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What is a self-directed individual retirement account?
A self-directed retirement account is the tool investors use to get their retirement funds “out-of-jail” and into their full control. Since the 1970’s, US citizens have had the ability to invest in a diverse group of asset classes in order to play for their retirement through cash flow, without getting forced into stocks and bonds. Unfortunately, due to the massive amount of marketing most large-retirement custodians conduct, very few people know they can invest in alternative investments while building their retirement account.
A self-directed IRA account is an IRA that allows the account owner to make investment decisions and investments on behalf of the retirement account. The IRS requires that a custodian hold the IRA’s assets on behalf of the owner of the IRA. This custodian is responsible for managing all transactions and records pertaining to the IRA, filing the appropriate IRS reports, and handling all the administrative duties on behalf of the IRA owner.
A truly self-directed IRA plan gives you control of your retirement funds without fees and lost opportunities of using custodians that prohibit self-directed investments.
- No transactional, asset holding fees – you pay no ongoing transaction fees regardless of how many investments you make
- Checkbook control – allows you to make on the spot investments as you have funds readily available
- True diversification – not only do you have access to the traditional IRA investments like stocks and bonds, you also have the ability to invest in real estate, tax liens, small businesses, private mortgages, and much more.
- Create a real estate partnership agreement – with a truly self-directed IRA, you can enter into partnerships with other investors, or partner with yourself.
What are the tax advantages of using a self-directed IRA to buy real estate?
When it comes to investing, it’s not what you make; it’s what you keep. Using your self-directed retirement plan can allow you to defer or even completely eliminate your tax exposure from income or gains from your investments. All of the income and gains from your real investments flow through your IRA, meaning that you do not pay taxes on your investments until you, personally, receive the profit. If you use a Roth IRA, your gains are completely tax-free.
If you invest $25,000 in a Roth IRA when you are 30 and leave the money invested at 9% until you are 59 ½, the Roth IRA will be worth $317,703.28 completely tax-free!
How do these transactions work?
1) Set up your self-directed Roth IRA
2) Fund your IRA
3) Direct your custodian to invest your IRA’s funds
4) Receive income and gains from your investments into your IRA
5) Enjoy strong gains in diverse asset classes without paying taxes!
How do I set up my self-directed IRA?
In order to create a truly self-directed retirement account, you need to work with a custodian that allows you to invest in alternative investments like real estate.
In a previous article, I outlined the 5 best Roth IRA providers that specialize in self-directed accounts. I always suggest my clients work with Udirect, an inexpensive and experienced custodian that has assisted many of my clients invest in real estate and non-real estate transactions in their self-directed retirement account.