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11 Top Questions for Using Self-Directed IRAs to Invest in Real Estate

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Over the last few weeks on the Real Estate on Radio Show, airing on Chicago’s WLS 890 AM, I have been covering a little-known alternative to traditional forms of retirement planning…utilizing a self-directed IRA. Plenty of those who have invested in their employer-sponsored 401(k) plan or have an individual retirement account (IRA)  at a brokerage account have experienced severe losses in their investments throughout this recession.  Many are hoping to ride this stock market wave back up yet still feel very skeptical in this economic recovery.  Investing in real estate is extremely attractive right now, since picking up properties as such rock-bottom prices has never been seen before, especially in Chicago since the early 80s.

I have received plenty of emails pouring into my inbox and I thought it would be smart to list the top questions being sent through.  I appreciate your intense desire to learn and uncover every stone possible, in taking financial control of your retirement plan and preventing any further losses from holding back your financial plans.  We are always eager to answer your questions, that’s why our Chicago-based financial talk radio show is here…for you!

Why haven’t I heard about self-directed flexible Retirement Plan investing before?

Brokerage companies earn commissions when you buy and sell stocks, bonds, and mutual funds. They don’t make money when you buy real estate. Further, very few custodians are interested in holding “non-traditional” assets they don’t understand. Finally, the industry is small. Only very few companies, at this time, provide “full service” to self-directed retirement plan beneficiaries.

Can I really invest my retirement assets in real estate?

Absolutely. In 1974, the Employee Retirement Income Security Act (ERISA) gave all self-directed retirement plans this option. In addition to real estate, you can direct your Retirement Plan investments into, among other things, mortgages, notes, tax liens, and private businesses. There are restrictions on some investments, but a “full-service” administrator will help you navigate through them.

Always happy to take your money questions 708.686.2000 x8

Can I combine personal money with my Retirement Plan money to make an investment?

Yes. You and your Retirement Plan can purchase an investment together. However, since you cannot sell property to your Retirement Plan, transactions between you and your Retirement Plan involving an asset after that asset is purchased are prohibited.

What are the benefits of having a Limited Liability Company (LLC) own my Retirement Plan’s assets?
For active investors, there are many advantages to using a LLC to own your Retirement Plan’s assets. The LLC structure offers maximum investment flexibility, provides asset protection, allows for “checkbook control,” simplifies asset titling, eases pooling of assets, and allows for immediate response to investment opportunities.

How are my assets managed?
Your assets are co-managed by you, a custodian and/or an administrator…preferably all three included. You make all investment decisions, and your custodian and administrator should be able to take care of all of the paperwork and reporting details. Once you make an investment, your administrator should be able to keep your books and records, coordinate the custodianship of your assets, oversee the annual asset valuation, and file all required annual reports.

How can I leverage my Retirement Plan assets to buy more expensive properties?

You can use the equity in the property you expect to purchase to borrow funds on a non-recourse basis. We can help direct you to non-recourse mortgage lenders who can assist you with the non-recourse process. Private financing and seller financing are additional options for Retirement Plan investing (have any rich friends?). Furthermore, you can pool your Retirement Plan’s funds with those of other people, other Retirement Plans, or even your personal funds to buy large (i.e. commercial) properties.

When an investment is sold by my Retirement Plan, can I keep the profit that is above my initial investment?

All money generated from an investment owned by a Retirement Plan must be deposited back into the Retirement Plan. Of course there is no income tax on this profit until the Retirement Plan begins its annual distributions (normally when someone reaches the age of 59 1/2 years old.  However, investors may incur unrelated business income tax (UBIT) on a portion of their investment income if the investment was made using borrowed funds.

Are there any pitfalls to self-directed Retirement Plan plans?

There are many potential pitfalls with respect to both prohibited transactions and timely reporting at the state and federal levels. Be sure to select a self-directed IRA administrator who has a specialty in structuring transactions in “safe harbors” to avoid problems and ensure statutory compliance.

Who makes the Retirement Plan’s investment decisions?

You do. Your account is truly “self-directed,” which means that you make the investment decisions for your retirement assets in much the same way as you invest outside of your Retirement Plan. But I wouldn’t try investing alone. Finding a good wealth-building coach, financial planner or adviser that has specialized skills with self-directed IRAs should help you navigate the complex rules that govern prohibited transactions so you can focus on making the best investment decisions.

What exactly is a “prohibited transaction”?
Retirement Plan transactions must be for the exclusive benefit of the Retirement Plan and must not directly or indirectly benefit the Retirement Plan’s owner. For example, the owner cannot:
a. Borrow money from, or sell property to, his Retirement Plan;
b. Buy property for his personal use with Retirement Plan funds; or
c. Use Retirement Plan assets to secure a loan.
Note. Exceptions may apply for 401(k) Plan participants.

Are there restrictions on where my Retirement Plan can purchase real estate?

No. Your Retirement Plan can purchase real estate anywhere.

What You Can Do

Money Smart Coaching: Would you like to invest in real estate but don’t know where to get the cash, credit or additional capital?  Do you have an IRA that is just “sitting there” or a 401(k) at a previous employer that you still have not rolled over?  Does your current employer give you financial literacy education or counseling in order to help you be a wiser steward with your paycheck?  Glad you have found a personal finance radio show that you would like to connect with off-air, off-line? If so, give us a call and we can help direct towards a Money Smart Coach in our national network who may help guide you along.  Set up a free, one-on-one financial review or coaching session today by calling 708.686.2000 x8 or email us: [email protected]

Currently there are "2 comments" on this Article:

  1. Joel Wymer says:

    Matthew – what a great way to use dormant or underperforming assets in our retirement plans. Now almost everyone’s American Dream of becoming a real estate owner/investor can come true. With the help of a good financial strategist this technique can really turbo charge retirement accounts across the country.

  2. […] at Money Smart Radio -“11 Top Questions for Using Self-Directed IRAs to Invest in Real Estate” Ok GSK readers you might want to get used to the Money Smart Guy, Matthew Sapaula being on this […]

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