You’d be hard pressed to find a working professional who does not understand the importance of setting money aside for the future. It comes as no surprise that employers contribute to or offer to match their employee’s contributions to 401(k) or 403(b) retirement accounts as part of compensation packages. However, those aren’t always enough to give a retiree the much-touted 70 to 80 percent of their pre-retirement income after they finish working X. If faced with that situation, it may be of interest to explore individual retirement accounts, or IRAs, to supplement employer-provided accounts.
Before we proceed, it is helpful to understand that an IRA is an account set up at a financial institution that allows an individual to save tax-free or on a tax-deferred basis X. Unfortunately, the plethora of venders and the plurality of IRA options overwhelm many people to the point of paralysis when it comes to choosing one X. We hope this article makes choosing an IRA and provider a little less paralyzing by explicating the self-directed individual retirement account and advising on how to choose. We focus on the self-directed IRA because it most appropriate for our core audience, real estate investors.
How is a self-directed IRA different from other types of IRAs?
The distinction is that the self-directed IRA provides the investor greater opportunity for asset diversification outside of the traditional stocks, bonds, and mutual funds X. Most applicably, one can invest in real estate through a real estate investment trust or in actual physical property, and in private mortgages through a custodian—a financial institution responsible for record keeping and reporting X. You’re essentially keeping all the benefits associated with traditional or Roth IRAs—tax advantages and compounding interests—but with more options and control X.
It is also important differentiate purchasing and maintaining real estate in an IRA from traditional property investments. Most notably: the property’s buyer is the IRA, not the investor; expenses must be paid by the IRA and any revenue must come into the IRA; property must be treated as investment, not for the immediate benefit of you, your business or your family; and maintenance and repairs must be done by a third party X. This likely results in more paperwork but shouldn’t be a deal breaker for most.
As with any financial decision, one must research before investing in real estate through a self-directed IRA.
Firstly, it is important to perform due diligence by becoming intimately familiar with the real estate asset your IRA will be purchasing X. Some options include: residential, commercial, mortgage notes, offshore real estate, and real estate owned properties X. Secondly, it is advisable to scrutinize the investment sponsor who will be managing the real estate on your behalf X. Thirdly, it would behoove one to examine the fee structures of prospective custodians. Essentially, know the potential fees and expenses that will impact the overall return on your investment, as fee structures vary by custodian X.