There may be some who are not familiar with Self-Directed IRA’s. They are not universally used, but those who have the right conditions surrounding their retirement and their retirement assets, may very well benefit from opening this type of IRA.
What is a Self-Directed IRA?
As everyone on the planet knows, an IRA is an Individual Retirement Arrangement, better known as an Individual Retirement Account. It allows people to put money in an account to save toward their retirements. Along with this type of savings account come many tax benefits.
A “self-directed” IRA is different because it allows you , the owner of the account, control over deciding what kind of investments you want to make, and directing the investment that you choose all by yourself. This type of IRA allows you to invest in “non-traditional assets”, like real estate, small businesses, lots, and many others.
If you are interested in real estate investments, you are in luck, because this retirement tool will allow you the flexibility you need to start your foray into a world that is interesting and rewarding.
1. Real estate investing is allowed using a self-directed IRA. That’s good news, because not every type of investment lines up with the Internal Revenue code.
2. When you decide to open a SD-IRA, you will be required to attain a “Custodian”. He is not in place to protect your IRA, but to hold your money in an account and make investments; not guide you nor instruct you. That means you will have to do your own due diligence, which will put more responsibility on you. You will be in charge of navigating all the rules and tax laws for your own investments. For example, there are penalties for early withdrawals. Once you find your investment entity the account holder must review and sign it, and your custodian must approve it and release the funds to you.
3. The requests, transfers, and deposit from your IRA account to your new SD-IRA account are not a swift processes, so you have to plan ahead so so you won’t get ahead of yourself, especially in the real estate market when, sometimes, time is of the essence. Normally, it takes about two weeks just to open the account.
4. The most important reason you would want your SD-IRA to be used for real estate investments is that over time there is an expectation that your investment will appreciate in value. Any tax deduction on the depreciation of the property is disallowed when using an SD-IRA. You cannot take advantage of any profits you accumulate until you retire.
5. If the investment you have made makes you a 50% interest holder, your family or other companies you may own cannot be involved in any dealings having to do with the property. This type of IRA, like other IRA configurations, cannot be used for collateral on a loan.
6. Even though this type of investing may look like plenty of work (and it is), all expenses incurred (taxes, insurance, maintenance…) are paid by the IRA. All income, on the other hand, is tax deferred. In case your tax bracket is going to be lower than your current one when you retire, this could benefit you quite a bit. And, another plus is that you can make tax deductible contributions to your SD-IRA.
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