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Investing in Multifamily Real Estate with a Self-Directed IRA

You might not realize it but investing in multifamily real estate with a Self-Directed IRA makes solid investment sense. If you are like many retirement investors, you have your money spread among stocks, bonds, and cash according to your tolerance for risk or your proximity to retirement. You probably feel secure with your mix, believing that it protects you through almost any economic downturn or black swan that comes your way.

Stocks are a wonderful long-term investment, but their volatility can be gut-wrenching if a substantial portion of your portfolio is devoted to them (remember back in 2000 when investors saw their equities pull back as much as 50%). And bonds are good for adding some stability and income to a portfolio, but they can decline in value when interest rates are on the rise.

A Self-Directed IRA can add much-needed diversification from typical investments like stocks, bonds, and CDs by allowing you access to alternative investments such as tax lien certificates, precious metals, private stock…and multifamily real estate investments.

Why invest in multifamily real estate with a Self-Directed IRA?

Real estate is a tangible and secure asset. As financier and politician Russell Sage once said:

“Real estate is an imperishable asset, ever increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and about the only indestructible security.”

What’s more, real estate often grows faster than a lot of those traditional investments. Multifamily properties provide greater potential to assist you in building that all-important retirement wealth. And investing in multifamily real estate with a Self-Directed IRA also lets you take a more proactive approach to growing your retirement account.

There are those who choose to buy one rental house at a time, satisfied that two or three single properties are all they need for a secure retirement. Others prefer the convenience of having several properties at the same location, and that is where multifamily real estate investing comes in.

There are substantial benefits

Investing in multifamily real estate with a Self-Directed IRA can provide you with valuable tax advantages. Here are some of them:

  • You can eliminate capital gains taxes.
  • You can eliminate income taxes.
  • You can eliminate dividend taxes.
  • With a Self-Directed Roth IRA there will never be any taxes to pay on the profits from the investments.
  • You can invest your Self-Directed IRA into multifamily real estate without worrying about withdrawal tax penalties

In addition to allowing your investments to grow tax-deferred or tax-free, investing in multifamily real estate with a Self-Directed IRA protects your assets and helps you with estate planning by creating lasting wealth for you and future generations.

Here is how it works

If you do not already have a Self-Directed IRA, American IRA can help you open one. Once it is set up, you will be ready to start investing in multifamily real estate in your new Self-Directed IRA.

You will start by choosing among apartment buildings, townhomes, and duplexes. As with any investment, you will need to do your due diligence—including looking at income and expense records, copies of leases, and rent rolls—to make sure the asset is worthwhile. Comparing the income that was generated in the past to its expenses can help you determine whether or not this is a viable investment.

The IRS has stringent rules for real estate investing

Because the IRS has these strict rules concerning investing in real estate with a Self-Directed IRA, it probably is not advisable to go it alone. Get advice from professionals such as an experienced real estate broker, an attorney, and a financial advisor.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

 

How do Self-Directed IRAs and LLCs Work Together?

Are you looking for closer control of your retirement funds? You might want to think about adding a Limited Liability Company (LLC) to your Self-Directed IRA. Is it imperative that you have an LLC? No, it is not. You can buy any alternative asset, except collectibles and life insurance, without an LLC. But it could be helpful to understand how Self-Directed IRAs and LLCs can work together to give you more flexibility with your investing.

So, how do Self-Directed IRAs and LLCs work together?

When you establish an LLC, it is a legal entity that can purchase assets, giving you more freedom to manage your retirement funds. Since you will have direct access to your Self-Directed IRA, you will get funds quickly for real estate purchases or maintenance. Just remember that these funds are the Self-Directed IRA’s assets and do not belong to you personally.

Any funds cannot return to you but must go back to your Self-Directed IRA. If your LLC wants to purchase an investment by borrowing money in the form of a non-recourse loan, you might be required to make additional filings for your Self-Directed IRA. It is always a good idea to consult a tax advisor if you have questions.

It is fairly common for retirement investors to establish an LLC as a subset of a Self-Directed IRA, which makes it possible to combine personal funds or Self-Directed IRAs from other investors to fund the LLC. Many of these investors then open a Self-Directed Checkbook IRA, making it easier to manage the LLC.

What is a Self-Directed Checkbook IRA?

Often called “checkbook control,” the Self-Directed Checkbook IRA gives the owners of a Self-Directed IRA signing authority over an account that gives access to their retirement funds. Because the LLC is a business entity, it can have a checking account. Funds for the checking account are provided from the retirement assets in the Self-Directed IRA.

After the LLC is set up with a checking account, you (the Self-Directed IRA holder) will have “checkbook control” over your Self-Directed IRA funds. You will now be able to disburse funds quickly and possibly avoid certain administrative fees.

And while Self-Directed IRAs and LLCs can work well together with checkbook control, there is also increased responsibility placed on the IRA owner, for example, understanding the prohibited transaction rules. You will need a specially prepared operating agreement, Tax ID number, a bank account, financial books, and provide recordkeeping and accounting. You will also need to understand the IRS rules that pertain to Self-Directed IRAs and to abide by them.

Keep in mind these advantages of a Self-Directed IRA LLC with checkbook control

  1. More control of your investments

With a Self-Directed IRA with LLC, you can protect and diversify your retirement funds. As soon as you find an investment you want to buy, you write a check. You avoid all the paperwork that goes with depending on your administrator and waiting for them to write it. Having this control can be a big advantage when there are time issues, such as with an auction.

  1. Fewer administrative costs

With checkbook control, you do not pay the administrative and transaction fees that usually come with Self-Directed IRAs. If you have several investments in your LLC, your administrator only charges you for one asset, the LLC. As a result, more of your retirement dollars are working for you.

  1. A word of caution on due diligence

Before you make the final decision to register as an LLC, protect yourself with due diligence. Find out if there might be drawbacks or costs you were not expecting. There could be tax requirements, fees from your state, or certain limitations.

Rules for LLCs vary by state, and just as with any other Self-Directed IRA investment, you need to be careful to avoid prohibited transactions that could endanger the tax-advantaged status of your IRA.

American IRA requires that all Single-Member IRA LLC documents be prepared by a qualified professional with an understanding of Self-Directed IRAs and LLCs. Self-prepared documents cannot be accepted.

Interested in learning more about Self-Directed IRAs or LLCs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Investing in Out-of-State Properties with a Self-Directed IRA

Investing in local real estate can be complicated, but when you move the process out of state, all those challenges can become magnified. Because of this, Self-Directed IRA investors will not give out-of-state properties a serious look. They focus on the negatives and miss out on good deals.

Investing in a property that is located in another state adds diversity to your portfolio and could give you a bigger return on your investment (ROI) than properties in your state. Sure, there are unknowns you must deal with:

  • You do not know the area.
  • You might not know the laws.
  • You cannot walk into a property and see it firsthand.
  • You have not developed any contacts.

But these are not barriers since each of them can be overcome. Many of us do not have the cash to make a real estate investment, and few of us have enough cash flow to support two mortgages, but a lot of us have accumulated retirement funds that could be used to take advantage of a potentially lucrative investment.

You cannot invest in real estate with a conventional IRA, but you can if you have a Self-Directed IRA. Once you have opened a Self-Directed IRA account, you have opened yourself to a vast array of investment opportunities, including real estate.

If you want to get started in real estate and believe that greater value is available in another state, here are a few suggestions to consider:

Decide what you want

It makes sense to know what kind of property you want before you start searching. Make a list of your goals for the property and what you want to see in it. Only then can you look for something that meets your criteria. Otherwise, you could get distracted during the process and end up with something that does not fit.

Ask yourself what kind of property you want and who would be an ideal tenant for it. Decide how much you want to invest in the property and how much rent you will need to get a good ROI for your Self-Directed IRA.

Without starting with a clear vision of what you want, it is no use deciding on a location.

Research the area

After you have come up with specifics for a property, you can focus on the area. You should get to know everything about where you are looking. Things are different from one area to the other. Look at:

  • Tax rates
  • Property values
  • Demographics
  • Employment rate and type
  • Crime rate
  • Local laws and restrictions

All of these factors help you decide if this is a viable area in which to invest. Most of this information is readily available. Check out the prospective city’s website for their Annual Financial Report. Once you have a handle on the area, you can start looking at specific properties to invest in with your Self-Directed IRA.

Pay attention to the details

Once you find an investment property that sounds good, dig into the details. That will not be as easy since you are not there in person. Here is where technology can assist you with video tours of the property, Skype, and electronic documentation. You can see the neighborhood and the property itself on Google Maps. If you are not up to speed on technology, take the time to learn enough to help you make this investment from a distance.

Other recommendations include getting in touch with area property managers to get their opinion on the property you are considering, evaluating rent prices, and talking to local investors who are familiar with the neighborhood and the property. As soon as you have the property under contract, hire an appraiser and a reputable inspector.

Assemble a trustworthy property management team

It can be very unnerving to own an investment property in your Self-Directed IRA that is hundreds (or even thousands) of miles away. That is why it is crucial to hire a property management company that you can trust to run the day-to-day operations of your investment.

Try to get as many referrals as possible and interview several before making a decision. Make sure they are communicating promptly and clearly during the screening process. If not, that could be a red flag that they will be unresponsive after you hire them. You are looking for a company that will keep you informed, manage your tenants, and guards your investment.

The property management company is vital to the success of your out-of-state investment property. Take your time and choose it carefully.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

How a Self-Directed IRA Helps Millennials Retire Sooner

“Retirement? I cannot even pay off my student loans!” We get it. However, there is a process to it, and starting a Self-Directed IRA sooner rather than later puts you on the way.

You have your monthly mortgage or rent to worry about along with paying back student loans, healthcare costs, and sometimes just making ends meet.

Whether you are employed or work for yourself, chances are you have started an IRA or 401K. Ideally, your employer also contributes a percentage of your pay to your plan as a benefit of working for them. You elect to contribute a small percentage of your pay as well.

At this point in time, your retirement planning consists of, if you have time, opening your monthly statement and seeing a bunch of numbers and percentages on a chart. You struggle to find that number at the bottom of the third page that you think tells you how much you have saved up thus far. It looks like your money will add up and that 30 to 40 years from now you might have enough to be able to retire.

It does not have to be that way. By converting to (or starting) a Self-Directed IRA, you can take control over your retirement possibilities.

If you are knowledgeable about your current “plan”, you often need to research the various funding options your current plan makes available to you and read through pages of growth and pie charts in order to make a decision.

What this means is that you are being asked to take your valuable time to make what is really an uninformed decision about something that may not impact you for many years.

The companies that “manage” these IRA and 401K plans make their money by charging employers service fees for “managing” all of these accounts. The opportunities they present for investing are usually limited to those entities the management company does business with or has a financial relationship with.

On the other hand, starting your own Self-Directed IRA allows you to freely choose your investing decisions.

Now think about how many people you know that do not own a home and are paying rent every month. The amount of rent they (or you) pay each month is based on a number of cost factors.

Suppose a landlord charging your friend $1,000 per month winds up with $75 per month “profit” after their mortgage cost, property tax, maintenance, janitorial service, garbage removal, redecorating, and property management costs. Suppose this landlord owns a 10 unit apartment building. That would make their “profit” $750 per month.

Chances are that your current IRA or 401K plan is not generating $750 per month (or $9,000 per year) for you at this early stage. Even if you have $100,000 in your account, a $9,000 annual contribution equates to 9%. It does not take very long to verify that your current plan is not producing at a 9% rate for you.

With that in mind, suppose you have a Self-Directed IRA instead. Among the capabilities it provides is an ability to invest in real estate at any time. This means that you could purchase or partner in the purchase of an apartment building or any other form of rental property.

Using your friend’s apartment above as an example, doing this under your own Self-Directed IRA could be contributing some or all of that $750 per month “profit” to your fund every month, and it is tax free.

It takes your personal time to find either a partner or the right investment property to purchase. Think of which is more worth your while. You could spend time each month trying to interpret your current IRA or 401K statement and making fast decisions about your 2% gain. Or, you could spend that time next month toward purchasing the best real estate opportunity to grow your Self-Directed IRA as quickly as possible.

Thinking long term, you could use your monthly profits toward investing in additional properties which generate rental profits and grow your own empire.

Suppose that you start your Self-Directed IRA now, and that ten years from now, your rental properties combine to be valued at $700,000. By then, your debt is paid off or close to it. You could then either keep growing your portfolio or you could sell it and retire.

That is ten years from now. Not thirty. The choice could be yours.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Be Cautious, Due Diligence is a Must with Your Self-Directed IRA

We see stories in the news all the time about criminal activity milking millions of consumers out of large and small sums of money. We all need to be even more careful when it comes to our Self-Directed IRA account.

Perhaps the biggest lesson came a few years ago when the owner of a large chunk of commercial land in Texas perpetrated rumors that the Disney people were looking to develop a theme park along the line of DisneyLand in that area.

Based on this “information”, several large commercial developers invested in what they were told was land surrounding where the Disney people were expected to build. They wanted to be able to develop hotels, restaurants, and everything else that families want near a Disney property.

However, there was no truth to the “news” that Disney had any plans to build there. The discovery of these lies was not discovered until several developers had spent millions of dollars on land which had much less value than they were told.

What does this have to do with a Self-Directed IRA?

If that scenario can happen to multi-million-dollar investors with teams of executives, this could happen to you and your family as investors dealing with some or all of your retirement money.

Even though the criminals in the Texas Disney scandal were eventually caught, several of those that invested under the false pretenses lost at least part of their money.

Back in December 2017, the Securities & Exchange Commission uncovered a scandal which generated more than $1.2 billion invested into a line of what proved to be unregistered securities. The majority of those who invested into this fraud were seniors, many of whom lost all of their retirement money.

That amount all came from consumers located within the state of Florida alone.

When you have your Self-Directed IRA, you have the flexibility of making your own investment decisions in terms of real estate and/or business interests you purchase in order to grow your funds.

This is why you need to exercise extreme caution and check into every detail before you make any payments.

Chances are you have or had a Traditional IRA or 401K plan, which are often administered by a management company retained by the employer, union, or other professional organization.

Those entities handle the due diligence process prior to making the various investing opportunities available to their clients.

However, while the Self-Directed IRA allows you the opportunity to invest with a higher rate of return, you, in turn, take on the responsibility of having to live with your decisions regardless of how well they work for you.

There are due diligence steps that you can take to ensure that an investment you are considering is a legitimate opportunity for you.

  • If you are considering investing in a real estate trust fund or holding company, you can check with the Securities & Exchange Commission. You should also do online research. Look for any complaints or inconsistencies in information they distribute including a company web site.
  • There are ways to research prior to making a purchase, or even making an offer, on a specific property. You can review comps, which are comparable prices of similar nearby properties, by looking at web sites such as Realtor.com.
  • In the event that a builder or developer is involved, you should research their recent transaction history. If a contractor is involved, you should check with the city or village in which the property is located to verify that the company is actually licensed there.
  • If it is not a property you can easily go and see for yourself, it is all the more reason to be careful. Unless you know for a fact that the company is reliable, do not invest in anything out of your area or out of state.

You should also research the community surrounding a potential real estate investment. There is the scene in the TV show from many years ago called “The Honeymooners”. Alice is complaining to Ralph about the time he bought a parking lot across from a movie theatre and how badly that investment turned out.

“How did I know they were building a drive-in?” was Ralph’s response. Good for a laugh, but a lesson for all of us in the process.

Make certain that you treat your Self-Directed IRA at all times like it is your own money. After all, it is.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

The Seven Deadly Sins of Self-Directed IRA Investing

1.)  Paying too much. Experienced investors will tell you: Make your money when you buy. Not when you sell.

This means that whatever the investment, the best investors are buying assets at a discount to the intrinsic value of the property. Time and reasonable care and effort will result in unlocking            value, and you can profit handsomely simply by selling the property for what it is worth. You do not have to hope you find a foolish buyer willing to give you more than it is worth. That is not a        strategy. Find unloved properties, ugly ducklings and hidden gems that you can buy on sale, take a little care, fix them up, and you can rent or sell for a fair price.

2.)  Doing business with relatives. It is not a great idea in any context. But if you do business directly with the wrong relative in your Self-Directed IRA, it is actually illegal – and could        result in severe fines, taxes and penalties.

Congress expressly forbids owners of Self-Directed IRAs from using them to buy from, borrow from, lend to or sell to certain family members. Specifically, you cannot transact with these              individuals:

  • Your spouse
  • Your own descendants and those of your spouse
  • Your own grandparents and great grandparents and those of your spouse
  • Your attorney, accountant or advisor who advises you on your Self-Directed IRA in a fiduciary capacity
  • Any entities controlled by any of these prohibited counterparties.

3.)  Commingling funds.  You cannot involve your own personal funds in your Self-Directed IRA investment in any way. All purchases related to your investment must come from your Self-  Directed IRA account that contains the property. Technically, by law, you cannot even change a lightbulb in your property unless you bought the bulb with money from your Self-Directed        IRA account.

Self-Directed IRA owners should work closely with American IRA, LLC to ensure that all transactions related to your property are routed through your IRA account.

4.)  Accepting rent payments personally. If you are renting out a Real Estate IRA property, you cannot accept a rent check made out to your own name. Rents and all other payments          related to your Self-Directed IRA must be made out to the entity that holds the property, or to your Self-Directed IRA account itself.

Likewise, you cannot take a cash payment directly. Doing so risks having the IRS declare the payment to be a prohibited transaction, potentially triggering the disallowance of the Self-              Directed IRA’s tax advantages, along with tax liability, penalties and lots of legal bills.

5.)  Signing a personal guarantee for a real estate IRA mortgage. The law mandates that you cannot pledge your Self-Directed IRA asset as collateral for a personal or business loan      outside of the IRA. All mortgages on your Self-Directed IRA property must be on a non-recourse That means that in the event you default, the only course the lender can take is to foreclose          on the property itself. They cannot come after you, personally. If you sign a personal guarantee, or pledge non-IRA assets to secure the loan, the IRS could strip your account of its tax-                        advantaged status, resulting in significant taxes and penalties.

6.)  Forgetting about RMDs. Real estate is highly illiquid. But if you have assets in a Self-Directed IRA, Self-Directed Solo 401(K) or other tax-deferred savings vehicle, you will need to  come up with cash each year to make your required minimum distribution, beginning by April 1st of the year following the year in which you turn age 70 1/2.

Self-Directed IRA owners should plan ahead so they are not caught in a cash crunch, unable to quickly raise the money within the IRA to make the RMD.

7.)  Paying a high percentage each year just to hold the asset. Many Self-Directed IRA firms charge a percentage of assets under management to hold IRA properties on your behalf.      Many times this is needlessly expensive and inefficient.

For investors who tend to buy and hold over long periods of time, switching to American IRA’s flat-rate, menu-based fee structure, rather than a high expense ratio, wrap fee or other AUM                charge can save thousands of dollars each year on fees.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Or visit us online at www.AmericanIRA.com.

Self-Directed IRA Tips: Conducting Due Diligence on Partners and Developers

Self-Directed IRAs are a proven wealth builder and income generator. No other asset class delivers such a potent combination of current income, capital gains potential, leverage – thanks to the possibility of increasing rents over time and finding additional revenue streams – inflation protection.  But of course, no real estate investment is a sure thing. Investment carries risk, and sometimes Self-Directed IRA investments fizzle. Due diligence is a critical skill for any real estate investor. This is especially critical if you are committing Self-Directed IRA funds to an investment along with others. Not only do you need to conduct a sober assessment of the value of the property and its potential for profitability; you must also assess your fellow partners and other stakeholders.

Ask these questions before committing Self-Directed IRA money to an investment.

Does the promoter have skin in the game?

Consider a ham and eggs breakfast: The chicken was involved. The pig was committed.

The difference is key: When you are investing in a real estate deal along with others, you want other partners and your managing partner to be like the pig, not the chicken. You want them as committed to making the deal work as you are.

Obviously, a professional real estate agent cannot be personally invested in every deal he represents. But real estate developers should be, or you should exercise extreme caution: If the opportunity is good enough for your money, why is it not good enough for them?

Real estate developers and promoters should eat their own cooking. Look for projects where the promoter and general manager (for limited partnerships and LLCs) has a significant portion of his or her own wealth invested alongside yours. You want a true managing partner, and not just a manager, at the helm.

Furthermore, if the investment goes south, a promoter with no equity of their own in it is not likely to stick around and make it work. They may just move on to the next project, leaving you and your fellow investors who actually do have your own money invested holding the bag.

What is the commission?

There is nothing wrong with sales commissions. But you should have your eyes open about how much you are paying when you are investing hard-earned Self-Directed IRA assets through a broker. If they take too much money up front in fees and commissions, you have much less money working for you in the investment, compounding for you over time.

Furthermore, it will take that much longer for you to recoup your investment, because you are starting out well underwater. It could take years to break even.

How experienced is the management team?

Have the managers been through the wringer before? What is their track record? Have they developed and managed properties of this type before? If this is their first venture, who were they working with before? Were they learning from some of the best in the industry, or did they leave a bad firm?

Also, where is the management team located? Are they near the property or do they have to buy a plane ticket to visit the property they manage?

How much are they borrowing?

Leverage is a powerful tool in real estate investing. But it is a risky one, too: The more money they are borrowing, the more even a small fluctuation in property values can hurt you, and even leave you upside down in your position for years.

It is important that the property meet your risk tolerance criteria, after accounting for leverage.

Furthermore, if the partnership or LLC is using a lot of borrowed money, you may not want to borrow money yourself, in addition to their own built-in leverage. That is just adding leverage on top of leverage. It feels nice in a strong market, but a downturn could be very painful indeed.

What is the exit plan?

Real estate is highly illiquid. It is the nature of the beast. But there should be some planning for a profitable exit, even if it is a few years in the future. The developer could have plans to sell the entire development at a profit after some wise investments enhancing the value of the property. They should be able to give you a rough timeline.

Even if the developer plans to hold indefinitely, there should be some way for you to sell your interest at some point. If not, then you should be paying a lower price to compensate you for the lack of liquidity.

Larger projects have little trouble helping a small investor out of their position, in time. For smaller, less established firms, it is much more difficult.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Or visit us online at www.AmericanIRA.com.

Prohibited Transactions and Disqualified Persons in a Self-Directed IRA

The Self-Directed IRA can be one of the most transformative tools any investor employs in their quest for a secure retirement. But while taking advantage of the tax protections in an IRA to invest in alternative retirement assets like precious metals and real estate can be incredibly freeing, it is important to recognize that there are also restrictions in retirement accounts—and those restricts are important to pay attention to if you do not want to be hit by steep penalties.

That is why we have taken the time to compile some of the common prohibited transactions and disqualified persons rules in the Self-Directed IRA. The more you know about your limits, the better you will be able to experience the freedom that comes with investing through a Self-Directed retirement account:

Prohibited Transactions in a Self-Directed IRA

What do we mean by prohibited transactions? These refer to those types of investments you will be expected not to make when you are using a Self-Directed IRA. Remember: while you can use an IRA for a wider variety of investment classes than stocks and bonds, there are some strictly-regulated and prohibited transactions you will need to avoid, including:

  • Alcoholic beverages. Wine is a particularly popular investment, as it keeps well, and rare wines can increase in value over time. But investors cannot use a Self-Directed IRA to protect wine investments, or any alcoholic beverages for that matter.
  • Life insurance. Putting a life insurance policy within a Self-Directed IRA is not possible.
  • Some precious metals. When you do invest in precious metals within a Self-Directed IRA, it is important to work with a reputable dealer and to double-check that the specific bullion or coins you are purchasing are in line with approved metals for an IRA.
  • Antiques and similar items could fall under the category of “collectibles,” making them prohibited transactions for the purposes of investing with a Self-Directed IRA.
  • Fine art is a popular investment for those who want to diversify their assets out of the stock market and other assets tightly tied to the global economy. However, these investments will have to be made without the tax protections of the Self-Directed IRA.
  • Using a Self-Directed IRA for loan collateral is another type of prohibited transaction. Sheltering retirement investments from outside influences also means sheltering them from the possibility of being collected after defaulting on a loan. Since collateral is not the purpose of IRAs, any such transaction would be strictly prohibited.

There is a great deal of freedom within an IRA to invest in the type of assets you want to own—but it is important to keep the above in mind before you get started.

Disqualified Persons in a Self-Directed IRA

In addition to prohibited transactions, there are prohibited individuals who are not allowed to take part in an IRA. What does this mean exactly? Let’s break it down:

  • You, your spouse, and descendants/ascendants or any entities they control can lend to your Self-Directed IRA or borrow from it.
  • Prohibited individuals cannot buy or sell assets directly to your Self-Directed IRA—including any entity they control.
  • The same rule as above applies to the buying or selling of services.
  • Using Self-Directed IRA assets for direct personal benefit—such as living within a house owned by the IRA—is strictly prohibited, and this rule applies to you, your spouse, and descendants/ascendants.

Understanding the limitations of the Self-Directed IRA maybe is not the most fun part of developing your own retirement strategy. But it is integral if you are going to do it the right way and ultimately take advantage of the fantastic opportunities offered within self-direction.

For more information on prohibited transactions and disqualified persons within a Self-Directed IRA, continue reading the information here at www.AmericanIRA.com or call us at 866-7500-IRA.

Using Private Stock with Self-Directed IRAs

One of the most attractive aspects of using Private Stock with Self-Directed IRAs is the diversification it brings to your retirement portfolio. The IRS does not put many restrictions on the assets that are allowed in your Self-Directed IRA—life insurance, jewelry, collectibles and some precious metals are not permissible—but your custodian might not give you access to the widest range of investments.

With Self-Directed IRAs, you open yourself to alternatives like real estate, tax liens, precious metals and, of course, that asset class that is usually available only to the wealthy: private equity.

It is a basic tenet of investing that you never put your money into anything you do not understand. So, here is a primer on using Private Stock with your Self-Directed IRA. Your custodian will fill in any blanks and help you get started:

How does private stock differ from common stock?

Unlike common stock, private stock cannot be purchased by the public on the open market. Typically, the offerings are made to pre-qualified individuals, and these offering must comply with the securities Blue Sky laws in the state in which they are issued.

While publicly traded securities are subject to public disclosure laws, private equity is not. This means that private equity investors must utilize their research skills, personal knowledge, and experiences before choosing a private company.

Be sure to study the offering materials carefully and seek out professional help if you are not clear on any parts of them.

What are the benefits for the investor?

Private Stock with Self-Directed IRAs provide the same tax advantages as Traditional or Roth IRAs. Furthermore, as mentioned earlier, investments in private companies add true diversification to your retirement account.

From an investment standpoint, private equity can be financially rewarding. According to recent studies, private equity outperformed the Standard & Poor’s 500 Index by over 5% from 2005 to 2015. But even though it diversifies your retirement savings and can be quite lucrative, it is critical that you understand where private stock fits in with your risk tolerance.

Are there risks associated with private stock?

There are risks with every investment. Even certificates of deposit have inflation risk (your interest rate is lower than the inflation rate) and interest-rate risk (you are stuck in a long-term CD when rates go up). So, “risk-free” does not exist in the world of investing.

But, those investing in Private Stock with a Self-Directed IRA will be raising their risk profile. The higher risk is offset somewhat by the possibility of a higher reward, but it is still important that a portfolio that contains private equity should be balanced with more conservative investments.

Be sure to follow the rules

Aside from the limits and rules that govern all IRAs, here are some rules specifically for investing in Private Stock with your Self-Directed IRA:

  • The Self-Directed IRA, not the IRA holder, is the owner of the private equity
  • Your Self-Directed IRA cannot purchase private stock that you already own
  • The Self-Directed IRA holder participates on behalf of the stock that the IRA owns
  • All investment earnings must flow into the Self-Directed IRA account
  • Disqualified persons, which includes the Self-Directed IRA holder, may not be employed by the company

While this list of rules is not all-inclusive, it should prompt you toward due diligence before you invest.

Purchasing private stock

Investing in Private Stock with a Self-Directed IRA is not all that difficult. Open an account with a reputable and experienced custodian. Identify the business you want to include in your portfolio. Direct your custodian, using a buy direction letter, to purchase the shares on behalf of your Self-Directed IRA. That is all there is to it.

At American IRA, we have the experienced professionals to make your private equity transactions go smoothly and quickly. With our simplified process, you can effortlessly diversify your Self-Directed IRA account with any private stock you wish to own.

For more information on purchasing Private Stock with Self-Directed IRAs, call us today at 866-7500-IRA (472) or visit us at www.AmericanIRA.com.

C Corporation UBTI (Unrelated Business Taxable Income) Blocker Technique May Help Reduce Self-Directed IRA Taxes

The Tax Cuts and Jobs Act – the sweeping series of Tax Cuts Congress passed at the tail end of December 2017 – included a bit of Christmas cheer for dedicated Self-Directed IRA investors.

Normally, as most readers are aware, there are no current year tax consequences for dividends, rental income or capital gains as long as the money remains within a Self-Directed IRA of any type. The income or gains continue to grow tax-deferred, or in the case of Self-Directed Roth IRA accounts, tax-free (as long as it stays in the account at least five years).

But that tax benefit does not apply to income or capital gains that are attributed to borrowed money. Instead, a special tax on what is called UBTI (Unrelated Business Taxable Income) applies.

You see, you only get the tax advantage on your own invested money – not on money you borrow from other people!

So, if you have 45 percent equity in a given property within a Self-Directed Real Estate IRA and you have a mortgage covering the other 55 percent, then 55 percent of your income from the property, and 55 percent of any capital gains from that property are federally taxable – at a punitive maximum rate of 37 percent!

The same principle applies to stocks and other securities in a Self-Directed IRA that are bought using a margin loan, and in certain cases, investing in an active business or trade via an LLC or other pass-through entity, such as a limited partnership. (S-corporations are pass-through entities, of course, but you cannot own them within a Self-Directed IRA, so they do not apply to this discussion).

Some Self-Directed IRA investors try to limit the impact of taxes on UDFI (Unrelated Debt Financed Income Tax) by creating a C corporation, and then using the C corporation to make the investments. It is a tax planning tool called a C corporation blocker.

Here is how it works: C corporations benefit a great deal from the Tax Cuts and Jobs Act, which reduces the corporate income tax rate from 35 percent to 21 percent. The corporation itself releases the dividends to the retirement account, rather than to the taxpayer directly, and they do not come from the property itself.

Obviously, there is a big difference between a 21 percent tax rate and a 37 percent rate, or even the old maximum income tax marginal rate of 35 percent.

Meanwhile, the real estate or other leveraged investment does not pay its income and gains directly to the Self-Directed IRA. Instead, they go to the C corporation.

When set up correctly, this is a big improvement compared to paying the marginal rate on your personal income tax returns, which is where your unrelated business income tax would wind up.

American IRA, LLC does not provide individualized tax advice. The information in this article is for general informational purposes only and should not be construed to be tax advice in your individual case. Readers should engage the services of a qualified tax professional, such as a CPA or enrolled agent before taking action.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Or visit us online at www.AmericanIRA.com.

Events

Webinar – Self-Directed Retirement Accounts – The Fundamentals

Sean McKay, Senior Vice President of American IRA, will be hosting this webinar: Self-Directed Retirement Accounts – The Fundamentals

Please click on this link to register: https://attendee.gotowebinar.com/rt/496593716250188291

This an introductory class to discuss the pro’s and con’s of self-directing your retirement account. The reality is that a Self-Directed IRA /401k is a terrific tool for many investors however it is not the right fit for all of us. Join us for this informational event.

After registering, you will receive a confirmation email containing information about joining the webinar.

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