Are You New to Self-Directed IRA Investing?

Many people are not sure if they have enough money in their IRA/401(k) account to even begin thinking about investing with it via a self-directed account. We have many clients who have taken accounts with small account balances and grown them into sizeable accounts simply by making one successful investment at a time. In this article, we will share the story of one of our clients, David G.’s 1st self-directed Roth IRA investment. David G., by the way, grew his account from $6,800 to $293,000 in 5 short years.

David G. Decides on What His First Self-Directed Roth IRA Purchase Will Be

David G. was new to self-directed IRA investing and said “I wanted to ‘test the water’ with an easy first investment. Land was a good choice because it requires very little management.”

David G. Finds a Great First Purchase

David G. wasted no time in finding the land he wanted to purchase. He found an oversized, undeveloped, 1.87 acre residential lot. This lot had a low selling price of $18,900 (in comparison to its actual market value of $31,000). The lot really had a lot of value and appeal within it as it contained: water, sewer, a great view, and an additional upside potential to split the lot into 2 parcels.

STOP THE PRESSES…put on the BREAKS…David G. only has $6,800 and he needs $18,900!

Ah yes, you are paying attention. It is true…David G. only has $6,800 in his Roth IRA! Well, David is a determined individual and he quickly realized that he needed more funds to make this deal happen. So, he made the maximum allowable Roth IRA contribution of $4,000 for that year. Then he partnered with his wife’s Roth IRA giving her Roth IRA 50% ownership. Let’s do the math for a moment… ($6,800 plus $4,000 plus $9,450 = $20,250). Through his yearly contribution and partnering with his Wife’s Roth IRA, there were more than enough funds to purchase this $18,900 property.

The property was titled:

American IRA, LLC FBO David G., Roth IRA, an undivided 50% interest and

American IRA, LLC FBO Mrs. David G., Roth IRA, an undivided 50% interest

Now HOLD ON A MINUTE…aren’t his wife and her ROTH IRA prohibited?!?!

Even though he cannot purchase from nor sell to his wife or other disqualified persons, he CAN partner with himself and/or any other person(s) and/or any other person’s IRA at the TIME OF ACQUISITION.

Important After Purchase Details

The IRA must take responsibility for the portion of expenses and/or income in exact relation to the percent the IRA invested in the purchase of that asset (in this case 50%).

The individual is not allowed to pay the expenses for the IRA or receive any income from the IRA.

Avoiding Some Simple Prohibited Transactions

David G., his wife, children, parents or entities they own or control are not allowed to use the land. (For Example: Camping, picnicking, walking the dog, storage, etc.) The IRS states the assets owned by the IRA must be for investment purposes only.

David G. hired someone to clear the land as needed–Neither David G. nor any prohibited persons are allowed to provide goods or services, such as clearing land owned by a self-directed IRA.

David G.’s IRA obtained liability insurance for the land to protect from losses in the event someone entered the property and injured themselves. While this is not a requirement, it is always a good idea to have insurance policies in place to guard against potential financial losses. Reminder this policy must be purchased by and in the name of the IRA not the account holder’s name.

For more information, or to explore your options, call American IRA today at 866-7500-IRA(472). We look forward to working with you.