Self-Directed IRAs
A self-directed IRA is unique because there are more investment options available to the client. Otherwise, a self-directed IRA is technically no different than any other IRA (or 401k).
Most IRA custodians only allow approved stocks, bonds, mutual funds and CDs. A truly self-directed IRA custodian allows those types of investments in addition to real estate, notes, private placements, tax lien certificates and much more.
What are the benefits of a Self-Directed IRA?
A self-directed IRA is for investors who want an active role in selecting their investments and having control over their portfolio diversification. Self-directed IRAs provide tax deductions and tax deferred or tax free compounding growth for the creation of wealth.
The Self-Directed IRA Custodian
The laws governing IRAs require that they have what is known as a custodian to administer investments, safeguard assets, hold paperwork/information and provide reporting on the accounts to the government.
Generally speaking there are two types of IRA custodians:
Self-Directed IRAs are required to have a "passive" custodian that does not give advice or sell products.
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An "active" custodian gives investment advice and/or offers investment products. This type includes most custodians who offer IRAs (banks and brokerage firms) that focus on mutual funds and CDs because they have a vested financial interest in you purchasing those investments from them.
Selecting a Self-Directed IRA Custodian
IRA Land Group recommends only using custodians who are a registered trust company. A registered trust company must meet stringent state and federal requirements including adequate reserves. Your funds and grant deeds are securely kept in a separate account for your sole benefit.
The small number of self-directed IRA custodians is continually growing as more investors choose to diversify their investments out of the stock and mutual fund markets. Choose your custodian carefully as you will want to have an active relationship with a custodian who is responsive to your needs.
Custodians are either third party administrators or regulated trusts. Their services offered, plan types administered and fees (asset and transactions) vary widely.
IRA Land Group has experience with most of the administrators and will coach you through the selection process. You should also seek the advice of a financial advisor or CPA who is familiar with self-directed IRAs. Our extensive network of professionals is available should you want to build a relationship with someone knowledgeable about self-directed IRAs and real estate issues.
Selecting a Self-Directed Plan Type
The choice for most investors is usually straightforward and simple. Most investors roll their IRA plan funds to a like type self-directed IRA plan.
Choosing a plan type is an important step in the self-directed investment activity. There are a number of important considerations, including: Annual contribution amounts, contribution deductibility, taxation of withdrawals, protection from lawsuits, complexity of paperwork, and expenses associated with each plan type.
IRA Land Group will assist your review of the available plan types to ensure you are taking full advantage of the tax tools provided by our government.
Types of Self-Directed Plans
- Traditional IRA
- Roth IRA
- SEP IRA
- Keogh
- SIMPLE IRA
- Individual 401(k) and Roth 401(k)
- Group 401(k) and 403(b) plans
- Coverdell Education Savings Account (ESA)
- Health Savings Account (HSA) - a medical IRA
Alternative Investments Allowed:
- Real Estate
- Single Family Homes
- Mortgages/Deeds of Trust
- Raw Land
- Commercial Properties
- Apartments/Duplexes
- Hard Money Loans
- And much more….
Prohibited Transactions
A prohibited transaction, including prohibited real estate IRA investments, can bring into question the tax-deferred status of your account, potentially resulting in the disqualification of your IRA and severe tax consequences.
The following is the definition of a prohibited transaction that comes from IRS Publication 590 and speaks of those acts that you should avoid so as not to incur additional taxes and other costs, including loss of IRA status.
“Prohibited Transactions"
Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.
Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).
The following are examples of prohibited transactions with a traditional IRA:
- Borrowing money from it.
- Selling property to it.
- Receiving unreasonable compensation for managing it.
- Using it as security for a loan.
- Buying property for personal use (present or future) with IRA funds.”
Realtors, CPAs and Custodians who Understand about Self-Directed IRAs
IRA Land Group understands the importance of using professionals who are competent and experienced with self-directed IRAs. Contact any of our representatives and we will provide you with our Network of Professionals.
For more details on IRAs as a vehicle for purchasing land, go to IRA FAQs.
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