Revealing the self-directed IRA

There are 11 types of IRA; That’s Eleven! But do you know about Self Directed IRA and what are the benefits?

Most investors mistakenly believe they have a “self-directed IRA” when in fact they have one that limits their options to a few investment types. Within your plan, you can choose stocks, mutual funds, or bonds. And while you may have hundreds and even thousands of options for where to put your money within that account, you likely won’t be able to invest in non-traditional retirement assets, especially if your IRA or 401 (k) is rolled over with a traditional brokerage house. .

So what is a true self-directed IRA? It is an account that allows you to invest in many other options within your IRA, including:

Rental real estate

Set up tops to resell at a profit (flip)

Private loans made at higher interest rates to other investors

Discounted private notes

Fiscal ties or fiscal deeds

Private companies and startups

Precious metals

Leases and lease options

Direct options (real estate options, not stock options)


Such investments receive the same tax treatment as more traditional IRA assets. Any taxes owed are deferred until retirement, usually at age 70½, when you should start withdrawing your savings, or possibly earlier.

This is an account for practical active investors with unique knowledge of some of the asset classes on the approved list, not for a “set it and forget it” investor.

By using this type of account, it is possible to make considerable profits with a relatively small amount of money. Here is an example:

You have the opportunity to purchase a dilapidated house on a property that you want a quick sale. You determine that the home is worth $ 200,000, after spending $ 40,000 on improvements. You contract to buy the property for $ 120,000. But lacking the $ 160,000 to proceed with the sale, he hires a partner who agrees to provide the full amount, as long as you take care of all the details, including closing, rehabbing, and reselling the home.

Also, you determine that you would like your share of the earnings to go into your IRA to get the obvious tax benefits. You only have $ 10,000 within your IRA to invest with. The appropriate move in these circumstances is for your partner to purchase the property in his name or from an entity he controls, such as a limited liability company. You enter into an option agreement to purchase half of the ownership of this property. You pay $ 100 from your self-directed IRA and complete the option paperwork and submit all the papers to your plan administrator.

This deal is now moving forward, and the property is rehabbed and ready for sale in 60 days and is selling and closing quickly for $ 200,000. It is worth $ 10,000 in selling and holding expenses, making a net profit of $ 30,000 on this agreement in five months. The actual title owner agrees to pay you $ 15,000 to close your option. This $ 15,000 is a return on the option investment of $ 100 and is deposited back into your IRA account tax-deferred or tax-free (for a Roth IRA).

Your investor contributed $ 160,000 and received $ 15,000 for a five-month investment. This represents more than a 20 percent annualized return on your money, which pleases almost all investors. If you used the money from your IRA for this investment, then your earnings would also be tax deferred.

Rental income

Here’s another example: A New York investor realized the self-directed IRA and used part of his IRA to purchase four rental homes in Metro Detroit. Each home was purchased for about $ 55,000 and the rents for about $ 900, with the cash flow going back to the IRA tax-deferred. If you sell them for a big profit a few years from now, that profit will also be tax deferred.

Be careful – there are also some prohibited investments with your IRA (see IRS Publication 590-B):

No loan of money to you, your spouse or any family member in your direct linear family chain.

Do not invest in collectibles.

Your IRA cannot personally guarantee any loan that you borrow money on. This means that any money borrowed from your IRA must be a “non-recourse” fund, meaning that only the asset can be offered as collateral and can be foreclosed for non-payment. The creditor cannot sue the IRA for any loan deficit that is in default.

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