How to Dominate Your Self-Directed IRA with this One Important Factor

There are a lot of questions that investors hold about a Self-Directed IRA. What is the best asset type? What are the best strategies for success? What are the pitfalls to avoid? What are the restrictions to avoid? And while these questions are tremendously important, sometimes, it’s good to cut through the clutter and get back to what really makes retirement success more likely. And the real answer is simple—so simple, in fact, that you might think there’s something more to it.

What is it? Savings Rate: Your Self-Directed IRA Strategy for Success

The simple fact is, you’ll get out of your retirement what you put into it—at least on the whole. It’s like anything else in that regard: if you’re willing to put in work and money, you’re probably going to get some results out of it. If you’re not willing to put in that work, you’re probably not going to realize those same results.

The good news about a Self-Directed IRA is that it can only feel like a lot of work on the front end. But after you’ve researched your investments, you might even find that the process is mostly automatic after that.

The answer? Your savings rate. How much money you put into retirement, plain and simple, is one of the most overpowering factors in your chances for success. Those who invest 20-40% of their income are far more likely to enjoy financial freedom in their retirement days than those who invest 10%, 5%, or even less.

How to Maximize Your Investment with a Self-Directed IRA

Of course, your savings rate isn’t necessarily efficient. Even if you put a lot of money away, if you make the wrong decisions with your Self-Directed IRA, a lot of that money will go down the drain. That’s why it’s important to put both money and the energy of thought into your retirement strategy. That’s the work that will ultimately pay dividends over time.

How does one maximize their investment? The first is simply by using an IRA to begin with. If you use a general investment account, you’ll have plenty of freedom, but you’ll also find that the taxes cut into your returns. By working with a tax-advantaged account, you can utilize an instant lever for expanding your growth over time. That might not seem like a lot right now, but as you consistently chip away at your retirement account, you’ll find that the percentages add up to a great deal over your lifetime.

Building a Better Strategy with the Self-Directed IRA

Of course, if you’re going to put a lot of your money into a project as ambitious as retirement, you’re going to have to feel inspired by it. You’re going to have to feel confidence in it. You can do that by using a Self-Directed IRA to invest in the type of asset that you know a lot about. For example, real estate investors can have a tremendous amount of success by investing in real estate through their IRA. By utilizing those legal protections and keeping them separate from their personal investments, they’re able to build a strong nest egg using what they already know about the real estate market.

The same might be true of another strategy. But before you jump head-first into the deep end of the pool, put in the legwork up front. Ask the right questions and keep learning. You can keep reading here at www.AmericanIRA.com or call us at 866-7500-IRA to find out more about a Self-Directed IRA and how it works.

Avoiding Self-Directed IRA Scams and Frauds – A Case Study

The vast majority of vendors and advisors operating in the Self-Directed IRA space are basically honest and want to do the right thing by their clients. There are always a few bad apples in any industry, though, and it seems investigators may have uncovered one operating around Chicago and Rockford, Illinois.

While everyone’s entitled to his or her day in court, and we make no claims about this individual’s guilt or innocence, it’s still worthwhile to look at what we know about the investigation and the state’s allegations, so that our own readers can more readily recognize signs of fraud in their own investment practices.

For some time, a financial advisor named Charles R. “Chuck” Hansen has been selling fixed annuities to retirement age clients under the name Senior Securities of Rockford. He has also been selling real estate under the name Chicago Wealth Partners.

Nothing wrong with either one.

However, at some point, according to investigators, Hansen began encouraging his fixed annuity clients to move money out of those annuities and invest the proceeds in his real estate activities.

Investment veterans can immediately see the problem: Fixed annuities are an extremely low-risk insurance product. Actually, assuming the insurance carrier doesn’t go bust, a straight-ahead fixed annuity from a highly rated carrier is about as low risk as it gets.

These investors bought these annuities for a reason: They wanted the certainty and the promises, protection and guarantees that they get with an annuity contract. Obviously, they wanted or needed something low risk. But Hansen prevailed on his clients who trusted him to take their money out of these annuity contracts (eating any surrender charges) and invest them with his house-flipping activities, promising them a higher rate of return.

The state alleges that Hansen told his investors that their investments would remain secure, and would generate reliable returns of between 6 and 10 percent – three to four times what fixed annuities have been promising.

As any veteran Self-Directed IRA investor knows, house-flipping is a risky activity. While good flippers can do extremely well and even become wealthy, nothing in house flipping is guaranteed, and any house flip is inherently risky.

Unfortunately for Hansen and his investors, he got the timing exactly wrong, and wound up going long on real estate directly into the worst real estate recession in living memory.

Hansen also got an unidentified third-party administrative services company to handle Hansen’s clients’ self-directed retirement accounts. This company, likely relying on false information from Hansen, mailed monthly financial statements as late as 2012 indicating their money was still secure. But by 2013, Hansen’s real estate company had lost nearly everything. Hansen’s real estate company collapsed, owing investors over $739,000, according to court records.

Hansen has been charged with one count of mail fraud, but still has not had his day in court.

However, Self-Directed IRA investors would do well to heed these lessons:

  • If someone tells you real estate investing – or any uninsured investment or anything not involving money markets, CDs, whole life insurance or treasury bonds – is “risk free,” take your money and walk away.
  • Do your own due diligence. Self-Directed IRA custodians and administrators don’t screen or judge your investments or second-guess your investment decisions. That’s not their function. They just handle transactions and recordkeeping. Due diligence, ultimately, is the responsibility of the investor.
  • Get a second opinion. If news accounts are correct, nearly any financial professional worth his or her salt would immediately recognize the conflict of interest inherent in pulling money out of a clients’ annuities and investing with the advisor’s own real estate company – and sound the alarm bells.
  • Any recommendation to liquidate an annuity or life insurance contract should be looked at very carefully – as should any recommendation to move money out of a guaranteed or low-risk investment and into a higher-risk investment.
  • Beware of any commissioned advisor who recommends making lots of changes to your investment portfolio. Sure, you’ll have to make adjustments and rebalancing moves now and then. But if they are doing it all the time, for no good reason, they may be guilty of “churning,” – making changes just to rack up commissions to line their own pocketbooks, and that’s an ethical no-no for brokers and advisors.

Borrowing in a Self-Directed IRA

It’s a stubborn myth that you can’t borrow money within your IRA. The fact is that there is nothing in the law that makes it illegal to lend or borrow money using a Self-Directed IRA or any other type of IRA or retirement account. Many of our clients have successfully taken out mortgages to buy real estate within their Self-Directed IRAs for many years.

So relax. You can use your IRA to borrow money for investments within your Self-Directed IRA account. However, there are rules you should be aware of. Read this over before you sign any kind of note!

  • You cannot borrow money from yourself. As the IRA owner, you cannot sell to or lend to your IRA directly. Nor can you lend to it or buy assets from it. By extension, the same applies to any entities (corporations, LLCs, trusts, etc.) that you control. This would create a conflict of interest for your IRA, which was created to provide for your financial security in retirement, not to be a cash flow device for you, or be a financial plaything, before you reach retirement age. Congress specifically wrote in laws prohibiting these kinds of conflicts of interest.
  • Understand prohibited counterparties. Just as your IRA cannot transact with you or any entities you control, it also cannot transact business directly with your spouse, nor your descendants or ascendants, or those of your spouse. The same applies to any entities they control. This means that your IRA may not borrow directly from these persons. However, the law does not currently restrict your IRA from transacting with siblings, aunts, uncles, nieces and nephews.
  • The loan must be in your IRA’s name. The check from the lender should be made out to the IRA itself, not to you, personally. If it’s a wire transfer, the wire transfer should go directly to the IRA, via American IRA, LLC. If you have questions about structuring the transaction, call us immediately at 866-7500-IRA before going forward with it. If you don’t do this properly, you could be facing significant taxes and penalties.
  • You can’t sign a personal guarantee. No matter what an overeager mortgage lender may tell you, you cannot sign a personal guarantee of any loan to your Self-Directed IRA. You also may not pledge any collateral from outside your IRA. Generally, the loan must be against the property being purchased.
  • You can’t pay off the loan with personal funds. All mortgage payments must come from within your IRA, and not from your personal bank account. Be sure to maintain enough liquidity within your IRA that you are able to make the mortgage payments.
  • The debt must be non-recourse. This means that in the event of default, the lender cannot come after you, personally, to make good on the debt. Any collateral or security must come entirely from within the IRA.

In practice, this makes your own personal income and credit history irrelevant for the purposes of IRA lending. The loan is based on the security of the asset being purchased, not your future income.

This also means that lenders will expect you to have more skin in the game than they would on loans underwritten based on your income. Only a few major lenders are active in the Self-Directed IRA market. Most of them will finance about 65 percent of a purchase, maximum. For condominium investments, they will usually only finance a maximum of about half of the investment.

Rates are higher. Expect to pay about 1 to 2 percent more for mortgages on IRA investments than you might pay on them outside of your IRA, though this varies.

Understand Unrelated Debt-Financed Income Tax. In Self-Directed IRAs, income and capital gains tax on assets bough with your own money are typically deferred until you begin taking withdrawals in retirement. This doesn’t apply, however, to assets you own via other peoples’ money. Expect to pay capital gains or income tax, as applicable, on any gains or income attributable to debt. For example, if your IRA owns 50 percent of a given property and you still owe 50 percent of the value of the property to a mortgage company, you can expect to pay tax on 50 percent of the net income you realize from the property that year.

However, if you establish a self-directed solo 401(k), and own the real estate within your 401(k) instead of an IRA, you may be able to legally avoid the unrelated debt financed income tax. Speak with your tax professional for statistics.

Contact American IRA, LLC to learn more.

American IRA is among the country’s leading experts on the ownership of real estate within Self-Directed IRA accounts and real estate IRA strategies. Founder and CEO Jim Hitt has been investing in real estate and other alternative asset classes within his own IRA since the early 80s.

We can’t provide specific tax advice to your personal situation (we’re third party administrators of Self-Directed IRA accounts, not tax experts), we can help you ensure that your loan and purchase are properly structured to be compliant with the law and with IRS regulations.

Starting a New Self-Directed Solo 401k For Your Small Business

The Self-Directed Solo 401k is an amazingly flexible and powerful tool for long-term wealth building. The combination of tax-deferred growth, high payroll deduction/deferred compensation limits and the generous allowance for contributions by the employer make it particularly attractive for those whose businesses are generating substantial free cash flow and income potential.

Furthermore, unlike with IRAs, there are no maximum income levels that you must not exceed in order to fully enjoy the tax benefits of the plan. Small business owners and plan participants can contribute to a Self-Directed Solo 401k plan no matter what their income, though with conventional (non-solo) 401(k) plans the contributions of highly-compensated individuals could be limited by “top hat” rules, if rank and file participation in the plan is poor.

These provisions typically aren’t anything most solo 401(k) plan owners have to worry about, however, because the only full-time employees in these firms are typically the owner and his or her spouse.

Why solo 401(k)s?

A solo 401(k) plan may help you reduce your income tax liability. This is because the law allows you to deduct the entire amount of your contribution each year from your taxable income. This goes both for you personally, as the account owner and plan participant, as well as the business, which can write off contributions to employee pension plans, including 401(k) plans as employee compensation expenses, if they are incorporated.

If the business is not incorporated, then you can still make pre-tax contributions by deducting contributions for yourself from your personal income.

Setting Up for Self-Direction

If you want to invest your solo 401(k) results using self-directed strategies that allow for investing directly in alternative asset classes that aren’t normally associated with Wall Street (e.g., gold, precious metals, venture capital, private placements and direct ownership of real estate), then you need to engage the services of a reputable third-party administrator or custodian, such as American IRA, LLC.

To get started, visit www.americanira.com and open an account. Click on “Self-Directed Accounts), then on Self-Directed Solo 401k plans, and download and complete the Self-directed 401(k) application kit.

Why a Self-Directed Solo 401k?

Solo 401(k)s also have a number of other valuable benefits as well:

Higher Contributions

  • Annual contributions up to $54,000 with an additional $6,000 catch-up contribution for those over age 50.

Borrow from Your Self-Directed 401k (Tax- And Penalty-free)

  • Borrow up to $50,000 or 50% of your account value (whichever is less) for any purpose. Loans must be paid back within 5 years.

Checkbook Control

  • Plan participants may have the option to have checkbook control over their retirement funds. American IRA acts as the record keeper for the Self-Directed Solo 401k plan.

Roth Provision

  • A built in Roth provision is included which can be contributed to without any income restrictions.

Easy Administration

  • You are the trustee of the plan. American IRA acts as the record keeper.

Funding your Self-Directed Solo 401k

Many of our clients who establish a new Self-Directed Solo 401k for their small business want to fund it by rolling over one or more existing IRA or self-directed IRA accounts into the new solo 401(k). Fortunately this is easily done for pre-tax IRA funds. You simply have to ensure that your 401(k) plan founding documents allow for this provision. This is best done when you’re first drafting your 401(k) plan, whether it’s a solo 401(k) plan or any other small business 401(k) plan.

If you’re planning on expanding the business and hiring more employees over time, the solo 401(k) plan may not be the best match for you. The solo 401(k) plan is specifically designed for self-employed individuals and single-owner businesses, including corporations and LLCs, as well as for ‘mom and pop’ businesses owned and operated by couples.

You can’t directly fund your pre-tax solo 401(k) with a rollover from a Roth IRA. The tax regimens of both types of accounts makes them incompatible.

Claim a tax credit

You may be eligible for a tax credit of up to $500 per year for up to 3 years, just for starting a solo 401(k) plan, SIMPLE or SEP IRA. This tax credit is designed to encourage employers to help their employees provide for their own security in retirement by offsetting the costs of setting up the plan. To claim the credit, fill out IRS Form 8881, or speak to your tax advisor.

Hard Money Lending and a Self-Directed IRA

Many times, real estate developers hit a snag. They’ll get enough funding to start a construction project, but run into a cash crunch in the middle of it. Or they may simply have trouble getting a loan from a bank or other traditional lender. Many times, they’ll turn to a natural ally – the Self-Directed IRA investor – for a special type of financing called a ‘hard money’ loan.

Here’s how a hard money loan in a Self-Directed IRA works.

The borrower is often a real estate speculator or small to mid-sized real estate company. Many of these developers have a hard time getting traditional financing, as most mortgage and bank lenders prefer to concentrate on residential mortgages and more traditional loans. Meanwhile, they have a construction project that may take anywhere from 3 months to five years to complete, and they need money to finish construction and unlock the value of the property.

The property won’t be generating much income, or any income, until it’s completed and they can begin selling or renting units or houses. So there’s no money available to make regular payments. This means that most bank or traditional lenders won’t touch these kinds of loans – their portfolios are designed to rely on regular payments from their lenders to maintain liquidity for depositors – which the Self-Directed IRA investor doesn’t have to worry about – at least until he or she retires.

The borrower usually needs an interest-only loan or a loan with no payments, with a balloon payment due shortly after the borrower can sell off the property, or at least get enough tenants paying rent to refinance. The borrower also generally needs a quick decision and little or no underwriting based on income. With hard money lending, the security comes not from income underwriting, but from the real estate itself: The underlying property secures the loan as collateral. In this regard, hard money lending is said to be asset-based, rather than income-based.

In order to attract capital, then, the borrower will have to pay an above-market interest rate on any borrowed money – often – 2 percent to 5 percent above the market rate for traditional mortgages. This is very attractive for Self-Directed IRA investors, who are always looking for a way to get market beating returns at a minimal or controllable level of risk.

The lender does not generally receive regular payments on a hard money loan. As a hard money lender, you’ll generally wait until the loan is due as a single big balloon payment, or you’ll refinance the loan if the lender needs more time and the two of you can come to an agreement on terms.

Meanwhile, because it’s a retirement account, you may well have the patience you need to make this kind of lending work. It’s not for lenders who need current income to live on. But if you are not planning on accessing your Self-Directed IRA assets for several years anyway, the hard money lending concept can work very well.

Of course, there are risks to Self-Directed IRA hard money lending. The developer could default, in which case you could foreclose on the property securing the loan. Interest rates could increase, and you’d still be locked into the somewhat lower rate opportunity.

Note that you cannot provide hard money lending to yourself or any other prohibited individual, which includes your spouse, descendants, ascendants and those of your spouse, or any business entities they control.

Investor vs. Custodian/Administrator Responsibilities With a Self-Directed IRA

Most IRA and 401(k) investors are used to having their hands held to some extent in the investment process. They work closely with financial advisors who carefully vet their investments from a pre-selected menu of registered securities, each of which have had their books and financial reports carefully vetted by an independent auditing firm in accordance with the Sarbanes-Oxley Act. Or they choose from a limited menu of mutual funds chosen for them by their 401(k) plan sponsor. But Self-Directed IRA investors take on some additional responsibilities.

When it comes to Self-Directed IRA investments, the Self-Directed IRA owner has the primary responsibility for doing due diligence and vetting his or her investments before investing money.

Of course, the ultimate responsibility is with the investor no matter what. It’s the investor who bears the ultimate risk if the investment doesn’t work out, and the price of bad advice or poor vetting is ultimately paid by the investor, personally. And a third-party auditing firm is no fail-safe: Ask anyone who invested in Enron stock in 2000.

Self-Directed IRA investments are often unrated, unregistered securities, private placements, venture capital investments, real estate, hedge funds, gold and precious metals, land or tax liens and certificates. You may see a prospectus, or there may not be one. It’s up to you to do the digging yourself, and to assess the accuracy of the seller’s or broker’s claims before you invest.

Self-Directed IRA investors and others who choose self-directed strategies or alternative investments for their retirement funds work with a custodian and/or a third-party administrator such as American IRA, LLC.

It’s important to understand who is responsible for what tasks when it comes to self-directed retirement investing. With Self-Directed IRA investing, you, the investor, take more direct control of the investment than most other investors do. You, and you alone, are ultimately responsible for the following tasks:

  • Determining the appropriateness if the investment for your own personal situation.
  • Determining the risk associated with an investment.
  • Reviewing the investment for the possibility of prohibited transactions.
  • Finding a seller or broker.
  • Making purchase arrangements with the seller, broker or sponsor.
  • Providing necessary documentation to support the asset purchase.
  • Providing written direction to disburse funds to the seller, broker or sponsor to purchase the transaction.
  • Finding a buyer.
  • Making sale arrangements
  • Verifying that funds are correctly invested.

The custodian or administrator of a Self-Directed IRA has important responsibilities, too:

  • Disbursing funds as directed by the account owner.
  • Ensuring the purchased asset is titled in the name of the IRA or retirement account and not the account owner’s personal name.
  • Providing period statements showing the account value (as nearly as can be determined).

Source: U.S. General Accounting Office Report: Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets.

American IRA, LLC is among the leading providers of third party administrative services in the United States. With offices in Charlotte and Asheville, North Carolina, American IRA, LLC works with investors and owners of Self-Directed IRAs in all 50 states. Founder and CEO Jim Hitt has decades of experience working with Self-Directed IRA investors and investing in real estate and other alternative investments for his own personal retirement portfolio.

For more information about our services, and how to integrate alternative investment classes and Self-Directed IRAs into your own portfolio, call us today at 866-7500-IRA(472). Or visit us online at www.americanira.com, where we maintain an extensive library of informative articles, blog posts, brochures and e-books.

We look forward to hearing from you.

Nearly Half a Million Investors Choose Self-Directed IRAs – Here’s Why.

Self-Directed IRAs are nothing new.

The Individual Retirement Arrangement goes back to the passage of the Employee Retirement Income Security Act of 1974. And while the vast majority of accounts since then have been focused on conventional assets such as mutual funds, stocks, bonds, annuities and CDs, the law has always allowed for all kinds of alternative asset classes as well, since the very beginning. American IRA founder and CEO Jim Hitt has been using his own personal IRA to hold investment real estate for his own retirement security since the early 1980s. It has worked out so well that he founded the company to help other investors do the same thing. Since then, American IRA, LLC has helped thousands of investors leverage the tax advantages of Self-Directed IRAs, Roth IRAs, 401(k)s, SEPs and other tax-favored accounts with real estate, gold and precious metals, and many other alternative asset classes.

But the self-directed retirement account industry has generally been fragmented, and overall statistics about self-directed investing have been hard to come by. But recently, we have been able to learn more about how widespread and popular Self-Directed IRAs and other retirement accounts have become among the investor class.

According to the Investment Company Institute, the total amount of assets in IRAs totaled $7.3 trillion, with an additional $4.7 trillion in 401(k)s.

According to research from the U.S. General Accounting Office, there were nearly half a million self-directed retirement accounts nationwide: 488,333 was the official tally of the number of accounts, with somewhat fewer actual investors, since some investors may own more than one retirement account.

The total value of all accounts amounted to nearly $50 billion.

The number self-directed retirement accounts identified by the GAO broke down as follows:

  • IRAs: 485,517, with a total combined balance of $49,768,207,085
  • Solo 401(k)s: 2,816, with a total combined balance of $187,692,662.

Solo 401(k)s make up less than 1 percent of the total number of Self-Directed IRAs, as of 2015, and less than 1 percent of the total amount of assets.

The Self-Directed IRA and self-directed 401(k) markets, then, are still quite small, niche markets. But those who use these strategies tend to be educated and affluent and attractive clients to financial services professionals.

These are 2015 numbers. The total number of plans and the amount of assets within the plans have undoubtedly increased in the interim. As of this writing, the Dow Jones Industrial Average has just closed over 22,000 for the first time, bringing a lot of equity portfolios up with it. Real estate prices have also gone up over the last two years, as well.

Why Do Investors Choose Self-Directed IRAs?

The GAO surveyed custodians and administrators to learn why their clients chose to use Self-Directed IRAs and alternative asset classes in their retirement portfolios. Nine out of the 17 custodians surveyed reported multiple reasons: Avoiding the stock market, diversifying their retirement portfolios, concentrating on familiar assets, investing in a tangible or familiar asset, or investing in a company that is not yet publicly traded.

How to get started

With stocks hitting record highs, finding ways to diversify a stock-heavy portfolio into other asset classes may be more important than ever.

Getting started with self-directed investing is very easy – especially for experienced investors who understand investments like real estate, precious metals, corporations, partnerships and LLCs and other common alternative investments for retirement accounts. First, open an account with American IRA, LLC, and fund it. Then find an investment that is suitable for you. Send us supporting documents and tell us where to send the money. We will maintain the title, deed and other ownership documents on your behalf.

To learn more, call us today at 866-7500-IRA(472), or go online at www.americanira.com and fill out the new account forms. If you have questions or trouble with the forms, call us and we will gladly walk you through them.

Our offices are in Charlotte and Asheville, North Carolina, but we work with Self-Directed IRA owners and solo 401(k) owners all across the country. We look forward to working with you.

Real Estate IRA Corner – Landlord Accused of Murdering Tenant. Don’t Make These Mistakes

Real Estate IRA owners and other landlords should pay close attention to a tragic incident that occurred in the Florida Keys.

Ryan Wilder, a landlord from Winter Springs, Florida, is sitting in jail today on 1st degree murder charges, accused of killing his tenant in a dispute at the property. According to local news reports, Ryan Wilder was visiting a property his parents owned in Duck Key, Florida, an island in the lower Keys when the incident occurred. The tenants, Kenneth Palicki, 47, and Colleen Lyons, 25, had been served an eviction notice requiring them to vacate the property by August 23rd, just a few days away.

Wilder had gone to the property. The tenants weren’t home, but Wilder had taken it upon himself to begin removing items from the property. The tenants returned to the property to find Wilder moving things out, and Palicki confronted Wilder, and asked Colleen Lyons to go call the Sherriff’s Department.

At some point while Lyons was on the phone to the Sherriff’s Deputy, Wilder shot Palicki four times: Once in his left forearm, once in his back, once in his neck and once in his upper thigh. Wilder then fled the scene in his vehicle, according to reports.

However, there’s only one highway going out of Duck Key. Lyons was able to give a good description of the truck, since the incident happened during broad daylight. Wilder was pulled over and arrested just a short distance away.

Palicki was pronounced dead at Fisherman’s Community Hospital soon after arriving there.

Local reports say that Wilder told his girlfriend, who was in the truck the whole time, that he shot Palicki in self-defense.

Lessons for the Real Estate IRA community

If you’re in the landlording business long enough – and you will be if you’re a serious Real Estate IRA investor – eventually you’re going to have to evict a tenant. When you do so, there are specific procedures you have to follow. Specifics vary by state, but no state allows landlords to ‘short-circuit’ the process by taking it upon themselves to remove a tenant’s property before they have been formally and legally removed from the property, or before it is apparent under state law that the property has been abandoned and the landlord has made all efforts to notify the tenant that they intend to remove their belongings.

There are legitimate reasons for a landlord or landlord’s representative to enter a rented home, but except in emergency situations, most states require the landlord to provide reasonable notice to the tenant, in writing. In Florida, the required notice is 12 hours, and the rules are the same for Real Estate IRA investors as they are for conventional landlords. (Many of our Real Estate IRA readers are local to North Carolina. If you’re curious, North Carolina has no statute on required notice to enter, but North Carolina landlords cannot unilaterally remove the property of a tenant who has not been formally evicted).

Things don’t look good for Wilder, who was not acting within his rights in removing tenant property from the unit. In other circumstances, he may have a claim to self-defense. But considering he was breaking and entering and removing the tenant’s property, and confronted the tenant where he had a legal right to be, it’s going to be very much an uphill battle for him.

Don’t be that landlord. If you are evicting a tenant, obey these principles:

  • Strictly observe the eviction process. Take no action to remove the tenant until specifically authorized by a court order.
  • Don’t attempt “self-help” evictions. That is, you can’t turn off utilities, disable gate access, or do anything else to make life unbearable for the tenant to hasten the eviction process.
  • Let the Sherriff’s deputy handle the direct confrontation with the tenant, on the day of the eviction. It’s not your job to physically remove the tenant. It’s the Sherriff’s deputy’s job. Your job is to be on site ready to change the locks and remove any leftover property – after the tenant has been formally removed.
  • Obey your state’s laws regarding landlord entry to properties in the meantime.

In this case, the incident is extra tragic because had Wilders just waited a few days, the tenants would have been removed from the property legally by the Sherriff’s deputy (in practice, the vast majority of evicted tenants move out before the Sherriff shows up.) Palicki would still be alive, Lyons would still have her boyfriend to help her find a new place (and pool incomes), and Wilder would not be facing life in prison.

Raw and Ranch Land Investing in a Self-Directed IRA

Many Americans dream of living out their retirement years under a big sky, in the great Western United States, where land plots big enough to run meaningful ranching, farming, timber harvesting and other income-producing activities are still relatively plentiful and affordable. Fortunately, the Self-Directed IRA is a flexible enough vehicle to enable you to realize this American dream.

Of course, Self-Directed IRA investors aren’t limited to farm and ranch investing in this context. Many real estate IRA owners choose to buy large amounts of land and begin developing it, creating country estates and rural housing, to rent out or sell later – again generating income for the real estate IRA owner.

Possible sources of income include:

  • Farming
  • Ranching and livestock raising
  • Egg sales
  • Timber rights
  • Mineral rights
  • Sale of hunting and fishing access (to guides, etc.)
  • Grazing fees
  • Renting land to neighboring farmers
  • Rental real estate
  • Barn and other storage
  • Billboard advertising space

You don’t have to engage personally in the farming and ranching activities. In fact, it’s usually better if you don’t: As long as you own the property in your Self-Directed IRA, you can’t stay in it overnight, even if you’re doing repairs. You can’t rent it to yourself, nor to any of your descendants, descendants, or those of your spouse. You also can’t pay yourself or any of these individuals anything for their labor, though you can hire others as employees as needed, provided you pay them from within the real estate IRA account. All expenses associated with the property must come from funds from within the IRA in order to maintain the favorable tax treatment of the IRA.

Be sure to consider water access and water rights as well as accessibility to the land during winter months. 

Financing

It is possible to finance real estate purchases within a real estate IRA. All loans and mortgages, however, must be on a non-recourse basis. You cannot sign any kind of personal guarantee for any loans your IRA may take, and your lender can have no claim to any property outside of the IRA.

It is generally easier to get financing on rural properties from lenders with experience with rural lending, and lenders who specialize in structuring loans for self-directed or real estate IRAs. However, you can get financing from any lender, including other Self-Directed IRA owners, as long as the loan is properly structured as a non-recourse loans.

You must also make all loan payments from within the IRA. Consider this carefully when buying raw land – if it will take some time before the land is generating significant income, be sure to reserve enough liquidity within your real estate IRA to keep making the rent payments, as well as taxes and insurance, etc., in the interim.

Penalty-Free Withdrawals and Hardship Distributions From a Self-Directed IRA

Rookies know the rules, they say; veterans know the exceptions. So it goes with a Self-Directed IRA: The normal situation is that anyone who wants to pull money out of a Self-Directed IRA before the age of 59½ must pay a 10 percent excise tax to the Internal Revenue Service.

The same goes with self-directed Solo 401(k)s in most circumstances. But the Self-Directed IRA has a number of ‘hardship’ exemptions that allow investors to withdraw money – that is, take an early distribution of their Self-Directed IRA assets – that other types of accounts and annuities don’t qualify for.

Higher Education

You can take up to $10,000 from a Self-Directed IRA in order to pay for higher education for yourself or a family member without incurring a 10 percent penalty. You’ll still have to pay any income tax owed on the money, but you’d have to pay the income tax sooner or later anyway, unless the money is in a Roth IRA account. Employer plans, such as the 401(k), don’t qualify for the higher education exception to the 10 percent excise tax on early withdrawals.

If you have money in a 401(k) account and you want to use it for higher education expenses, consider rolling it over to an IRA first, if your plan allows it, and then taking your withdrawal from the IRA, rather than the 401(k)

Substantially Equal Periodic Payments 

You can take money from an IRA or Self-Directed IRA if you commit to taking it in the form of substantially equal periodic payments over the rest of your life expectancy, or the joint life expectancies of you and your spouse. Section 72(t) of the Internal Revenue Code spells out the rules. This is a popular way for those who have amassed substantial retirement savings to retire early. You must use an IRS-approved mortality table to calculate your maximum withdrawal. Again, you’ll still pay income taxes on the income you take, except for Roth IRA withdrawals (provided the money has been in the Roth IRA for at least five years). The rules can be tricky, so don’t make any moves without first consulting with your tax or financial advisor.

Death, disability and health care expenses 

If the IRA owner dies, or becomes permanently and totally disabled, such that he or she can no longer work for a living, he or she may qualify for penalty-free withdrawals from an IRA or Self-Directed IRA.

Withdrawals taken to pay medical insurance premiums, or to pay for unreimbursed medical expenses, are also generally exempt from the 10 percent excise tax for early withdrawals.

First-time home purchases

You can tap your IRA or Self-Directed IRA for up to $10,000 to raise a down payment for a first-time home purchase for yourself or an immediate family member.

Withdrawals taken to avoid foreclosure or eviction are also exempt from the 10 percent excise tax.

If you are a member of the reserve component of the Armed Forces of the United States and you are called to active duty, you may also qualify for an exemption to the 10 percent penalty for certain withdrawals.

For more information on exceptions to the 10 percent excise tax that apply to withdrawals from IRAs, Self-Directed IRAs, Roth IRAs and other retirement accounts, contact your tax advisor.