The idea of holding real estate by the time you hit retirement age is an appealing one. Not only does real estate have the potential to generate passive income, but it also tends to be a relatively stable, slow moving asset class that doesn’t crash the way the stock market does. Of course, any piece of real estate doesn’t reflect the market as a whole. But there’s a reason why so many people are wondering how to set up a Self-Directed Real Estate IRA: they know it can be a compelling way to store wealth for the long-term future.
The only question is, how? In this post, we’ll address how you can get started with real estate investing within an IRA, offering you the tax protections that come with retirement accounts.
How to Get Started with a Self-Directed Real Estate IRA
For starters, you can’t take any old IRA that you might have already and transfer real estate to it—not without the proper set-up already established. That means you’ll want to follow these steps before setting up your investments.
The key to holding real estate in an IRA is to open a Self-Directed IRA. A Self-Directed IRA is the same as any other type of IRA, but with the caveat that you’re the one in charge of making the buy and sell orders to your custodian directly. The custodian administers the account, carrying out the buy and sell orders. To hold real estate within a Self-Directed IRA, you’ll need to work with a Self-Directed IRA administration firm who offers services for administering the buying and selling of real estate within your retirement account.
Many people who first hear of this setup might confuse a Self-Directed IRA with types of IRAs, such as Traditional IRAs and Roth IRAs. But it mostly refers to the style of investing with one of these accounts. For example, it’s possible to hold a Self-Directed Traditional IRA, just as it’s possible to hold a Self-Directed Roth IRA.
The First Steps for Opening Your Self-Directed IRA
If you don’t already have a Self-Directed IRA, you should reach out to a Self-Directed IRA administration firm to get the process started. They’ll have the necessary paperwork for you to file. But before you do, make sure that you consider the range of options in front of you. As the previous section noted, there are multiple types of Self-Directed IRAs, including Roth IRAs, Traditional IRAs, SEP IRAs, and even Self-Directed Solo 401(k) plans. Just as you’d choose which type of account is best for you if you weren’t self-directing, you should choose the ideal account for your situation and retirement strategy before you get started.
Once you know what you want to open, you then should consider the type of funding you want to use. You can open an account directly and begin making contributions toward it. You can also open an account and transfer funds if you have a similar type of account already open—a transfer is a direct and straightforward way to ensure that the funds move quickly. However, you may also have to try a rollover, for example, if you’re working with accounts of two different types.