The Truth, and Nothing but the Truth

Myths have existed almost since the dawn of civilization; fortunately, we’re here to correct the top misconceptions associated with self-directed IRAs. So what’s fact and what’s fiction when it comes to IRAs? Much like the popular TV show MythBusters, today we’ll be dispelling the most common misunderstandings and general confusion once and for all!

Myth #1: It’s not legal to invest in non-traditional assets. In fact, the Internal Revenue Service doesn’t tell you what you can invest in; it simply tells you what you can’t. For example, collectables and antiques are off limits, but anything that isn’t excluded is allowed. The fact that there are so many options on the table is perhaps one of the biggest surprises for many potential investors!

Myth #2: I can’t buy real estate with my IRA. This myth is absolutely and unequivocally untrue – in fact, real estate is the #1 alternative investment in a truly self-directed IRA. Real estate offers such a vast array of choices that its potential is practically limitless! Real estate serves as an excellent option for diversification and may produce consistent cash flow along with the possibility for long-term gains.

Myth #3: A self-directed IRA is different than “A Regular IRA”. A truly self-directed IRA follows the same Internal Revenue code and Department of Labor rules as institutions that offer IRAs. Fortunately this makes it easier for everyone involved!

Myth #4: My money is not safe in a self-directed IRA. The reality is that all uninvested cash is FDIC insured up to $250,000, just like cash in a local bank’s IRA account. You can be confident that your money is safe so you can focus on more important concerns – namely managing your current investments and then finding more!

Myth #5: My IRA can’t borrow money – Your IRA is indeed allowed to borrow money to acquire IRA assets. Borrowed funds are commonly used to finance real estate investments, (though they’re not limited to such properties). Certain guidelines need to be followed, so feel free to schedule a debt finance real estate consultation with our office to discuss your options.

Myth #6: I need an LLC to have a self-directed IRA – Many individuals and organizations advocate setting up a limited liability company (LLC, or ‘checkbook control LLC’) in order to hold a self-directed IRA, but this isn’t a strict requirement. In fact, you need to already have a self-directed IRA in place if you want to experience all of the powerful tax benefits of an IRA.

Myth #7: I can buy a vacation home with my self-directed IRA – You can purchase a vacation home with your IRA, but its personal use by you or any disqualified person prior to distribution is a prohibited transaction. Some people use their self-directed IRA to purchase a vacation home they would like to use in their retirement years. They use it to generate income until they reach 59½ years old and then they take the home for themselves as a distribution. Keep in mind that a Roth IRA is an excellent vehicle for this because the distribution is tax free.

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