A self-directed IRA is a great way to build tax-free wealth. Learn how it works, how it’s different from traditional retirement accounts, and how you can use it to grow your real estate portfolio.
What is a Self-Directed IRA?
IRA is a tax-protected retirement account. Most people go to any bank and open an account and let the bank decide on what assets to purchase. The banks get to choose whether your funds go to aggressive or non-aggressive investments. These can be government bonds, mutual funds, stocks, or other traditional assets.
In comparison, a self-directed IRA is when you are now in charge of where these funds go. You can decide whether you want to use your IRA to invest in:
- Real Estate
- Private Companies
- Precious Metals
- Oil & Gas
- Mortgages
- Promissory Notes
- Livestock, etc.
There are some basic rules that you need to understand when it comes to you and your IRA.
- You and your IRA are two separate entities. You don’t own the assets, your IRA does. This is why all of your transactions need to go through a custodian. We can help you decide who to look at and what questions to ask when selecting your IRA custodian.
- You can’t use your property for the benefit of yourself or the people considered as “disqualified” by the IRS. You can see the list of disqualified persons here.
- Self-dealing is also prohibited. This means that if you are a business owner, your business cannot benefit from your self-directed IRA real estate investment. A list of prohibited transactions is listed here.
Now that we have a few of the rules out of the way, you may be wondering where to start when you want to invest in real estate with your self-directed IRA.
5 Steps to Invest In Real Estate Through Your Self-Directed IRA
Step 1. Open a Self-Directed IRA through a Custodian
SDIRA custodians offer different kinds of assets, so make sure that the custodian allows for real estate investments.
Step 2. Fund Your IRA
You can either transfer your IRA funds from your previous custodian to your self-directed IRA, rollover funds from another IRA custodian or contribute new money to your new self-directed IRA.
Step 3. Find an Investment Property
Make your investment goals clear before you decide on which property to purchase. You may be looking to find a consistent monthly cash flow, or you may also prefer waiting for a big pot of gold after years of appreciation.
Step 4. Instruct your Custodian to Make the Purchase
After the seller accepts your offer, your custodian handles the paperwork and uses your IRA funds to pay the deposit. Afterward, you and your real estate broker open escrow.
Step 5. Close Escrow
Once your title company is ready to close, you need to submit some paperwork to your custodian. The title company then closes your escrow.
This process can be overwhelming at the beginning but the wealth-building rewards can be as incredible. Real estate as a hard asset helps diversify your retirement portfolio. It can provide you a tax-protected monthly stream of income and appreciate in the long-term.
You think it’s still too much for you? You can instead become a private money lender using your Self-Directed IRA. Read more about it here!
We do not provide tax, legal, or investment advice or endorse any products, services, or investments of any time. This information is for educational purposes only. We encourage you to consult investment professionals.
