Best Practices in Real Estate IRA Investing

Real Estate IRAGenerally, the best and smartest things you can do in Real Estate IRA investing are the same as the best and smartest things you can do outside of real estate investing. There are a few differences around the margins, because of the specific rules concerning prohibited transactions within Self-Directed IRAs (and other self-directed accounts, for that matter), and restrictions against using property for your own personal benefit. But broadly speaking, a good real estate investment is a good real estate investment, whether it’s inside or outside of a Self-Directed IRA.

At American IRA, we have many clients who are very successful real estate investors with track records going back through several market cycles. All of them are vastly different people, but they all seem to have a few things in common.

A reputation for integrity. Word gets out about bad landlords. Today we have social media and websites devoted to apartment and landlord reviews. If you’re a bad landlord, or don’t deal fairly with your tenants, you will cause the value of your rental property to decline and you will have needlessly high vacancy rates.

Similarly, even if you are more of a flipper than a renter, the real estate investment community is fairly small – even in large cities. You will not get away with bad faith, unfair dealing, or shady behavior for long. The more people who respect and admire you, the more and better investment opportunities you will have, in the long run.

A businesslike approach. Our most successful real estate investing clients don’t treat their real estate practices like a hobby. They have professional-grade accounting systems in place. They establish entities. They retain professional help, and even put together informal “boards of advisors.” They keep a strict separation between their personal money and investment money and they have separate bank accounts. If it’s the majority of their income, it’s nearly a full-time job to many of them. They take similar care of properties in their Real Estate IRAs and self-directed solo 401(k)s and other retirement accounts. Even if they aren’t taking current income, they are very much running a currently viable investment “company” of sorts, within their IRA.

They focus on what they know. Most of our clients don’t run from property to property, making bids on and purchasing vastly different properties in very different neighborhoods. They aren’t going to buy a 5-acre farm in Iowa one day and then turn around and buy a Miami Beach condominium the next day. They focus specifically on what they know best. If you are comfortable with your grasp of valuations in a given neighborhood for 2 and 3 bedroom homes, then focus on that. This is what Warren Buffett calls a “circle of competence.” You can’t know everything well. If you try to do everything well, you will do nothing as well as you should. Focus on properties in the “sweet spot,” where you are the expert. Fewer mistakes = better long-term returns.

They get accounting help. For many people, real estate investing is very intuitive. Real estate taxation is not. There are many tax advantages to real estate investing, but simplicity of the tax code is not among them.

There are simply too many rules for the tax layman to stay abreast off all the time, and they are constantly changing. As a real estate investor, you’ll need to have a working knowledge of a lot of financial and taxation concepts. But that’s a far cry from actually filling out your returns. Invest in an experienced accountant.

Pro-tip: CPAs have a lot of pull with their clients. They are also very knowledgeable about the details of their client’s affairs. Because of this, they can be valuable sources of referrals for real estate investors.

They Don’t Work Alone. We mentioned the informal board of advisors many of them have with friends in key professions. That’s part of a broader trend – real estate is a people business, as much as a property business. The most successful are always nurturing their contacts in the community through networking, community service, and simply walking their neighborhoods, talking to property owners and looking for motivated sellers and motivated renters. Nurture your network. Include people from all walks of life, and build alliances. Send them referrals, generously. You will get your share.

They make money when they buy, not when they sell. Whether they are fast fix-n-flippers or long-term rental property owners, they all get good deals up front. They are always buying at surprisingly less than market value, because they find motivated sellers and they are good and wise negotiators. That way, they don’t rely on the weather, the “markets,” or things they can’t control, for future returns. They always seem to be finding properties for five to seven cents on the dollar, and either turning them around or renting them at or near full market value.

These people who keep up these good practices over a period of years inevitably do very well. Opportunities come to them, and they are careful to send opportunities to others as well.

If real estate is your ‘sweet spot,’ or you want to learn more about Real Estate IRA investing, please join us for an upcoming Web-based workshop and seminar on getting started in Self-Directed IRAs. If you’re already familiar with the basics of self-directed retirement accounts and want to focus on real estate, enroll in one of our workshops entitled “Growing Your Retirement Account with Real Estate”. Sign up for one of our free, no-obligation seminars here. Or call us at 866-7500-IRA (472)

The Biggest Retirement Planning Mistakes (And How To Avoid Them)

Self-Directed IRA MistakesLife, sadly, is a one-way Slip n’ Slide. Time only goes in one direction, and we only grow older – never younger.

Well, sure, we expect that. But there are also elements in the tax code and in the very nature of money and saving itself that make retirement planning mistakes very difficult and often impossible to undo. Whether you use a plain vanilla, off-the-shelf retirement program or our preferred solution, the Self-Directed IRA, Here are some of the most common:

  1. Not starting now. There’s always a reason to delay, it seems. But when it comes to retirement savings, your greatest ally is time. Every year, every month, every day you put off saving seriously for retirement in a dedicated tax-advantaged vehicle designed for that purpose is a year, month or day you can never get back again.

Think of it: The annual contribution limit for Self-Directed IRAs, Traditional IRAs and Roth IRAs this year is $5,500. If you don’t make the contribution this year, you don’t get to just double up your contribution next year to make up for the lost year. First, the year’s worth of potential compounding is lost forever. Second, the law doesn’t even allow you to contribute more than that $5,500 that you missed last year. The only exception is if you are age 50 or older, in which case you can contribute an extra grand. Still not enough to make up for the lost year. It’s not even close.

  1. Borrowing too much. Debt can be a lever when applied to business investment, sure. But when it comes to personal financial planning, it is all too frequently a cancer. Strive to live on less than you make, regardless. If your liabilities are growing faster than your assets, you must act to correct the problem.

We’re not opposed to prudent borrowing to buy assets, where the asset’s expected total return is greater than the interest rate and other costs of carry. But borrowing on credit cards, home equity and out of 401(k) fund a lifestyle you simply cannot sustain on earned and/or investment income alone is not sustainable.

  1. Making early withdrawals from retirement plans. The tax advantages of retirement plans – whether they are Self-Directed IRAs, Roth accounts or traditional tax-deferred – type balances you usually find in 401(k)s, are powerful indeed. Plus, unless certain circumstances apply, you have to pay an excise tax of 10 percent on most retirement plans if you pull funds out before you turn age 59½ or – in the case of 401(k)s, up to age 55 if you have retired or left the employ of the plan sponsor. If you make early withdrawals from tax-deferred accounts, you are not only paying income taxes (which you would anyway sooner or later), you are also giving up the 10 percent penalty, plus up to 20 percent additional withholding from 401(k) plans, plus the combined benefit of future years of income and capital gains tax deferral.

That’s a big hit, over time. It’s usually worth it to make premature distributions only as a last resort.

  1. Saving too conservatively. Most of us know not to bet the whole retirement nest egg on a single horse race. That would be crazy. But it’s also crazy to bet your whole retirement lifestyle on the performance of, say, a 2 percent CD or money market or guaranteed investment contract. Inflation continues to eat away at retirement savings over the long haul – and usually at a rate that exceeds the interest rate available on cash. To preserve buying power and get ahead enough for savings to be worthwhile, you must take some risks somewhere.

American IRA helps our clients do that by allowing them to choose to direct retirement investments to the fields they know best, via Self-Directed IRAs, – not just the few ho-hum funds and insurance products that are usually available from investment houses. By focusing on your strengths, you may be able to get better returns for a given amount of risk.

  1. Relying on Social Security. Social Security is designed merely to be a very last-ditch safety net to prevent senior citizens from becoming absolutely destitute. It would cover only a very minimal existence, if that. Social Security alone does not support a lifestyle many people would freely choose.

If you think you’ve made some mistakes so far, take heart. Almost everyone has slipped up one way or another at some point. Don’t worry about water under the bridge. Instead, give us a call today at 866-7500-IRA (472), and we’ll work together to make the best of things going forward.

We specialize in Self-Directed IRAs, Self-Directed 401(k)s and other retirement accounts. If you believe you can benefit from the additional flexibility and focus on asset classes that Self-Directed IRAs can provide, you may be a great candidate. We look forward to serving you.


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No-More 60-day Daisy-Chain IRA Loans: Tax Court, IRS Tightening Rollover Rules

Tax-Free | IRA RolloverYes, IRS Publication 590, dealing with individual retirement arrangements, says specifically that you can withdraw money from an IRA or qualified retirement plan tax-free and penalty free, as long as you roll the money into an IRA within 60 days.

But who are you gonna believe? A judge? Or your lyin’ eyes!?!?!

In a recent ruling against a taxpayer who was relying on the IRS’s own plain language in their own publication that he can take a withdrawal from a given retirement account tax-free as long as he rolls it over within 60 days.

Specifically, the dispute is over IRC section 408(d)(3), that allows IRA owners to withdraw funds from an IRA without having the money taxed or subjected to the 10% early withdrawal penalty so long as they redeposit the cash, or roll it over to a different IRA, within 60 days after the date of withdrawal.

The IRS has always informed taxpayers that the one-year waiting period applies separately to each IRA involved.

Here’s the IRS’s own language out of Publication 590:

Waiting period between rollovers.   Generally, if you make a tax-free rollover of any part of a distribution from a Traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA [emphasis added]. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.

The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA.

So, according to the IRS, if you have three IRAs, and you pull the maneuver with the first one, and deposit the money in the 2nd one within 60 days, you can still take a freebie withdrawal from the third IRA account, as long as you redeposit it or establish a new IRA and deposit the funds within 60 days.

Otherwise, you get hit with a taxable distribution, plus any applicable penalties.

However, in this case, against Alan L. Bobrow, who is himself a tax lawyer and the former General Tax Counsel for CBS, the government threw out Publication 590, and actively based an argument on two cases from the 1990s that directly contradict their own published manual. The IRS is argued in the Bobrow case that rollovers are limited to only once per year per taxpayer, not per IRA.

This ruling essentially puts the kibosh on an old strategy, however, that allowed people with multiple accounts to ‘daisy chain’ a loan, rolling it from IRA to IRA, which allowed them to extend a 60-day loan for a much longer period of time.

The details get pretty technical, but here are our takeaways.

  1. Don’t mess about with anything other than a trustee-to-trustee transfer, if you can help it. The minute you take personal possession of funds in your IRA, you dramatically increase the chances of something going wrong.
  1. Don’t do more than one rollover transfer per year. It is true that the IRS, in attempting to reconcile many years of publication history with its absurd argument in this particular case, is throwing out its years of publication history in order to win this single case. They are revising their rules to disallow multiple IRA rollovers in the same year effective January 1, 2015. But as we can see from this case, the IRS speaks with a forked tongue in these matters.
  1. The IRS and the courts frown on those 60-day cash-in-hand rollovers, if there is any indication whatsoever that you’re using the money as a back-door loan.
  1. The IRS is known to cut people some slack on the 60-day rule – if they can demonstrate extenuating circumstances. However, the bar gets higher if you’re using the rule to get a cheap 60-day loan, or if they think you’re a tax professional or other sophisticated individual who should know better. If you’ve blown the 60-day threshold (this genius tax lawyer blew his because he forgot that August and July both have 31 days in them!), contact a tax professional immediately. Often a well-crafted letter can get the IRS to waive the rule.

For more information, see IRS Announcement 2014-15.

For the full Tax Court decision, see Bobrow v. Commissioner.

As one industry wag said, “leave it to a tax lawyer to botch the process, tick off the IRS, and ruin the strategy for the rest of us.”

Indeed. And that’s why we can’t have nice things.



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Make Your Retirement Savings Last

Retirement Nest Egg, Self-Directed IRALife expectancies, thankfully, are going up. That’s a great thing, thanks to the miracles of modern medicine and improvements in the distribution of health care and improved nutrition.

But that means retirement nest eggs have to last longer, too, as Americans live longer and longer past their retirement age.

Assumptions about longevity and safe draw-down rates that seemed reasonable when we started investing in IRAs in the 70s and in 401(k)s in the 80s are no longer valid for two big reasons:

  • We’re living much longer.
  • Interest rates are a fraction of what they used to be.

So it’s more important than ever to stretch every retirement dollar you have to ensure you don’t run out of money before you run out of time!

Here are some ideas to consider:

Consider income-generating investments such as REITs and rental real estate. These offer certain tax advantages (avoidance of double taxation in most cases), enable investors to take advantage of leverage, have the built-in advantage of investing in real assets and not pieces of paper, and are IRA-friendly. You can even own rental real estate directly in your IRA or other retirement account through self-direction. Visit our free seminar to learn more.

Start withdrawals from tax-deferred retirement accounts early. Sure, you don’t have to make required minimum distributions until you turn 70. But if you take smaller distributions early and stuff them into a Roth IRA, if you’re eligible, you may be able to reduce your marginal tax rate on your withdrawals. That’s because your income in any given year after age 70 will be lower, since your balance for RMD calculation is lower, and withdrawals from Roths are generally tax-free.

Balance Social Security against taxable investment income. If you’re not careful, taking too much in investment income can cause half of your Social Security benefits to become taxable. Some investment income sources aren’t taxable, though – or are only partially taxable. Roth income is generally tax-free, as are withdrawals of dividends from participating life insurance policies. Proceeds on life insurance loans are tax-free, as long as you don’t surrender the policy, generating capital gains on any amount withdrawn over basis. Annuities, combine income with return of capital, so only a part of your annuity income is taxable. Some investments in limited partnerships, MLPs also generate some of your income in the form of return of capital, which are also non-taxable.

By maintaining tax diversity – that is, holding assets that are taxed in a variety of different ways – including inside and outside of retirement accounts, you increase your flexibility for tax management, while potentially realizing less income in higher marginal tax brackets over time.

Engage a life insurance strategy.

If you have some substantial free cash flow during the year and you want or need life insurance, you may consider overfunding a permanent life insurance policy to the maximum extent allowed by law (without turning the policy into a modified endowment contract).

That way, you get the benefit of a large tax-free payout to a beneficiary of your choice in the event of death, or the possibility of tax-free withdrawals of dividends and tax-free loans proceeds when the loan is secured by the death benefit or cash surrender value of the policy. In the end, accumulated cash values in permanent life insurance policies, including whole life, participating whole life and universal life policies – are generally treated similarly to Roth IRAs. However, you have much less flexibility in what you can invest in than you have with an IRA or Self-Directed IRA (see below).

Use a Self-Directed IRA

Your IRAs and similar accounts are not restricted to stocks, bonds, CDs, annuities, cash and mutual funds. You can potentially vastly increase your long-term returns and possibly reduce expenses by choosing use a Self-Directed IRA in almost any investment you feel comfortable in, or in which you feel you have a market-beating advantage. For an introduction to the Self-Directed IRA concept, please attend one of our free informational on-line seminars that we conduct several times per week. You can sign up here.

Use Annuities

A lifetime income annuity from a highly-rated insurance company is specifically designed to hedge against longevity risk – or the risk of living too long. Yes, part of the income coming back to you is taxable as ordinary income. But it is the only option that will provide income to you for as long as you live, in writing, guaranteed.

One strategy: Identify your very basic, minimum needs in retirement, and get a lifetime income annuity that pays this amount. That way, you know you have your basic needs covered. You also have the freedom to invest the rest of your portfolio for an even greater return than you would, otherwise.

Keep an emergency fund – outside of your retirement.

Don’t force yourself to make a taxable distribution or early distribution you don’t want to make. Keep an emergency fund in something reasonably liquid, though not necessarily all in cash. One idea: Keep 1 month worth of expenses in cash in the bank or a money market. Another six months in a longer term CD, and the rest in a short-term bond fund or other vehicle that pays a reasonable interest rate. The idea is to have as little money as possible earning a negative return after inflation.

We’d like to be a part of any long-term retirement strategies you do make. Please visit us at, or give us a call at 866-7500-IRA (472).

We look forward to serving you.


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Break the Underperformance Cycle

According to the new Quantitative Analysis of Investor Behavior (QAIB) from mutual fund industry consulting firm DALBAR, the average mutual fund investor actually underperformed the market over the last 20 years – by a whopping 7.4 percent per year.

Combined with the typical and customary (but still high) expenses mutual fund investors typically pay out to Wall Street money managers, that’s enough to slash their overall investment returns by half.

Since the QAIB’s inception in 1984, the S&P 500 has generated returns of 11.11 percent, annualized. But when you just look at the cash-flow-adjusted returns of the individual shareholder, mutual fund investors concentrating in stock funds have only generated 3.69 percent. That’s less than 1 percentage point above inflation (2.8 percent over the same time period).

Investors in asset allocation and fixed income funds did even worse, with actual cash-flow-adjusted returns of 1.85 and 0.7 percent, respectively.

According to DALBAR’s data, the average investor in mutual funds trailed the index over the trailing 12 month, 3 year, 5 year and 10 year time period.

Why is this? Because the average investor tends to be bullish when stocks are about to fall, and bearish when they are about to rise. ‘Twas ever thus, and probably always will be.

Furthermore, the tyranny of the mutual fund expense ratio works against the investor in bull and bear markets alike.

One way to break the cycle: Get out of it.

Using a Self-Directed IRA or other retirement account can help you sidestep not only the unreasonably high fee structures of many retail mutual funds, with expense ratios exceeding 1 percent. Depending on what you do with your IRA, self-direction can help you ignore the day-to-day gyrations of the stock market and all the media hype, and allow you to focus on what matters most: The long-term returns of your retirement investments at reasonable levels of risk.

Few Americans have the discipline to ignore the daily dose of alternating mania or melancholy from the financial media. If it were that easy to ignore the noise, you wouldn’t have these huge disparities between the theoretical return of the broad stock market indices and the actual returns experienced by investors after adjusting for their jumping in and out of the stock market at bad times.

Making the quantum leap to Self-Directed IRAs can help you declare independence from the mob, because self-direction allows you to invest in things that are grossly under-covered by the mass financial media. For example, Self-Directed IRAs, 401(k)s, SEPs, SIMPLEs, Roth IRAs and other accounts let you put your assets in investments you may know much more about than any TV reporter:

  • Private equity
  • Private lending
  • Rental real estate
  • Land banking
  • House-flipping
  • Commercial property
  • Tax liens and certificates
  • Farms, ranches and livestock
  • Private businesses, partnerships and LLCs
  • Precious metals (with some restrictions)
  • And much more.

The only investments the IRS places off limits to self-directed retirement accounts are life insurance, alcoholic beverages, art and collectibles, jewelry, gemstones and certain forms of precious metals, chiefly because of inconsistent or uncertain purity standards.

The IRS also prohibits buying or selling from yourself or lending to or borrowing from yourself, or directing your IRA to do business with a spouse, ascendant or descendant, or any of their spouses.

Who does it work for?

Self-Directed IRAs or other retirement accounts may be a realistic and effective option for you under any of these circumstances:

  • You are not satisfied by interest rates or expected rates of returns in mutual funds
  • You have professional-level expertise or other market advantage in a given investment or asset class
  • You want to diversify your retirement account
  • You understand real estate and believe you can be a better real estate investor than fund-picker
  • You have the risk tolerance and time horizon to withstand lower liquidity and/or more short-term volatility
  • You want to reinvest your returns in your assets rather than ship them off to Wall Street in the form of expense ratios. American IRA only charges a reasonable flat rate for services, as opposed to a high percentage that compounds over time. However, you will have to manage your internal expenses within your Self-Directed IRA or other retirement account.
  • You understand the risks

Want to know more?

Join us for a free, no obligation Webinar and tutorial entitled Getting Started with Self-Directed IRAs. Just click on the event you’re interested in, sign up, log in and learn. There’s no obligation, no fee.

Or, alternatively, give us a call at 866-7500-IRA(472).

We look forward to getting to know you.

Recovering Interest Rates Make Private Lending Within IRAs More Attractive

Bad news for borrowers can be good news for lenders. After a very long dry spell, interest rates are starting to nose up out of the cellar. Which means it’s getting more profitable to lend money, as opposed to borrowing it.

At the same time, many folks have been looking at taking some profits in the real estate world, capitalizing on a broad housing recovery over the past several years. Essentially, this reflects a ‘risk-off’ strategy, including potentially de-leveraging retirement portfolios by converting them – wholly or partially – from net borrowers to net lenders.

Outlook for Private Lending in IRAs

The rising interest rate trend is likely to continue for some time. It took a while for interest rates to get as low as they did, and it will take time for them to move back up to healthier and more sustainable rates for net savers.

With that in mind, it’s time to take a look at the potential of using self-directed retirement accounts, such as IRAs, Roth IRAs, SEPs and solo 401(k)s to engage in Private Lending.

Advantages of self-directed IRAs and Private Lending

Normally, interest income is taxed at ordinary income rates. But by lending money from an IRA or other retirement account, you can defer any income taxes due on this interest income. All interest received goes back into your retirement account, where it can be reinvested, instead of going to the IRS and taken out of action, as far as you’re concerned.

The general tax rules concerning traditional versus Roth IRAs apply: Interest income in tradition IRAs as well as 401(k)s, SIMPLEs and SEPs is normally tax-deferred. Interest in Roth IRAs and designated Roth 401(k) accounts grows tax-free, subject to the same 5-year rule that applies to stocks, bonds and mutual funds within Roth accounts.

Penalties for Early Withdrawal

Further, you will have to pay a 10 percent excise tax on amounts you withdraw from an IRA or 401(k) prior to age 59 ½, unless you are over 55 and have left the work force, in which case you can begin taking penalty-free 401(k) distributions once you are older than 55.

A few rules concerning lending from within retirement accounts that most other lenders don’t think about: You can’t take a current tax write-off on bad debts. There was no current income tax due if they paid you, and there’s nothing to deduct against if someone defaults on a loan. Ultimately, you’ll just have less money available for eventual distributions in retirement than you would if the borrower(s) had not defaulted.

Furthermore, traditional IRAs, 401(k)s and SEPs have required minimum distributions (RMDs). You must begin taking income out of these accounts by April 1 of the year after the year in which you turn age 70½.

That means you can’t have your entire portfolio lent out when the deadline comes! If you don’t make your RMDs as required, the IRS can and almost always will levy a 50 percent penalty on any amounts you should have taken as RMDs and didn’t. Ouch.

Prohibited Transactions

It’s always tempting to lend to oneself or to family members. That’s not allowed in IRA accounts, though. Here are the rules:

  • Disqualified persons include the IRA owner’s fiduciary and members of his or her family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).
  • The following are examples of prohibited transactions with a traditional IRA.
    • Borrowing money from it
    • Selling property to it
    • Receiving unreasonable compensation for managing it
    • Using it as security for a loan
    • Buying property for personal use (present or future) with IRA funds

To open an account with American IRA, or simply to learn more about the flexibility and benefits of self-directed IRA accounts, including real estate IRAs and IRA partnerships, call us today at 866-7500-IRA(472).

Real Estate IRA Basics FAQ

If you’re coming here because you saw something on the Web about real estate IRAs, or you heard something from a friend, you came to the right place. Yes, real estate IRA investing is legal, has a long track record of success, and is an increasingly popular option for investors who understand the asset class, or who are looking to diversify further.

Is it legal?

Yes, real estate investing within your IRA is quite legal. That’s even true for foreign real estate – the assets aren’t restricted

What are the advantages?

The advantages to real estate within an IRA, compared to other asset classes, are many:

Downside protection. Compared to conventional financial products such as stocks, bonds and mutual funds, real estate has a crucial advantage: Any stock or bond can potentially fall to zero overnight. This is not true for real estate. No matter what happens to the economy, or to Wall Street, at the end of the day a house is a house, and will have value as long as people need a place to live. That’s substantial downside protection.

Simplicity. Further, real estate is easy for most people to grasp. You don’t have to be a financial guru to be a successful real estate investor. Just have a good grasp of numbers and a good feel for a property’s potential value and how to unlock it.

Potential steady income stream. For most of us, retirement is about income generation. Real estate has a centuries-long and proven track record as a reliable income generator through all kinds of economic cycles and upheavals.

Inflation protection. The dollar is almost certain to lose value over the long haul as inflation takes its course. Land and buildings tend to go up, even as the dollar loses value.

Tax deferral. Most landlords have to pay income tax on rental income – a substantial current year cash flow burden. If you hold your real estate in an IRA, however, any rental income tax is deferred until such time as you withdraw the money from the IRA. In the case of Roth IRAs, withdrawals are potentially tax-free, as long as your money has remained within the IRA at least five years.

How big an account do I need?

There’s no specific minimum size. Just be aware that any expenses the IRA incurs has to be met using cash available within the IRA, plus any allowable contributions for the year, which could be limited by your income.

I heard I can’t borrow money in my IRA. Is this true?

Here’s the deal: Your self-directed IRA can, in fact, borrow money, but only on a non-recourse basis. That means the lender can have no claim or collateral on any asset outside of the IRA itself. It is true that you cannot pledge assets in your IRA as collateral for a loan made to you, personally, and you cannot pledge non-IRA assets in a loan made to your IRA. But IRAs and other retirement plans can and do borrow money every day.

Before you borrow, though, understand that any profits or income attributable to borrowed money may be subject to unrelated business income tax.

Are no money down options available?

Normally no. Typically, lenders willing to make loans to self-directed retirement accounts to buy real estate require a down payment of 35 percent or more. It is possible, however, to partner with your Real estate IRA! That way, you can provide the down payment with your own funds, and your real estate IRA picks up the rest, or vice versa. See this article for more information.

What restrictions apply?

You cannot use any property your self-directed IRA owns for your own personal use, or for your spouse’s use. This is true even if your self-directed IRA only owns a tiny fraction of the property-if it owns a single penny’s interest in your property, you cannot use the property for yourself or your spouse.

The same applies to select family members, including ascendants, descendants, their spouses, and any financial, tax or legal advisors working with you on the self-directed IRA and their spouses.

You cannot personally lend money to or borrow money from your self-directed IRA, nor may any prohibited party described above. Nor may any entities they control. Neither may any prohibited party.

You cannot sell property to, nor buy property directly from, your own self-directed IRA. Nor may any prohibited individual or entity. You also cannot directly provide services to your self-directed IRA, nor may any prohibited party, nor may any entity they control. That means you can’t hire your own company to do repairs on the property, and you can’t hire your son as the property manager to oversee the real estate held within your self-directed IRA.

Where can I find out more?

To open an account with American IRA, or simply to learn more about the flexibility and benefits of self-directed IRA accounts, including real estate IRAs and IRA partnerships, call us today at 866-7500-IRA(472).

Turn-Key Real Estate in Your IRA

You’ve probably heard by nDan Doranow about the concept of holding real estate within your IRA, Roth IRA, solo 401(k), SEP or other tax-advantaged retirement account. That concept has actually been around for years, and it’s been a successful strategy for thousands of investors.

So successful, in fact, that some entrepreneurs are rolling out a comparatively recent concept: “turn-key” real estate investing.

Here’s how it works: Your IRA or other retirement account would still acquire direct ownership of real estate, just as in a conventional real estate IRA. You would still realize the benefits of exposure to real estate as a distinct asset class, within your IRA, and the tremendous potential benefits of tax deferral of rental and capital gains income.

The difference: With a turn-key program, someone else is doing all the running around.

Essentially, everything is done for you. Your IRA essentially hires and provides capital to a manager, who handles all the day-to-day aspects of property investing. The management company will handle the search for investable properties, fixing and flipping, tenant selection, rental collections, maintenance, management and upkeep, and everything else you can think of. Your role in a turn-key real estate arrangement is more or less as a passive investor – except you would have much greater input into the decision-making process than if you simply owned shares in a REIT or fund. These operations operate on a much smaller scale. You may have direct contact with the managers and rehab team, for example.

This can be a very good arrangement for those who are otherwise diversified, who believe in the long-term benefits of real estate and who want a concentrated position in just a few properties at any given time, where a REIT or REIT fund or ETF may be too broad a play.

It can also be good for experienced real estate investors who feel their own communities may be overvalued. You can select a manager who works in an are that you believe is undervalued and may have more upside potential.

For example: If you live in Manhattan, you can hire a turn-key manager who lives and works in Witchita – a vastly different market than your local area, with a very different set of economic correlations.

What to be aware of

Obviously, this concept is only going to be as good as the management company you hire to handle your investment for you. For this reason, it’s likely that returns between these companies are going to be highly variable and therefore risky.  Management companies are likely to beat or fail to match the broad real estate market – and by a wide margin. Some questions to ask before you commit:

  • What is the background and expertise of the management team? Do they have a track record of success in both up and down markets? Have they been in operation as professional investors for at least an entire market cycle?
  • Are they predominantly rental property-focused, which generally means focused on generating an income stream for you? Or are they fix-and-flippers, which is a strategy more likely to generate uneven capital gains? Does their approach match your individual needs?
  • What is the fee structure? Is it reasonable, given the expected returns in the sector? (remember that if they use leverage to boost returns, they also boost interest costs and risk at the same time. Also, remember that income or profits attributable to leverage may be subject to a special tax on unrelated debt-financed income.)
  • If this is an income-oriented investment, how does it compare with other available income plays, such as oil and gas pipelines, annuities, utilities, dividend stocks, and other

In our view, the turn-key model can be very successful, but results can vary widely based on individual circumstances.

Want to learn more?

If you’re reading this prior to April 9th, 2014, sign up for an exclusive webinar, sponsored by American IRA, LLC, focusing specifically on the finer points of turn-key real estate investing. We’re pleased to be bringing in Dan Doran, longtime expert on the topic and veteran investor in the challenging South Florida area for over 20 years. In addition to his own real estate investing activities, Dan’s been a sought-after speaker, trainer and mentor to real estate investors for over ten years. The seminar will cover the 12 critical questions you need to ask in doing your due diligence before committing funds to a turn-key real estate manager.



Preserving Benefits for Inherited IRA

Inherited IRAOne of the primary benefits of saving in an IRA is the tax-deferred growth on earnings, which provides the compound effect of earnings-on-earnings.  You can benefit even more with a Roth IRA because these earnings can be tax-free.  Unfortunately, this tax benefit is often severely diminished by beneficiaries who make mistakes when handling inherited IRAs. Avoid these errors by taking some simple steps with any IRA that you inherit.

Avoid Unintended Distributions

One of the most common and costly mistakes made with inherited IRAs occurs when a beneficiary requests a distribution when the intent was to transfer the assets. This often occurs when the beneficiary completes the wrong type of paperwork or mistakenly believes that the amount can be rolled over. If you make an unintended distribution, the amount would be included in your ordinary income for the year and therefore would no longer be eligible for tax-deferred (or tax-free in the case of a Roth IRA) growth. The amount could also put you in a higher tax bracket, which may subject your other income amounts to a higher tax rate.

Solution:  When moving assets to your inherited IRA, ensure that the paperwork is for a transfer and not a distribution. Once the assets are distributed from the IRA, they are no longer eligible to be held in an IRA or other tax-deferred retirement account. An exception applies if you are a surviving spouse, as spouse beneficiaries can rollover these amounts to their own IRAs.

Take RMD Amounts

If the IRA owner died on or after reaching the required beginning date (RBD), a required minimum distribution (RMD) must be taken from the IRA for the year that he died. If he did not take this RMD amount, then you must withdraw that amount by the end of the year.  You may also be required to take your own “beneficiary” RMD for IRAs that you have inherited. Failure to take these RMD amounts by the applicable deadline will result in you owing the IRS a 50% excess accumulation penalty.

Solution: Ensure that all RMD amounts are withdrawn before the deadline. If you are unsure about whether you need to take an RMD, contact our offices as soon as possible.  If you missed the deadline due to reasonable causes, the IRS may waive the excess accumulation penalty.

Split Timely for Multiple Beneficiaries

Generally, multiple beneficiaries of an IRA are required to use the life expectancy of the oldest beneficiary when computing beneficiary RMD amounts. This can severely reduce the tax-deferred benefit for the younger beneficiaries, when the oldest beneficiary is much older or the beneficiaries include a non-person such as an estate or charity. For instance, a 45-year-old beneficiary’s distribution period can be reduced from 38 years to five years, if he is one of multiple beneficiaries of an IRA owner who died before the RBD, and one of those beneficiaries is the decedent’s estate.

Solution:  If you are one of multiple beneficiaries, segregate your share into a separate account by September 30 of the year that follows the year in which the IRA owner dies if one of the beneficiaries is a nonperson such as an estate or charity. The deadline is extended to December 31 of the year that follows the year in which the IRA owner dies if there are no non-person beneficiaries.

Work With an Advisor Who Understands IRAs

The rules by which IRAs are governed are many, varied, and often complicated. The assistance of a financial professional who is knowledgeable about IRA rules and regulations can help you to avoid irreversible errors and maximize your tax benefits.

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