Did you know you can buy investment property using your IRA? In this article I’ll show you how you can use a Self Directed IRA to invest in real estate using money you already have in your existing IRA account. I’ll also give you insights on my own personal experience investing in real estate with a Self directed IRA.
I’ll also hook you up with some good resources to find out more, and even set up your own Self Directed IRA.
I Wanted an Alternate Investment
If you’re like me, your investment accounts didn’t do well because the stock market crashed, then took years to get back to where it once was. I also had the difficulty of my income getting slashed almost in half during that time along while also paying cash for my wife’s two college degrees.
I had wanted to get into real estate investing for a long time but didn’t know how I could swing it. I didn’t want to go into debt to buy real estate, but also didn’t have the cash available to just go out and buy a house.
After doing some research, I found out about Self Directed IRA’s.
How Does a Self Directed IRA Work?
A Self Directed IRA is simply a different way of setting up your IRA retirement account that converts your existing account into an LLC (a Limited Liability Company). Setting up your IRA as an LLC allows you to invest in alternative investments such as real estate, businesses, franchises, tax liens, private placement stock, loans, mortgages, and other investments that are usually prohibited under traditional IRA rules.
The vast majority of people who have a self directed IRA use it to invest in real estate.
However, there are some investments that are prohibited even under the Self Directed IRA account rules, such as collectibles (Art, Beanie Babies, coins, etc.), Life insurance contracts, as well as any investment that would be considered self dealing such as buying a house and renting it to yourself.
By the way, you can also set up a Self Directed Roth IRA and Self Directed 401k in much the same way.
What Are The Advantages of Buying Real Estate Witha Self Directed IRA?
Converting your standard IRA to a Self Directed IRA account can work to your advantage because it allows you to diversify your investments beyond the usual limited choices of stocks, bonds, and mutual funds. You can invest in real estate that appreciates over time, plus collect rental income that feeds directly back into your IRA account to be used for more investing.
Just like a typical IRA retirement account you can’t take money out for your present benefit without paying taxes and penalties (Your tax rate + 10% penalty). Also, you can’t start taking money out without penalty until age 59 ½.
The biggest advantage though, is that you have more control over your investment destiny, and many more options than just picking from the typical list of stock or bond funds within your average IRA account.
Setting Up a Self Directed Account
Setting up and administrating a Self Directed IRA account can be a bit complicated. It’s probably not the best fit for someone if you tend to be disorganized or if you’re not willing to put in the time to gain total understanding of how it works.
Setting it up is not cheap, either. The typical fee for setting up a Self Directed account usually comes to a few thousand dollars due to the amount of paperwork and fees involved in setting up the LLC. There is also time spent consulting with the professionals that set everything up for you. They spend a lot of time to guide you through the process to make sure all the I’s are dotted and the T’s are crossed.
There are a lot of rules you have to be aware of with a Self Directed IRA. But once you understand what kinds of transactions you should avoid, it’s not that complicated.
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