length of term. Once again, if the money paid back goes into the IRA, there is no tax due until you begin to draw it out.
Maybe you'd like to direct your account to buy silver eagle coins. You can do that. You can also buy gold bullion. If you feel that those precious metals will go up in value, you can buy them and then hold on until you feel the time is right to sell them. Once again, the profit just adds to your account value.
You've heard the commercial jingle, " You have a structured settlement and you need cash now." Those guys don't pay face value. They buy that note for 50% to 60% of value and then they get the monthly payments until the note matures. You can do that too within your IRA.
Following the rules and getting educated are the two keys to making this work. We'll go over those parts now. We'll begin with a basic list of self directed IRA rules.
"Self dealing" rules prohibit owning a business within your IRA if you are an officer or have controlling interest in that business. The best move is to keep complete arms length from any investment. There are too many good options to risk an IRS interpretation that takes your account out of IRA status.
You may however, create a limited liability corporation that is owned by your IRA. This entity will then be assigned it's own tax ID number, (EIN.) The is a great option if you'd like "checkbook control" of your funds.
If I decided to ever buy real estate within my personal IRA, I would pick this option. It costs a bit more to set up, but that checkbook control is a definite advantage. Here is a link with some good information on this innovative investment possibility.
When I was in the real estate rehabbing business in past years, I ran it as a business LLC. My self directed IRA was holding other types of investments.
If you use your IRA for the down payment on a rental property and need financing for the rest, you must be certain not to use any of your personal money. When we get to the part about custodians, you'll see this point again. The short answer is to never co-mingle IRA funds and personal money.
You may not purchase real estate from family members, nor may you purchase real estate for family members. Further, you may not be that bank that we referenced a couple paragraphs ago for a family member. Just keep that arms length idea in mind and you'll be fine.
If you have a vacation home owned by your self directed IRA, you can't use it. Actually it is suggested that two weeks per year may be allowed, but I tend to err on the side of caution. There are too many good ways to dramatically increase your retirement account balance to risk it by cutting corners.
You cannot lend money to your self. You may not pay yourself back for work on your IRA owned investments. Just do the work and consider your compensation to be the increased value of your tax deferred retirement account.
Self directed IRA education is obviously essential. Within that category is picking a custodian. Every self directed IRA must have a custodian. And there is a big difference between a true custodian and an IRA administrator. Custodians face much greater scrutiny and are fully versed in the niche they represent. Administrators are basically salespeople for services within a company.
When picking a custodian, find out if the company has been around for a while. Are they experienced in the areas in which you seek to invest? Are their fees reasonable for what they provide? Do you get full value for their work? And can they provide you with timely, accurate information? Do they have an accurate, available library?
My self directed IRA is with Equity Trust. There are many others of course. But when I entered this area, I didn't know too much. I read a few good books and did my research, but that doesn't eliminate the apprehension of making that first investment with real money. They were able to advise me and prepare all the necessary paperwork. They knew what they were doing and did it very well.
I found that Equity Trust had very knowledgeable people and an excellent source of written information. I need details and am very cautious. Be sure to pick a company that meets your investment goals and risk tolerance. Be sure to pick a company with a proven track record of working for their clients.
Please consider reading those books included in our list of classic books that apply to investing. The first choice should be "Rich Dad Poor Dad" by Robert Kiyosaki. This book will get you started with the correct mindset for investing success.
I'll close this page with a brief discussion of Traditional vs. Roth IRA. In case you didn't know, in a traditional version, you get to deduct your yearly IRA contribution up to a certain income limit. Any profit is taxed as ordinary income when you reach retirement age. With a Roth version, you don't get that yearly tax deduction, but you are also not taxed upon retirement withdrawals. You'll need to decide which is best for you.
If you are not willing to invest some time into your financial education, a self directed IRA may not be best suited for you. But if you are willing to do some work, this concept can absolutely boost your golden years income. If you have nothing saved yet, this method will help you catch up in the shortest time, even if you are nearing retirement age with no savings. Col. Sanders didn't make it big until he was well past age sixty.
This investment vehicle may be your method to jump start that retirement account. If you have an existing 401k, you may roll that account or part of it into an IRA and begin to use these methods to grow your account value. Just be sure to pick a company that specializes in a self directed IRA.