With the increase in tax rates and the uncertainty in the stock market, many individuals with substantial amounts of cash in IRAs mutual funds, stocks, 401(k)s, and other investment vehicles are in an excellent position to take advantage of the benefits of self-directed IRA real estate investments for their retirement savings.
What is a Self-Directed IRA?
A self-directed IRA is a retirement vehicle that provides individuals with the opportunity to take a more active role in their retirement portfolio and prepare for the future. A self-directed IRA can invest in many different types of assets; one of those assets is real estate.
Can Do and Can’t Do When using a Self-Directed IRA to Purchase Real Estate
Can Do:
- Purchase a rental property and take advantage of cash flow and appreciation to increase your ROI within your self-directed IRA.
- Use a combination of IRA cash and financing to purchase real estate – your self-directed IRA can borrow money such as a mortgage.
- Partner with other entities or even disqualified parties to purchase real estate.
- Begin taking CASH DISBURSEMENTS at the age of 59½ with NO TAX PENALTIES.
- Buy, renovate, and sell (aka Flip) properties with the cash and resources of the self-directed IRA.
Can’t Do:
- Buy or sell real estate to prohibited parties, including: (1) The IRA owner or the spouse of the owner; (2) the IRA owner’s lineal descendants and ascendants; (3) a 10% owner, officer, director or highly compensated employee of such entity; (4) an entity with combined ownership greater than 50% by a disqualified person(s); (5) anyone providing services to the IRA, such as the trustee or custodian
- Pay for expenses outside of funds in the IRA.
- Invest in life insurance and artwork and other similar collectibles (sorry stamp collectors), rugs, antiques, metals (with some exceptions, i.e. gold, silver and palladium bullion), gems, coins (again with some exceptions including some U.S.-minted coins), alcoholic beverages, and other types of tangible personal property.
- Have any “self dealing” which amounts to using the real estate for personal use.
- Rent the property to a prohibited party (see above).
- Take a distribution or payment out of the self-directed IRA for “self dealing” purposes.
It is impossible to discuss everything that is important to consider when contemplating a move to a self-directed IRA and there are many ways to go astray of the IRS rules where your client could find themselves facing significant tax penalties. If structured correctly however, a self-directed IRA can have significant gains over that of a traditional IRA and create a steady income stream waiting to be tapped upon reaching the required age. As with any investment strategy, it is essential that clients seek competent legal and tax advice before making substantial changes to their retirement portfolio. To protect yourself from liability, always advise your clients to seek advice from the appropriate party.
The Wells Realty & Law Groups look forward to meeting you and providing assistance with your legal needs and those of your family. Call us at 480-428-3290 or email us at info@wellsrealtylaw.com.
