Self Directed IRA’S
Is your IRA in the toilet? Have you ever wondered if there was a safe place for all that IRA money? Someplace you can plant it that wouldn’t cost you in penalties when removed from a dying IRA Account before you retire? Someplace safe that won’t lose a dime?
I have the answer for you. And it is not a gimmick. It is being done all over the country by savvy investors.
In one easy move you can transfer your money to a Self Directed IRA. What does this mean? It is still a retirement plan. The big difference is that instead of someone else investing where they think your money should go, you direct them to place it where you want it to go.
A Self-Directed Individual Retirement Account is an IRA that requires the account owner to make investment decisions and investments on behalf of the retirement plan. IRS regulations require that either a qualified trustee, or custodian hold the IRA assets on behalf of the IRA owner. Generally the trustee/custodian will maintain the assets and all transaction and other records pertaining to them, file required IRS reports, issue client statements, assist in helping clients understand the rules and regulations pertaining to certain prohibited transactions, and perform other administrative duties on behalf of the Self-directed IRA owner for the life of the IRA account. Self-directed IRA accounts are typically not limited to a select group of asset types (e.g., stocks, bonds, and mutual funds), and most truly self-directed IRA custodians will permit their clients to engage in investments in most, if not all, of the IRS permitted investment types (an almost unlimited array of possibilities including foreign real estate). Some of the additional investment options permitted under the regulations include, but are not limited to, real estate, stocks, mortgages, franchises, partnerships, private equity and tax liens. Self-directed IRAs, by allowing a wide range of investment choices, improve the account owner’s opportunities to diversify their IRA portfolio(s). Some investments, such as life insurance or collectibles as defined by the Internal Revenue Service, are not permitted in IRAs. Also, if real estate or any other investment asset held in a self-directed IRA has been employed for personal use, or to gain any other personal benefit (other than a return for the IRA), in the view of the IRS or the Department of Labor, the IRA(s) may become immediately taxable. In addition, if the IRA owner is younger than 59 1/2, the IRA will be subject to an early withdrawal penalty of 10%. It is important, however, to understand that the IRA account holder is responsible for compliance with all codes and regulations. While a custodian’s job is to follow the directions of the account holder as a non-discretionary trustee, a custodian cannot ensure compliance or give legal or tax advice. Therefore, those interested in self-directed IRAs should seek education offered by an unbiased source.
This biggest advantage is this:
You can direct your IRA to purchase Real Estate! It is true. There are rules for this. For example you cannot buy a home for you to live in. You cannot buy or sell from/to a direct relative. And you cannot take the income from the property.
But you can buy rental properties to generate income into your IRA.
Let me give you an example:
Let’s say you have enough money in your IRA to buy a duplex outright. You transfer your money to a Self Directed IRA, and have the IRA buy the property. Then direct all the rents to the IRA (which you must do). Your IRA will grow back from the rent. And when the time comes to draw from the IRA you can sell the property and will still have the money from the rents in the IRA.
Here is a possible scenario:
Let us say that you paid $100,000 for the duplex (just to round numbers) from your IRA and then you collect rents from the property for 10 years at $1000 per month into your IRA. You have generated $120,000 in those 10 years from the rents that are growing safely in the IRA and you still have the property, which could continue as income for retirement, or could then cash out upon retirement. At cash out, one would hope that in ten years the economy would have recovered and the property would have gained some value, which could put more money in your pocket, in addition to the original investment purchased, plus rents.
Your $100,000 in ten years could turn to $220,000 in value in this case, even if you just got what you paid for it.
Now let us take it a step further. You have the IRA generating $1000 per month and you don’t want that money just sitting there. At first you could be safe and buy something like CD’s to generate safe growth, even though t is small. After a year you may have accrued a slight gain in the $12,000 from rents. After several years you may have accrued enough of a gain that would allow you to buy a small house outright. This in turn could generate more rent.
You can see how this could snowball with the right clear headed thinking. On top of this, by following some rules, you can also take out a loan for a property with the IRA. This gets complicated and talking to the right people is a must. But the possibilities are huge for anyone willing to do a little research.
With a tanking economy and home owners quickly becoming renters this may be a much safer bet then the losing prospect of the stock market.
Remember, before doing anything with your money, be sure to check with your accountant or financial advisor.
How is your retirement fund performing?