Most of you know about IRA's - there are Traditional IRA's and Roth IRA's - and most of you that have an IRA have your money invested in stocks, bonds, and mutual funds, right? Did you know you can also use your Traditional or Roth IRA account to invest in other assets, like real estate?
There are basically three types of IRA's:
- Managed IRA - A brokerage makes decisions about where to invest your money.
- Self-Managed IRA - You choose stocks, bonds, and mutual funds you want to invest in.
- Self-Directed IRA - You choose exactly what you want to invest in - real estate, franchises, mortgages, etc.
For the purpose of this article, we are going to focus on Self-Directed IRA's and investing in Real Estate.
What Exactly is a Self-Directed IRA?
The term "self-directed" simply means that you, as the individual account owner, have complete control over selecting and directing your IRA investments. With this type of IRA, you can invest in real estate, stocks, mortgages, franchises, partnerships, precious metals, private equity and tax liens. There are several items you cannot invest in - life insurance policies,
S-Corps, artwork, collectibles, jewelry, to name a few. This type of investment account will require more work but the reward is worth it if done correctly!
Real Estate Self-Directed IRA Basics
First off, you must have a custodial firm hold your money in the IRA and make the investment on your behalf - with your direction, of course.
You can use your IRA to invest in any type of real estate - raw land, commercial properties, or residential rental properties. However, you cannot invest in a property you or anyone in your family already own or plan to live in - so no personal use of any property you purchase.
You can not pay any expenses directly from any other accounts; all repairs, property taxes, etc must be funded from the IRA. Any income generated from the property must go directly to the IRA - you cannot have any direct financial benefit from the property.
Pros & Cons
The biggest advantage is you have more control over what your money is invested in... but with control also comes risk. You would need to choose properties wisely, otherwise, you could quickly wipe out your retirement accounts.
The Devil's in the Details
As with anything related to the IRS - Self-Directed IRA's can get complicated. There are specific rules on how the account must be setup, funded, and reported to the IRS - so please call us or your financial adviser if your considering investing in real estate using an IRA.