A Self-Directed IRA is a simple concept. You open one with a Self-Directed IRA administrator like American IRA. You issue buy/sell orders within the account. Then, with that administration team in your corner, you can make all sorts of investments with the tax protections of an IRA. But there’s still one question. Is it right for the kind of investment you want to make? What if you want to use a Joint Venture, for example, to add some oomph to the capital you hold in a retirement account and invest in something more ambitious, like real estate? To answer that question, we’ll look at Joint Ventures, how they work in IRAs, and whether one might be right for you.
What is a Joint Venture?
A Joint Venture is distinct from a partnership in that it’s what happens when you pool resources with a second party, but don’t build a long-term formal arrangement out of that venture. A Joint Venture, of course, can eventually turn into a partnership. But for investing purposes, a Joint Venture means you’re temporarily teaming up with someone else to make an investment happen.
It’s important to understand how this works within a Self-Directed IRA, as Joint Ventures can sometimes run afoul of retirement investing rules. For example, here’s how we put it at our Joint Ventures page:
A simple example of a Joint Venture would be the purchase of a single-family house. The Self-Directed IRA invests with a non-disqualified person to purchase a house to rehabilitate and re-sell.
Notice that term “non-disqualified person.” In other words, you have to have a Joint Venture with someone who isn’t an immediate relative, ascendant, or descendant, to use a few examples of disqualified persons. You can’t initiate a Joint Venture with your son, for example, or your daughter—not one within an IRA, anyway.
The Joint Venture ultimately ends when the goals of the venture have been met. For example, if buying an investment property, the Joint Venture may then end when the property is sold.
How Is It Different than a Partnership?
A partnership is a long-term, formally written agreement to possibly invest with two or more parties. Typically, an investor might enter into a written agreement with someone else to purchase multiple single-family houses, for example, to eventually sell them. A Joint Venture is similar to this but is much less formal and isn’t repeatable. If you want to enter into a repeatable relationship with someone else in which you make investments like these through a Self-Directed IRA, a partnership would be the way to go.
Why a Self-Directed IRA?
Investors can use the tax protections of Self-Directed IRAs to realize the long-term benefits of retirement investing. For example, an investor can put money into a retirement account and keep that money churning through real estate investments, potentially growing over time. The fact that the money is in a retirement account means that investors can enjoy a long term of tax-free growth. In some cases, such as with a Roth IRA, an investor may pay the taxes up front and owe no additional taxes upon reaching retirement age and taking distributions from the account.
This can potentially add up to far more gains in an account over time, giving investors added potential to earn lots of money for a retirement nest egg.