Tax Lien Investing in a Self-Directed IRA
Tax liens. For most people, those two words are scary. But there’s another side of tax liens that can potentially create reliable income for a retirement investor who wants to invest those tax liens within a Self-Directed IRA. By investing in tax liens, an investor can take over the lien, acquiring the debt for the potential to create that reliable income. And in many cases, there are added benefits to investing this way, including the possibility of foreclosure and taking the property into the IRA itself. Here’s what you’ll need to know about this unique way of investing if you want to expand your retirement investing horizons:
How to Invest in Tax Liens in a Self-Directed IRA
First, let’s get started with the mechanics of tax lien investing in an IRA. Note: if you want to follow along, check out our dedicated page on tax lien investing here.
Taking over a tax lien and collecting on the debt owed to that asset means investors can potentially see very high interest rates on the debt. The interest rates you can charge are often limited by the state under whose jurisdiction you’re operating, but in many cases, interest rates can be as high as 18% or more. In the case of foreclosure, you can then decide whether you want to sell the property or keep it in the IRA and generate a profit by renting it out through the Self-Directed IRA.
Why Tax Liens?
Investing in tax liens can be a great way to diversify your retirement portfolio and take advantage of potential returns. With a Self-Directed IRA, investors now have the opportunity to purchase tax liens backed by federal and state governments. This type of investment offers a guaranteed rate of return with minimal risk, making it an appealing vehicle for retirement savings.
Tax liens are essentially claims on the property or assets of delinquent taxpayers who have failed to pay their local or state taxes. When investors purchase these liens, they become creditors of the taxpayer and have rights to the property until their claims are paid off. Liens are typically sold at public auctions, with interest rates varying depending on year issued, location, and type of tax lien certificate.
Investing in tax liens through a Self-Directed IRA offers several advantages compared to typical stock investments. Tax lien certificates offer secure returns that are generally high—upwards of 18%—and better than those found in stocks or bonds in most cases. There is also more limited volatility due to their status as secured debt instruments (i.e., they remain attached to property), which can provide valuable stability for investors looking for investment options less correlated with the markets overall movements. Additionally, investing in tax liens can be done via traditional methods such as physically attending auctions or purchasing them over an online marketplace—allowing investors to pick up deals quickly when opportunities arise.
What are the Limits of Tax Lien Investing in an IRA?
It is important to remember that there are limitations when it comes to investing in tax liens through an IRA account due to IRS rules and regulations regarding Self-Directed IRAs. These restrictions include prohibitions against investing directly into entities where you may have an affiliation and against any investing activity deemed as self-dealing or deemed as providing personal benefit from such activities (e.g., no renting out the property to someone you know). It is important for investors considering this option familiarize themselves with all relevant IRS laws prior making any decisions related to utilizing a Self-Directed IRA account for tax lien investments in order avoid any penalties or legal ramifications down the line which could impact one’s retirement savings significantly.
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