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Self-Directed IRA FAQ

What is a Self-Directed IRA?

From a legal standpoint, a self-directed Individual Retirement Account (IRA) is not different from any other IRA. The term “self-directed” simply indicates that you choose your IRA’s investments and that you don’t limit yourself to the packaged products available at traditional IRA custodians. Most brokerage houses and banks tend to offer self-directed IRAs that are within their own product/service portfolio, so you are somewhat limited if you do business with a specific bank or brokerage company.

Which products can a Self-Directed IRA be invested in?

The rules governing products in which an IRA can be invested in are exclusive—not inclusive. In other words, the rules only specify products in which you cannot invest. Therefore, there is a virtually unlimited array of possible investments that fall well within the permissible boundaries. The Internal Revenue Service only defines the following assets as excluded (prohibited):

  • Life insurance products (for example, a life insurance policy in the name of the IRA owner),
  • Collectibles (for example, antique rugs, cars, stamps, furniture, etc.), and
  • Collectibles (for example, antique rugs, cars, stamps, furniture, etc.), and

Can I buy real estate using my IRA?

Yes, you can buy real estate within your IRA, Roth IRA, SEP IRA, and Solo(k) plans. Additionally, you may be able to use your other retirement plans—such as a 401(k) or 403(b) account—to fund a self-directed IRA or Solo(k) in order to buy real estate. Imagine not being confined to investing your hard-earned cash in the volatile stock market or limited-return certificates of deposit. You can diversify your retirement money in many creative and beneficial ways.

How do I buy real estate with my IRA?

The professionals at Smartland can assist you in transferring your existing retirement account to a bank that allows self-directed IRAs. Then we work with you to find a property that you would like as an investment. When you decide on a property, you make an offer and purchase it. Instead of mutual funds and stocks, you can have real estate as an investment and diversify your portfolio.

What type of return on investment (ROI ) can I expect?

There are no guaranteed returns, and there is risk involved in any type of investment. But generally, we don’t present an opportunity unless it projects at least a nine percent return per year.

What is the first step?

Education is always the first step. You can start reading the information we’ve posted on our website. If you decide to explore further, you can contact us for a free consultation. From there, we’ll help you determine what your best investment strategy should be.

Can I roll over my 401(k) into real estate?

The simple answer is “yes”. However, if you wish to maintain the 401k and have invest it in real estate, the 401k plan sponsor must allow the purchase of real estate. If the plan does not allow it, it may be possible to amend the plan. Otherwise, you can establish a self-directed retirement plan with a custodian (like a bank or trust company) that allows alternative investments such as real estate—and then rollover your funds to your new plan and invest in real estate. In any case, if you are contemplating changes to your retirement account, such as rolling over your 401k, you should call us to discuss your specific situation.

Can I roll over my IRA into real estate?

Yes. The IRS allows you to invest your IRA in real estate. However, if your present IRA custodian does not allow real estate investments in your IRA, you can set up a self-directed IRA with a custodian that does allow real estate investments. Then, simply transfer your IRA funds to your new self-directed IRA and begin investing in real estate.

Why should I take money out of the stock market and put it into real estate?

We’re not suggesting that you take all of your money out of the markets to invest in real estate. What we advocate is the diversification of assets, not just ownership of multiple types of mutual fund, but diversification into investments that are not directly correlated to the ups and downs of the stock market. For specific suggestions as to diversification and portfolio allocations for your situation, we suggest a consultation with a certified public accountant (CPA) or certified financial planner (CFP).

Can I use property that I purchase?

Property you purchase within your IRA cannot be used for a personal benefit while it is in your IRA. IRS Publication 590 specifically prohibits personal use of any IRA investment. However, you can purchase property now, manage it as a pure investment property within your IRA, and then convert it for personal use once you start taking distributions from your retirement account. For specific rules and guidelines, please consult a CPA who is knowledgeable on self-directed IRAs.

Is it legal to own real estate in your IRA?

Yes! Since IRAs were created in 1974, the IRS has excluded only three types of investments in an IRA: collectibles, life insurance, and capital stock in an S corporation. The IRS allows real estate investments within retirement plans. To get to the heart of the issue, go to www.IRS.gov, the Internal Revenue Service’s own website. Once there, perform a search for Publication 590, which is the 100-page booklet that defines everything the IRS wants you to know about IRAs. On pages 44 through 49, you will see the explanation of what you can’t do within an IRA. You will see, as previously mentioned, that you cannot purchase collectibles or life-insurance contracts. You will not see that you cannot purchase sub-chapter “S” corporation stock because, in this case, it is not the IRA that is prohibited from investing with a sub – “S” corporation, but rather the sub – “S” corporation that is prohibited from having an IRA as a shareholder.

How can I take funds out of my IRA to buy real estate without paying taxes and penalties?

That’s simple. You don’t take funds out. You buy real estate just like you would buy a stock or mutual fund in your IRA. Buying real estate is just a purchase of a different type of investment. The mechanics of execution are also different because the completion of a real estate transaction takes place in many steps. This process may take 30 to 60 days to complete. Through Smartland, you will have access to professionals who will make the process simple.

Can I purchase stocks or certificates of deposit in my self-directed IRA?

Yes. You can continue to invest in the same types of investments as you have in the past. The self-directed IRA simply gives you the option to diversify your investments into real estate.

Why haven’t I heard of this before?

The primary reason is that most people hold their IRAs with financial institutions whose business models imply making money from stocks, bond, mutual funds and insurance products that they can package and sell to the masses. Recommending alternative investments, such as real estate or business acquisitions, requires a more tailored approach.

Does the establishment of a self-directed IRA replace my current 401(k) and will I lose my employer match?

No. The self-directed IRA you set up can be an addition to your 401(k); it does not have to replace your 401(k). You can still contribute as much as you can. Or you can simply contribute as much as you need to get the full company match and then transfer funds into your new self-directed account when the time is right.

What kind of real estate can I own in my IRA?

Your IRA can buy raw land, commercial property, residential rental property, and options on real estate. You can also make loans, such as first and second mortgages secured by real estate.

Are smaller investments possible?

Yes. There are several ways to invest in larger projects with a relatively small amount. The easiest way is to join forces with other investors and to own property through an LLC or a TIC (tenants in common). Your IRA can also borrow money to purchase real estate. Each situation should be evaluated carefully to determine the best strategy.

What is the minimum investment?

There is no minimum required. It all depends on the real estate you are considering. And opportunities also exist to group funds with other investors or buy shares in a real estate partnership or fund, with as little as $1000.`

Can I co-invest with my friends and relatives?

Yes. You can combine your IRA and personal funds with your wife’s or husband’s savings, her or his IRA, funds from your friends, children or other relatives (or any other combination) in order to enter into the transaction together as tenants-in-common. Each investor appears on the grant deed (the legal document giving title to the property) as a percentage owner, based on the amount of each investor’s contribution towards the full purchase price. For example, if your IRA contributed 10,000 dollars towards the purchase of a 100,000 dollar parcel of land, the grant deed would specify that your IRA was a ten percent owner. There are also other ways, such as setting up an LLC. Again, these options should be explored thoroughly with a qualified professional.

If I combine with some friends and still don’t have enough to make an all-cash offer, is there a way to get a loan for the balance?

Yes. You could also combine with other parties, where one who is unrelated to you or any other IRA owner (e.g. a friend) takes out a loan to finance a portion of the transaction.

Can I use my IRA for a down payment?

Yes, in many cases you can use your IRA as down payment on a real estate purchase. However, there are important considerations when borrowing money within your IRA, so you should discuss this issue further with a qualified professional.

What if I want to invest in a large commercial property and I need support from other parties? Are there ways to simplify the purchase and management of the property?

Yes. A popular approach is for a group of investors to combine forces and invest in an entity, such as a limited liability company (e.g. LLC). The LLC can purchase the property. This may be done for a variety of reasons, but this approach will also allow the LLC to take out a loan. Also, if you have a large group of investors, LLCs simplify the purchase and management of real estate property by reducing the number of parties in the execution process. The LLC gives you the opportunity to be a completely passive investor, if you wish. Again, you should always consult with a qualified professional regarding this or any legal, tax, or financial issue.

If I buy rental property with my IRA, can I manage it?

Yes and no. You can perform managerial functions for your property, much the same way you would for any other asset (e.g. making decisions to buy and sell, acquiring legal advice, etc.). This could include making decisions as to whom to rent, what plumber to contract with, or what builder to choose when you add a porch. However, you should not build a porch yourself, or put on a new roof, etc., or, in general, add any material value to your property through your interaction with it. If discovered, the IRS would consider such “sweat equity” activities illegal contributions to your IRA.

Can I collect the rent checks for my IRA rental property?

Yes and no. You can have the renters forward rent checks to you, but made payable to your IRA. They cannot be made payable to you, nor can you deposit them, even if you issue your IRA the equivalent amount in a new check. Rather, simply make a notation in your register that the tenants made their payments, and forward the payment to the bank acting as your IRA custodian. Of course, you can always use a non-related party (e.g. friend) or a property manager or property management company to assume these and other responsibilities.

Can my IRA get a mortgage on the property?

Yes. An IRA can enter into a non-recourse loan with a financial institution or the seller of a property.

Are the gains on income taxable from IRA real estate investments?

No, in most cases. If an IRA buys investment real estate and then sells it at a profit, all income generated while it was held in the IRA, and all the gains resulting from the sale, will be either tax-deferred (regular IRA or tax-free [Roth IRA]), if the purchases were all cash with IRA funds. If the IRA borrows to finance the purchase, the portion financed may be subject to income and capital gains taxes. A discussion with a tax professional is highly recommended in these situations.

What is a Solo(k)?

The Solo(k) is a tax-qualified retirement plan that enables contributions up to the maximum annual amount on a tax-favored basis for solo business owners. In 2013, the maximum was 51,000 dollars for someone under age 55.

Am I eligible for a Solo(k)?

If you are a solo business owner, with no other employees, you are eligible. If you and your spouse own a business with no other employees, you are also eligible. Other businesses may also be eligible. As with any tax, legal, or financial issue, it is important to seek the expertise of a professional who is adept at those areas and who can evaluate your specific situation and have a clear discussion with you—so that you have a clear understanding of the options.

What are the benefits of a Solo(k) vs. a SEP IRA?

Solo(k) contributions consist of two parts: Employee and Employer, and this allows most solo business owners to contribute significantly more than a SEP IRA. Both are capped at 51,000 dollars per year in 2013. You can make that contribution with 163,000 dollars in business income in a Solo(k) and need 245,000 dollars of business income with a SEP IRA. Also, the Solo(k) has a Roth component that has no income limitations. That allows you to contribute to a Roth using after-tax funds and any earnings may be withdrawn tax-free at retirement. You may also take a loan from a Solo(k), but cannot from a SEP. Lastly, financed real estate investments in a Solo(k) can qualify for an exception to the tax on unrelated-debt financed income (UDFI), but the same cannot be said for SEPs. A SEP may trigger taxes if you take a loan.

Why should I self-direct my Solo(k)?

Limiting your options to stock market investments may be unwise. You should take advantage of the opportunity to truly diversify your retirement portfolio by opening a Solo(k) account with a reputable, experienced custodian that allows you to direct your investments. Then, take a look at one of the best investments you can make today: real estate!

How do I learn more?

The professionals at Smartland can show you how to diversify your assets into real estate. We can assist you through all the details to make the process quick and easy. Call 877-IRA-0277 or email us for an initial consultation to explore this topic further.