When you save for retirement, usually what comes to mind are things such as employer 401(k) accounts and traditional individual retirement accounts (IRAs). But that’s not the only path toward security in your golden years.
One alternative? Setting up a self-directed IRA. This kind of retirement account allows you to make a broader range of investments. Instead of being limited by the stocks, bonds, and mutual funds a traditional IRA provider chooses for you, a self-directed IRA allows you to choose and put capital in alternative investments, such as real estate.
See why this could be the right plan to achieve your retirement goals. Walk through the process of setting up your account and using a self-directed IRA for real estate.
What are the benefits of using a self-directed IRA for real estate investments?
Self-directed IRAs are unlike any other investment fund, naturally bringing unique benefits to the table. These and other perks make it easy to decide if a self-directed IRA is right for you.
It diversifies your portfolio.
One of the biggest differentiators of investing in real estate is that, unlike other investments, it provides ROI potential beyond traditional assets such as stocks and bonds. This diversification enhances your portfolio’s stability and returns because real estate is uniquely untethered from the stock market, shielding you from volatility.
It offers tax advantages.
Don’t want to deal with tax headaches? Investing through a self-directed IRA can offer tax-deferred or tax-free growth on rental income and capital gains, so you don’t pay taxes until withdrawal.
Your investment may also be fully tax-deductible if you fall under certain income thresholds. There is a catch-up provision of up to $5,550 or $6,500 per year for those over age 50.
It gives you control over your investments.
Your money, your choice. A self-directed IRA empowers investors to make their own decisions. Those with expertise in the real estate market can leverage that knowledge to maximize returns.
Once you fully understand the benefits of using a self-directed IRA to invest in real estate, the adventure begins. IRAR has you covered with a step-by-step guide to acquiring real estate with a self-directed IRA.
Step 1: Do your homework.
Before you make any moves, do your due diligence. A few dos and don’ts for using a self-directed IRA in real estate can guide you toward investing effectively and lawfully.
Conduct thorough research.
Ask critical questions about the investment. Take time to ensure the property aligns with your financial goals and that you can honor any regulatory requirements.
Avoid prohibited transactions to ensure IRS compliance.
A real estate investment is just that: an investment. Neither you nor any disqualified persons may use or benefit from the property or engage in prohibited transactions.
This means you can’t actively use the property, whether as a vacation home or something else. You also can’t purchase from or sell the assets to a disqualified person or permit them to provide services to your assets as it constitutes self-dealing and is a conflict of interest.
Step 2: Set up your self-directed IRA.
Ready to roll? While there’s more than one way to manage a self-directed IRA, getting started is easy. Determine the account type that works best for you and the most practical way(s) to build it up.
Open your account.
Work with IRAR to put everything together or set up your IRA online. You have your choice of account types that fit your goals, including:
- Traditional IRA (pre-tax dollars)
- Roth IRA (post-tax dollars)
- Individual 401(k)
- SEP IRA
- SIMPLE IRA (for small business owners)
Fund your account.
“So, do I just make a deposit?” If it’s your first time using a self-directed IRA to invest in real estate, having questions about money is natural. You can fund your new account in any of three ways:
- Transferring funds from an existing account of the same type
- Rolling over funds from another retirement account or old 401(k)
- Making annual contributions in line with IRS limits
Step 3: Fund your investment.
As you consider specific real estate investments, make a game plan for where the money will come from. While it’s designed to help, your self-directed IRA may or may not be able to do the heavy lifting.
Purchase with cash.
Money burning a hole in your account? If your self-directed IRA holds enough cash, you can purchase the property outright.
Partner your funds.
You don’t have to be a one-person show. Combine your IRA with other IRAs or personal funds from investors or your own pocket for the initial investment. After the transaction, your IRA will just split the ownership, expenses, and profits based on your percentage of ownership.
Form an LLC with IRA funds.
Maintain control by forming an LLC. As your own entity, you can take charge of all transactions without jumping through hoops with your custodian. The funds in your LLC’s checking account are readily available–plus, you can buy and sell your investments on your own.
Invest in mortgage notes.
Consider mortgage notes as an alternative way to invest in real estate without owning the physical property. Mortgage notes are a promise to pay the holder so you can use your self-directed IRA for real estate without becoming a landlord.
Step 4: Make it yours.
The moment has finally arrived to purchase the property. But there’s still a process to follow, and it’s similar to buying a home. Work closely with your custodian—such as IRAR—and make sure your funds and paperwork are in order.
Sign, seal, and deliver your offer.
Once you identify a property, get your offer on the table. Ensure the purchase contract is titled with your self-directed IRA custodian as the buyer. This means that when you partner with IRAR as your custodian, we’ll sign on behalf of the IRA.
Example of how title is held: IRAR Trust FBO Sally Bates, IRA #12345
Provide an earnest money deposit.
You’re so close to finally using your self-directed IRA for a real estate investment that you can taste it. With a resounding “yes” on your offer and a signed contract, your IRA provider just has to wire this good-faith deposit to the title company in the name of your IRA using your IRA funds.
Open escrow.
Escrow and its associated inspections and appraisals just require a bit of paperwork. As you begin the process, be sure to provide your:
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Warranty deed
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Title insurance and closing instructions
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Closing statement
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Wiring instructions
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Additional documentation, as applicable
Step 5: Close the transaction.
At long last, that piece of real estate is about to be yours. Once inspections are completed, you are well on your way to closing the transaction. Breathe a sigh of relief knowing that using your self-directed IRA for real estate gives your retirement portfolio a little extra flexibility. There’s just one thing left.
Close escrow.
Your IRA provider will take care to review your documentation. Assuming everything is in order, they can now fund the remainder of your investment!
Rethink your retirement with IRAR.
Take a fresh approach to retirement planning with a self-directed IRA and real estate investments. A self-directed IRA could improve your retirement potential, from diversifying your portfolio for greater returns to maintaining greater control over your funds. Use this step-by-step guide to inform your planning—and turn to IRAR to help you execute it successfully.
Curious how to get started? Reach out today to learn more. We’ll fill in any remaining blanks to help you begin your journey.
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