Worried About Stock Market Risk? Diversify into a Self-Directed Real Estate IRA

For those who are worried about excessive stock market volatility, an allocation to real estate continues to prove itself an effective diversifier.

It’s still a risk investment, so prices may fall during periods of flight-to-safety. But historically these are short-lived, while the steady income stream from rent provides ballast.

Real estate investments can involve direct ownership of individual properties, or be indirect, through ownership of real estate investment trusts (REITs). Investors can also own real estate directly in taxable accounts or take the increasingly popular route of holding real estate within specially-set-up retirement accounts, called “self-directed retirement accounts.” The most popular of these is the Self-Directed Real Estate IRA.

Ownership of real estate within a Self-Directed Real Estate IRA allows the investor to combine the advantages of real estate as an asset class with the advantages of tax-advantaged investing – a powerful financial alloy.

Let’s consider each of their advantages, separately:

Advantages of real estate investing

  • Steady stream of rental income.
  • Increasing income over time as rents tend to increase year over year.
  • Potential for capital appreciation.
  • While dividend stocks also provide income and the potential for increasing income and capital appreciation, federal regulations limit the amount you can leverage a stock portfolio with margin lending. Real estate investors have much greater access to leverage, which can increase both income and total return on investment. (Greater leverage also magnifies downside risk, as well).
  • Real estate investors constantly maintain, expand and upgrade the national housing stock, improving the standard of living for all Americans.
  • Depreciation (in taxable accounts), which helps improve the cash flow from real estate investments. Investors can deduct a portion of their real estate income for wear and tear, in anticipation of the need for eventual replacement of roofs, carpeting, furnaces and other components. Depreciation does not apply in Self-Directed Real Estate IRAs, however, because the tax advantages in IRAs are even greater: Current income is not taxed at all. So, there’s nothing the Self-Directed Real Estate IRA investor needs to deduct against.
  • Intrinsic value. Unlike paper assets, any of which can plummet to zero overnight – real estate has intrinsic value as a place to live, work, grow crops, mine, place billboards, cut timber or any number of other value-producing activities. Unlike stocks, a given real estate investment almost never becomes worthless.
  • Tax-free exchanges. In taxable accounts, rental properties (of “like kind”) can be exchanged as often as you like, capital gains taxes deferred, under Section 1031 of the internal revenue code. In a Self-Directed Real Estate IRA or 401(k) or other tax-advantaged retirement account, there is no capital gains tax at all, except on amounts attributable to someone else’s money (borrowed money) in IRAs.

Advantages of Self-Directed IRAs and other retirement accounts

  • Income attributable to investments made with your own money is not taxable in the current year. It’s either deferred, or in the case of assets in Roth accounts left in place at least five years, tax-free. You only have to pay current income taxes on income earned with someone else’s money – i.e., a mortgage.
  • Capital gains taxes on gains attributable to your own money rather than borrowed funds are deferred, or in the case of assets in Roth accounts left in place at least five years, tax-free.
  • Asset protection. Unlike assets held in personal taxable accounts, assets in self-directed retirement accounts, including Self-Directed Real Estate IRAs, enjoy substantial legal protection against the claims of creditors. Even if you personally go bankrupt, it is very difficult for creditors to touch assets in non-inherited retirement accounts.
  • Limited liability. Real estate is, by its very nature, a liability-generating asset. Landlords can get sued for any number of things, real and imagined. But you personally cannot be held liable for any liabilities generated from within an IRA, since you are not a personal guarantor of IRA debts. Even if a plaintiff wins a judgement against the owner of the property – your IRA, not you, personally – they cannot then collect your personal assets. Collections are limited to the assets within the IRA, or the LLC or corporation that owns the property within the IRA.

Owning real estate within a Self-Directed Real Estate IRA allows the investor to combine the best of both worlds.

Disadvantages of Self-Directed Real Estate IRA Investing

The disadvantages are few, but include the following:

  • Real estate is generally illiquid. It takes time and money to sell a real estate holding if you need to raise cash in a hurry.
  • Real estate assets need maintenance. There are ongoing costs associated with maintaining a rental property. You will need to fix roofs, sinks, toilets, doors and windows. You will need to keep the wiring up to date, install new carpet and flooring, appliances and make rent ready repairs between tenants. Your rent prices and purchasing decisions need to account for these factors.
  • Property taxes. You will need to pay property taxes to local or state governments, depending on the jurisdiction. Your total returns need to be enough to compensate you for the ongoing property tax costs.
  • You will need to maintain landlord insurance, flood insurance and other types of insurance coverage to protect your investment.
  • Income from non-Roth retirement accounts is taxed at ordinary income tax rates. Lower long-term capital gains taxes do not normally apply to distributions from IRAs and 401(k)s. But income from Roth accounts, once the assets have been in a Roth account at least five years, is tax-free.
  • Required minimum distributions. IRAs are such a good deal, and the tax advantages so powerful, that Congress decreed that you cannot defer income and capital gains taxes on Traditional IRA investments forever. Except for Roth accounts, you must begin taking distributions and paying taxes on those distributions no later than April 1st of the year after the year in which you turn age 70½.
  • Transaction restrictions. You have to use the tax advantages of an IRA for the purposes for which they are intended: To create income security for yourself and your family in retirement. Congress forbids transactions that tend toward self-dealing, or the enrichment of your immediate family. So, you cannot use your IRA or other retirement account to transact directly with yourself, your spouse, direct ascendants or descendants, or any fiduciary advisor who advises you on retirement matters.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Strategies to Make the Dream of Early Retirement a Reality with a Self-Directed IRA

It might be hard to fathom, but there are those who love their jobs so much that they want to keep working as long as they can. If you are not part of this minority, however, you probably have the recurring dream of retiring early. After all, the thought of leaving your job behind while you are still healthy enough to enjoy all that free time has a certain appeal.  A Self-Directed IRA could be the key to your success.

Unfortunately, for most American workers the dream never comes true. They struggle to retire comfortably by their regular retirement age, which today starts with early retirement at age 62 and continues to full retirement at age 66.  So, to be realistic, unless you hit the lottery the only way you will retire early is through hard work, smart financial decisions, and some sacrifice.

If you want to make your dream of early retirement a reality, use these proven strategies:

Establish the habit of saving early

You will need to get a jump on early retirement by saving as much as you can while you are still working. If you plan to leave the workforce early, you have less time to build up your retirement savings. Couple that with the fact that your money will have to last for more years, and it should be apparent that you will need to save aggressively.

Take a look at this example: If a 30-year-old saved $750 per month to reach the goal of retiring at 65, that monthly amount would have to more than double to have accumulated the same amount by age 55.  And the savings would have to last through those ten extra years of retirement.

To get an estimate of how much you will need to save—based on your age, your target date for retirement, and your current salary—it’s best to talk to your financial advisor to run the numbers.

Make a plan

As you talk to your advisor, make a plan for getting to early retirement. Discuss your travel plans, what luxuries you hope to have, and items such as insurance that you will be responsible for paying in early retirement. With these figures in front of you, the two of you should be able to come up with a realistic roadmap.

Pay off all your debt

Too much debt can derail your plans for early retirement. It can take up a substantial portion of your income if you are making mortgage payments, auto loan payments, or have student loan debt. You have a better chance of a successful early retirement if these debt payments are not part of your monthly budget.

Rely on yourself

A comfortable early retirement is not just going to happen on its own. Traditional pensions are going by the wayside, and early retirement means a lower monthly social security check in the future. So, if you are hoping to retire early, it will mostly come from your efforts and savings.

Find other sources of income

The transition to zero income can be a painful adjustment. You will feel less pressure if you have additional sources of income. You could do some part-time freelance work or start a small business to supplement your income. Some people build an income stream with real estate. Investment properties provide rental income, and you can begin building your real estate portfolio before you retire.

Savvy retirement investors are using Self-Directed IRAs to purchase real estate. With the help of an IRA’s tax benefits, they reach retirement already established with a source of extra income.

Start investing when you are young

Time is a big factor in how much you accumulate for early retirement. If you start investing when you are young, your investments have time to grow. And because you have started early, you can afford to look at investments that carry more risk (and more potential for growth!) to make your portfolio grow and give you the best chance of leaving work early.

Make a few sacrifices

If you want to have extra money to set aside for your early retirement, you should be willing to make some small sacrifices. Conventional wisdom usually counsels you to give up that daily 4-dollar latte, but there are countless other little luxuries that you could painlessly give up to beef up your monthly savings.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Self-Directed IRA Taxation: New Rules Affect UBTI Calculation

Recent changes in the tax law will affect Self-Directed IRA owners who borrow money to leverage investments within their IRAs – especially those who have mortgages within Self-Directed Real Estate IRAs.

Under the terms of the clumsily-named Act to Provide for the Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (we know you are hanging on the edge of your seat), there are four changes that have been made to the way we calculate unrelated business income tax – the tax the IRS applies to income and capital gains in Self-Directed IRAs that are attributable to borrowed money rather than your own.

Prior to January 1st, 2018, investors were allowed to aggregate all their unrelated business income from all sources, as well as all expenses, and then calculate the result based on the whole.

The new rules require investors (or, more often, their tax professionals) to calculate unrelated business income and expenses from each investment, separately, and calculate UBTI separately.

This effectively prevents tax-exempt organizations from using losses in one unrelated business activity to offset gains in another. It also may affect some Self-Directed IRA owners with multiple leveraged properties within their IRAs.

The Act also effectively lowered Section 11 taxes in most cases, reducing the separate tax brackets of 15% (on unrelated income lower than $50,000), 25%, 34% and 35% down to a flat rate on all such income of 21%.

This hurts smaller investors, since it represents a tax increase on amounts below $50,000. But it benefits the larger investors with very substantial portfolios. The breakeven point at which you begin benefitting from the flat tax rather than the graduated tax system comes at $90,385. Under that figure, you are hurt by the new rule. Over that income level, you benefit from it.

The Act also imposes a cap on net operating losses. NOLs are now limited to 80 percent of unrelated business taxable income, and limits carryforwards, make it more difficult to gain credit for losses taken in prior years. Carrybacks are also effectively eliminated.

The fourth way Congress changed UBTI taxation involves compensation to employees of tax-exempt organizations and is unlikely to affect most Self-Directed IRA investors. If you are curious, the new rule requires any transportation fringe benefits paid to employees, any amounts spent to support an on-site athletic facility, and any amounts spent on a qualified parking facility to be added to UBTI, unless the same benefits are also offered to volunteers.

These changes will primarily affect Self-Directed IRA owners with significant mortgages, because income and gains attributable to borrowed money, as opposed to your own contributions and earnings on your own contributions, will be taxable under UDIT rules.

401(k) accounts will generally not be affected.

American IRA, LLC does not give individualized tax advice. This article is for general informational purposes only. For information specific to your individual situation, you should consult a qualified tax professional.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

10 Things you need to Know about Investing in Cryptocurrency in 2019

If you are a seasoned Cryptocurrency investor, you already know that it’s been a bumpy ride. If you are new to the game, you are probably filled with questions as you take those first tentative steps. Of course, you have likely noticed the year-long bear market that Cryptocurrencies faced in 2018 and are wondering if this will continue. And you are probably asking yourself if this is the best time to be getting started.

Bitcoin, the largest and oldest of the Cryptocurrencies, had a close encounter with the $20,000 price level in late 2017. As of this writing, it trades at around $3,800. Yes, 2018 was a major disappointment, but that does not mean Cryptocurrency investing is dead or even on life support. Anyone contemplating an investment, however, should go into it with eyes wide open.

Here are ten things to consider:

  1. If you are going to invest, ignore all the noise

There are some in the financial media who are embracing the prospects of Cryptocurrency, and there are quite a few calling it a scam or just a fad. Both sides are making plenty of noise, so it’s best not to pay close attention to any of it. Treat your investment as you would any other: buy it, hold it, and ignore the loud voices around you.

  1. Perform due diligence

There is no excuse for investing without understanding the product you are buying. This is the digital age and researching the underlying asset of any investment has never been simpler. Most coins have whitepapers that can be accessed online, and a good place to find them is at sites like All Crypto Whitepapers.

  1. Bitcoins are scarce

Dollars, euros, and yen have an unlimited supply, but an underlying algorithm controls the number of bitcoins. There are only 21 million Bitcoins to mine, and approximately 17 million have been mined already. And, as time goes on, they will become harder and harder to mine.

  1. Bitcoin’s Price

Bitcoin’s price is set by whatever people are willing to pay. As of March 1, 2019, it was trading at $3808. That price is for one Bitcoin, but exchanges will allow investors to purchase less than one Bitcoin.

  1. Bitcoin is not the only Cryptocurrency

In fact, there are 2526 other forms of Cryptocurrency out there as of March 1, 2019. Here are the top ten:

  • Bitcoin
  • Ethereum
  • Ripple
  • Bitcoin Cash
  • EOS
  • Cardano
  • Litecoin
  • Stellar
  • IOTA
  • NEO
  1. Cryptocurrency is treated as personal property for tax purposes

As an asset, Cryptocurrency is treated as personal property for federal income tax reporting purposes. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency. Check out this IRS publication for more Q & A’s on Cryptocurrency.

  1. Price Volatility Will Be Low

Compared to the severe price volatility in 2017, Bitcoin’s fluctuations in 2018 were more subtle. Many Crypto experts believe that trend toward stability will continue in 2019. If so, the Crypto industry could attract more institutional investors that are typically uncomfortable with rapid fluctuations.

  1. More companies are accepting Bitcoin for payment

More companies are accepting Bitcoin and other Cryptocurrencies as cash payments for goods or services. Microsoft, PayPal, Overstock.com, Subway, and Gap are just some of the well-known businesses. There are even Bitcoin-powered credit cards arriving on the scene.

  1. How to Secure Bitcoins

Bitcoins are a target for hackers and scammers, so it’s crucial to secure them. Check out TREZOR, a hardware wallet, or Ledger Nano, a security company that offers secure Bitcoin storage devices.

  1. Many investors do not know where to buy Cryptocurrency

Here’s the short answer:

  • Find a Bitcoin exchange
  • Trade your local currency, like U.S. dollar or Euro, for bitcoins
  • Move your bitcoins into a secure Bitcoin wallet (see #9)

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Questions to Ask Your Advisor before Investing a Self-Directed IRA into Alternative Assets

If you own a Self-Directed IRA, you probably chose it because it gives you more options and control over your retirement assets. But with that extra control comes added responsibilities, the biggest of which is to perform due diligence. In other words, it’s up to you to research all of your investments thoroughly to ensure that everything is legal, you understand the tax ramifications, you are aware of the risks, and you will not disqualify your account by investing.

Here are some questions you should be asking your investment advisor, so you are not venturing into the unknown:

What is the total cost of the investment?

The total cost includes the price of the asset plus any commissions and fees. You might feel reluctant to ask how your advisor is paid, but it’s important to know that, especially if your relationship will be ongoing.

How much experience do you have with this type of investment?

You want to make sure that you are working with an advisor who is knowledgeable in this type of asset. Experience in certain alternative assets is not just a plus; it’s essential.

How often do you plan to meet with me?

Communication is the key to you feeling empowered and confident. An annual account checkup probably will not do that. Make sure right up front that the advisor is willing to meet or check in by phone as frequently as you wish.

Does your firm hold my money and investments?

The answer you want to hear is no. You want an investment firm that manages your assets and an independent custodian who holds them. If the firm that manages your money also holds it, there is a greater opportunity for investment fraud.

What are the tax consequences of the investment?

While your tax situation should not steer your investment decisions, taxes should be a consideration and part of the conversation. For instance, your advisor should know your tax bracket, if you are in the Alternative Minimum Tax, and whether you have carryover short-term or long-term capital losses. With this information in hand, it’s easier to recommend purchases that fit your particular situation.

Will these investments violate the prohibited investment or prohibited transaction rules?

The IRS does not have a list of investments that are allowed in a Self-Directed IRA. But they do have a short list of prohibited investments:

  • Life insurance contracts.
  • Collectibles such as artwork, rugs, antiques, gems, stamps, alcoholic beverages, and most metals or coins (with some exceptions).
  • Subchapter S corporations.

There are also certain prohibited transactions between a retirement plan and a disqualified person inside a retirement account that could result in the entire amount being distributed to you and taxes due on that full amount. That’s why you want to make sure your investment is not related to any disqualified individual or entity.

Will the investment require more money from me in the future?

Is this a type of investment that will require funding down the road that goes beyond your initial purchase amount? Your advisor should help you determine if you can maintain the investment if additional capital is needed.

When should I expect to see returns on my investment?

You ask this question to make sure the rate of return and lead times correspond to your long-term goals. Think about your retirement income needs and any required minimum distributions you will face. If the investment is not going to start providing returns for several years, you might not be in a position to wait that long.

While it is prudent to discuss these questions with your advisor, you should be performing your own independent research on any asset you add to your portfolio. Due diligence can add an extra layer of protection to your retirement savings.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Self-Directed 401(k) Corner: Are You Keeping Up with the Joneses? Average 401(k) Balances by Age

The average 401(k) balance, according to a new study from Fidelity Investments, is $106,500. But that figure by itself does not tell us anything useful: First, the figure includes investors of all ages. It does no good for people who are relatively young or old to compare their balances with this average. A 25-year-old with an average balance of $106,500 would be doing very well indeed, while a 65-year-old with this balance would be in scramble mode.  The study likely does not include many Self-Directed 401(k)s – Fidelity mostly handles employer accounts with very few Self-Directed 401(k)s, if any.

Second, 401(k) average balances are skewed way upward by a few extremely successful investors. We can tell because the median 401(k) balance – where the investor at the 50th percentile stands – is much lower than the mean balance-weighted average. This holds true for every age group, which Fidelity broke out as follows:

Ages 20-29

According to Fidelity data, the dollar-weighted average 401(k) balance for the youngest cohort of investors – those just starting their careers – is $11,600. But the median 20-something has a 401(k) account balance much lower than that – just $4,000.

And that’s only of the subset of 20-somethings that has a 401(k) balance at all. Many people in this age group have no access to an employer-sponsored retirement plan at all. Or if they do, many of them have not started contributing yet. The average student loan balance for recent graduates is well over $30,000, while the average monthly student loan payment among those not still in deferment is $393 (median $222), according to data from the Federal Reserve.

Ages 30-39

On average, 30-somethings are sporting average 401(k) balances of $43,600, according to Fidelity’s data. The median account balance is $16,500.

One data point to note: These are individual account balances, not total account balances from possible multiple employer plans accruing to individuals. An individual in his or her late 30s with three different plans from private employers of $15,000 each would show up as three accounts of $15,000, not $45,000.

So, the average balance is skewed upwards by a few hypersavers and outperformers with exceptionally skillful (or, more likely, lucky!) 401(k) allocations. But the median is pushed downward by the balances at former employers of prolific savers.

Ages 40-49

The average 401(k) balance for 40-somethings is $106,200. The median balance, again, is much smaller than the mean average: $36,900. However, in both cases, the balance easily doubles. This is partly a function of both men and women entering their peak earning years in their late 30s (for women) and late 40s (for men).

There’s also a post-student loans effect: There is more cash available to contribute to retirement funds once student loans are paid off. Furthermore, contributions get a boost once children, born in their parents’ early to mid-20s – are grown and college, if any, is paid for. Parents can frequently increase contributions in their late 40s.

And, of course, there is the increasing contribution that appreciation makes. The older you get, and the higher your balance, the greater the effect of interest and earnings of investments made in prior years, compared to current contributions.

Ages 50-59

The average 40(k) balance for those in their 50s is $179,100. The median balance is $62,700.

This cohort benefits from catch-up contributions, which allow them to contribute an additional $6,000 per year to their 401(k) plans once they turn 50, though only a small percentage of plan participants actually does this.

Age 60-69

The average 401(k) balance for the 60s cohort is $198,600, according to Fidelities data, while the median balance is $63,000.

These individuals can still make catch-up contributions, and are not yet subject to required minimum withdrawals, which won’t become necessary until April 1st of the year after the year in which they turn age 70½.

However, at this age, some of them will have already started to take distributions. There is no penalty on 401(k) distributions after age 59 ½, and for those who have already left the work force, there’s no penalty after age 55.

In reality, both the mean and median income levels listed here are inadequate to fund a comfortable retirement for most of us. As you emerge from your 20s and 30s, you should have retirement balances that are several times greater than your current income.

For more on this topic, see our recent blog post, “How Much Should You Have Saved In Retirement By Now?”

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Due Diligence on Private Lending from Your Self-Directed IRA

One of the many benefits of having a Self-Directed IRA is the ability to loan your money. However, just like a bank, when you are lending your own money, it is vitally important that you perform due diligence on private lending.

Due diligence enables you to minimize risk by only loaning to people you are confident will repay the loan on time with the agreed upon interest.

There are a number of “checklists” which include the information needed to perform due diligence on private lending. Unless you are able to complete your checklist, you are potentially exposing yourself to an unacceptable risk. Before negotiating interest rates, size of the loan, repayment rates and any of the other issues regarding your loan, first the borrower must be proven creditworthy. The list of necessary information for performing due diligence on private lending with a Self-Directed IRA account can be broken down into several sections.

Borrower’s Financial Health

You might as well start with the first, most obvious question that must be answered – will the borrower be able to repay the loan? If the borrow is likely to have trouble paying, stop right there and do not waste any time.

The first documentation any Self-Directed IRA lender should require is income verification. This should include proof of employment, which consists of pay stubs or W-2 tax forms. In addition to the proof of employment, you should request at least three years of federal income tax returns, three months of bank statements, and balance sheets for the business if the borrower is self-employed. At least several months of paid utility bills are additional evidence of the borrower’s financial health. Proof of the buyer’s credit rating is also essential before you loan your money.

Legal Documentation Proving Ownership

Once your potential borrower can prove the ability to pay, go on to the next requirement, which is proof the borrower does in fact own the property being used as collateral. As the Self-Directed IRA lender, you must require a copy of the purchase contract, which also includes a legal description of the property. It should also detail any easements or restrictions on land use. A map of the property which shows the land to which the borrower owns should be included with this. As proof not all humans are angels, more than one person has attempted to borrow money against land he does not actually own.

A title search must also be performed as more proof of ownership. This will also reveal any liens, judgements against the property or unpaid taxes. A title insurance policy must be required, as this protects the Self-Directed IRA lender against any lawsuits or claims relating to property ownership.

Property Value

After having ascertained the borrower’s ability to pay and ownership of the real estate, the property value must be proved. As this is the Self-Directed IRA loan’s security an independent determination of its worth is needed.  This is determined by having the property appraised. If the property is to be used as a rental, information such as the fair rental value for similar properties in the area, vacancy rates and the strength of the local rental market. A professional inspector who provides a report about the property’s condition should also be mandatory, if the structure has been completed. The inspector’s report should include, in addition to a report on the property’s condition, examination for any pests, particularly termites and rodents, as well as determination of any environmental hazards. There must be proof that all improvements were inspected and approved.


The borrower must carry sufficient property insurance coverage to pay back the loan in case of damage. In certain locations such as flood zones or risk of earthquakes, special insurance must be covered to guard against these special risks. The borrower should name the Self-Directed IRA lender as an additional insured party on all policies.

Without legal proof of the above information, going any farther is just a waste of your valuable time.

Interested in learning more about Self-Directed IRAs, download our free e-guide.  Contact American IRA, LLC at 866-7500-IRA (472) or visit us online at www.AmericanIRA.com.

Five Reasons a Self-Directed Real Estate IRA May Be Your Best Investment Vehicle

There are few ways to build wealth as efficient or even as exciting as real estate. But what is the best way to start investing in real estate? The answer may come in retirement preparation, such as an IRA or Solo 401(K).  Many real estate investors refer to Self-Directed IRAs as a Real Estate IRA.  Holding real estate within an IRA comes with several advantages—as well as responsibilities—that even seasoned real estate investors should want to learn about.  Here are five reasons you might consider a Self-Directed Real Estate IRA as your next vehicle for investing in real estate assets:

Reason #1: Extra Protections via the Tax Code

The tax advantages that come with Self-Directed IRAs are obvious to anyone who has invested through a retirement account before. Long-term growth in a Self-Directed Real Estate IRA can minimize tax burdens over the years, which in turn helps investors save money. Profit collected from rental real estate via a property manager can then enter an account tax-free or tax-deferred.

But in the world of Self-Directed IRAs, it is also important to note these tax advantages will mean some additional regulatory work for your real estate investment. For example, the real estate held within a Self-Directed IRA will not be available for personal use by the account holder or any disqualified person to the account.  As such, it should be regarded as a separate investment entity.

Reason #2: A Plethora of Options

Those who invest in real estate regularly are used to having unlimited options available to them. The temptation is to view a Self-Directed Real Estate IRA as a way to restrict these options.

Real Estate IRAs include plenty of options, including the ability to use leverage to make real estate purchases with non-recourse loans, provided by North American Savings Bank, www.iralending.com. These loans give a degree of separation between Self-Directed IRAs and the investor, which in turn helps protect the retirement nest egg. Options such as using a property manager are not only available but may be preferable.

Another option is the ability to use a property manager to handle day-to-day oversight and management of the property and possibly even the rare eviction process.  Sure, you may make a punch list of repairs needed at the property, meet potential tenants, and even collect the rent check to drop off or mail to our office, but careful consideration should be made not to enter any activity that could result in sweat equity as this would be prohibited.

Reason #3: Moving Property Without Capital Gains Taxes

Selling property on your own will mean capital gains taxes. Conversely, you sell property within a Self-Directed Real Estate IRA, it is then protected from capital gains taxes. This reason alone is a great motivator for real estate investors; even if they are not excited about the non-personal use limitation.  The tax advantages could far outweigh not being able to personally use the asset.

Reason #4: Diversification

By this time, you have probably heard about “diversification” so much the word has lost all meaning. The problem is even the “Experts” think of diversification as owning lots of different types of stock. But what if the stock market enters a bear market? Diversifying your interests across asset classes—such as using non-traditional assets like real estate—gives the protection to continue investing without paying attention to one portion of the stock market.

Reason #5: Financial Security

By utilizing the wealth protections available in Self-Directed IRAs, a real estate investor can compound these gains into something even more substantial for retirement. That means the goal of financial security is even more possible with a well-placed real estate investment within a Self-Directed IRA. That Self-Direction has the potential to unlock financial security, which means peace of mind. Adding all of these advantages up together means real estate can be one of the best ways to build a sizeable nest egg by the time retirement arrives.

Interested in learning more about Self-Directed IRAs, download our free e-guide.  Contact American IRA, LLC at 866-7500-IRA (472) or visit us online at www.AmericanIRA.com.

Who is a Disqualified Person to your Self-Directed IRA?

Every Self-Directed IRA comes with a list of people and entities that are not allowed to interact with it in certain ways. These parties are called disqualified persons, and if they do engage in prohibited transactions with your IRA, it could lose its favored tax-status.

So, why does the IRS prohibit certain individuals–you, your spouse, and all lineal descendants and ascendants—as well as fiduciaries such as attorneys and financial planners, from engaging in transactions with your Self-Directed IRA? It is simple: the IRS is making every effort to keep you from benefiting directly from the IRA until you have retired, distributed the funds, and paid the tax you owe. Remember, your Self-Directed IRA is a tax-deferred retirement investment—not tax-free!

Keep in mind that the prohibited transaction rules that apply to your Self-Directed IRA do not prohibit what your IRA can invest into but with whom your IRA may engage in a transaction. For instance, yourIRA may purchase a multi-family property–but not from your mother. She is on the Disqualified Persons list. Your Self-Directed IRA would have to buy the real estate from a third-party seller with whom you have no family or business relationship.

Now that you are somewhat familiar with the prohibited transactions rules, let’s look more closely at these Disqualified Persons:

Who are the Disqualified Persons?

  • You, the IRA owner
  • Your spouse
  • Your family members, which include parents, children, grandchildren, and the spouses of children, grandchildren, etc. This rule would also apply to legally adopted children.
  • An entity–corporation, partnership, trust, or estate–owned or controlled more than 50 percent by a disqualified person.
  • Investment providers or fiduciaries of the IRA.
  • Any entity in which you, the IRA account-holder, are an officer, director, a 10% or more shareholder, or a highly compensated employee.

It is worth noting that brothers, sisters, aunts, uncles, cousins, step-brothers, step-sisters, and friends are not considered to be Disqualified Persons.

Some examples of prohibited transactions involving Disqualified Persons

The following is not an exhaustive list of violations, but it provides some of the most common examples of transactions that are disallowed by the IRS:

The direct or indirect sale, exchange, or leasing of property between a Self-Directed IRA and a disqualified person: You sell an interest in some property that your IRA owns to your father.

The direct or indirect lending of money or other extension of credit between a Self-Directed IRA and a disqualified person: You lend your spouse $10,000 from your IRA.

The direct or indirect furnishing of goods, services, or facilities between a Self-Directed IRA and a disqualified person: You buy a property with funds from your IRA and fix it up yourself.

The direct or indirect transfer to a disqualified person of the income or assets of a Self-Directed IRA: You fall behind on your mortgage payments and pay $2,500 from your IRA to catch up.

The direct or indirect act by a disqualified person who is a fiduciary whereby he/she deals with income or assets of the Self-Directed IRA in his/her own interest or for his/her own account: A real estate agent buys a house using his IRA funds and earns a commission on the sale.

Receipt of any consideration by a disqualified person who is a fiduciary for his/her own account from any party dealing with the Self-Directed IRA in connection with a transaction involving income or assets of the IRA: A woman uses her IRA funds to loan money to a company which she manages, controls, and has an ownership interest.

If you are not sure, ask!

Interested in learning more about Self-Directed IRAs, download our free e-guide.  Contact American IRA, LLC at 866-7500-IRA (472) or visit us online at www.AmericanIRA.com.