Maximizing Your Options: Self-Directed IRAs and Real Estate Investing
The perception of retirement savings is that the money has to be invested in traditional avenues like CDs, bonds, stocks, and funds. However, there are a large number of non-traditional investment options that are available through an increasingly popular type of retirement account, called a self-directed IRA. Self-directed IRAs let the individual investor decide where to invest their money based on their own expertise – and one of the most common investments is in the opportunity-rich real market.
How Real Estate Investing through an IRA Works
Individual retirement accounts (IRAs) make up more than $2 trillion of investment assets, about 20% of the total assets in retirement plans. While about 98% of these IRAs are invested in traditional areas like mutual funds and stocks, a large number of IRA holders are switching to self-directed IRAs, which let them decide where to invest their money. In fact, the amount of assets held self-directed IRAs has more than doubled in the last five years, representing tens of billions of dollars in assets.
Most self-directed IRA funds are spent in real estate, and virtually any kind of property is allowed for investment: land, commercial properties, office buildings, shopping and retail centers, single family homes, rental units, condos and multi-tenant buildings. The only limit for real estate investments is that they cannot directly benefit the account holder or a near relative (such as buying an investment property and then using it as your primary residence).
There are three different ways that IRA funds can be invested in real estate:
• By purchasing the property outright. In this case, the assets in the IRA are used to buy the property entirely.
• By supplying a deposit or down payment. The IRA fund can be leveraged to get a mortgage on a property, with the property used as collateral. This minimizes personal risk and can greatly increase the overall value of your investment.
• By buying a property as part of an investment group. As long as the property deed shows your undivided interest in the property, it’s available to your self-directed IRA for investment.
When using a self-directed IRA to invest in real estate, you select the property, negotiate the price, and find the lending institution, while an escrow account is created in the IRA trustee’s name and the IRA trustee performs the actual transaction. The property is then held as part of the account’s assets. This is analogous to picking a stock with great dividends and instructing your IRA advisor to purchase a certain number of shares.
What an IRA Trustee Means
The structure of self-directed IRAs provides a balance between independent real estate investment control and experienced investment professionals. For any self-directed IRA, there has to be a qualified custodian, or trustee, for the account. The trustee understands all legal and tax prohibitions on investments, manages the actual retirement account, handles administrative tasks and carries out all of the actual transactions. The trustee also offers professional advice as you plan your investment strategy, which is particularly important for long-term investing in real estate. All account funds are held in an escrow account managed by the trustee.
The self-directed IRA trustee has an integral role in whether you successfully invest in real estate with your IRA. Even major investment companies may not have experience with self-directed IRAs or real estate investing, and knowledge matters. For example, the profits from a self-directed IRA may be subject to unrelated business income taxes (UBTI) because of the nature of the investment, while depreciation and expenses for the property are calculated differently. (This is in sections 511-514 of the IRS tax code.) An experienced IRA trustee will know all the liabilities and incentives available.
Most importantly, ask about investment goals and options; get involved and be willing to take control of your investments. The most important asset the IRA trustee offers is strategic, experienced planning. Trust Administration Services specializes in IRA-funded real estate investing, along with other self-directed IRA investment plans, with billions of dollars in assets.
Trust Administration Services is available to you to assist in determining whether real estate investments through a self-directed IRA can help you meet your retirement plans.
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