I receive a lot of questions about this topic. Most of us put our savings to purchase real estate. There are a few using IRAs. This is also called Self Directed IRA.
Most IRA investors use their retirement plans for stocks, bonds and mutual funds. However, very savvy investors choose the Self-directed IRAs. These investors can invest their IRA capital in traditional places as well as wider range of investments, such as real estate, private loans and other alternative assets. They have the potential to assist communities in a tangible way.
Here’s how a Self-Directed IRA Investment Works. While there are limits on the amount of out-of-pocket contributions made to an IRA in a given year ($5,500 for those under 50 in 2018; $5,500 for those 50 and older), there are no limits on the amount that can be rolled over or transferred from an existing retirement account (such as a 401(k) or existing IRA) to a self-directed IRA. Nor are there limits on the amount that can be invested from the account.
To purchase real estate in a self-directed IRA, funds come from the IRA and, once settled, the IRA owns the property — not the investor. Once the IRA owns the investment, all expenses related to the investment are paid from the IRA and all profits, which are tax-advantaged, go directly to the IRA.
For many investors, IRS rules could sometimes cause headaches. If commingle personal funds into the building or use funds from the building to pay yourself as the owner or even manager of the property, you could destroy the whole arrangement if you don’t know what you are doing. Investing in real estate is hard enough, but investing in real estate while having a whole new layer of rules and regulations that can trip you up at any time may be too much for most real estate investors.
Furthermore, there are certain financial institutions, (custodian account holder) that support the increased investment flexibility of self-directed accounts, however. Equity Trust, Broad Financial are a few such custodians.
There are certain investments the IRS doesn’t permit for an IRA, however, such as collectibles (artwork, stamps, antiques and the like), life insurance and certain coins. It’s important to consult with your tax attorney or other financial professional before investing in a self-directed IRA.
Written by Harry Hui – Exit Excel Realty