Understanding Self Directed IRA’s
Chances are, no matter what size your nest egg may be, you’re not considering putting it into any type of stocks or bonds given the turmoil that our economy and Wall Street have been experiencing of late. This is no indication that you should not be earning some dividends of some sort on your retirement fund. The question is what should you invest in at this time and more importantly, understanding how to make that investment when you decide what it is.
Self directed IRAs are similar to regular IRAs but different in one fundamental way; they provide you, the owner, with freedom to make nontraditional investment choices. Self directed IRAs provide the ultimate freedom by giving you, the owner complete control of your IRA from balancing the account to check writing to making all of the investment choices for your self directed IRA.
Traditional IRAs, which are controlled by financial institutions such as banks and financial services companies, are typically allowed to contain investments such as bond, stocks, mutual funds and the like. This is the fundamental difference between traditional IRAs and self directed IRAs. With a self directed IRA, you can choose from nontraditional investment options such as real estate such as bowling alleys and apartment buildings, plane leases, business loans and more. And like their sister traditional IRAs, funds from such investments that are placed in your self directed IRA remain tax-deferred as long as you don’t withdraw them.
If it is not obvious at this point, the entire world is not your proverbial playground when it comes to investments. In other words, don’t tempt the government by trying to add antiques or artwork to your self directed IRA because Title 26 Sections 408 & 4975 of the IRS code strictly prohibits these types of investments.
When it comes to real estate, there are a few catches that you must be aware of and abide by to keep your investment into your self directed IRA legal and above board. One such catch is that real estate transactions must be at arm’s length. This means that certain family members and associates cannot actually reside in a property held by your IRA nor can they be involved in an investment.
You may be thinking, how would they know. A better thought to consider is how would they NOT know. The bottom line is that you should choose to govern your self directed IRA as is required by law because failure to do so can result in your IRA being disqualified and all of the taxes and penalties being placed on the account that have been withheld. And no, they won’t let you take your money out before the taxes and penalties. At best, you will get what’s left after the government gets theirs so it is better to be safe than sorry.
Another catch to be aware of is that you must maintain a balance that will afford the mandatory distributions that take place when you turn 70-1/2. In a nutshell, the choice to invest in real estate as an investment option for your self directed IRA is not one that should be tackled alone. Real estate is a very intense and sometimes quite complicated system that deals with housing of all sorts, commercial properties and more. There are many laws that you must be aware of and abide by when it comes to residential rentals and other types of properties that can generate residual income for you.
The bottom line is that real estate is an undertaking that you should be well versed in before you attempt to add real estate investment options to your self directed IRA. The reason for this is because real estate makes many demands. In most states, certain types of real estate ownership and sales require you to hold a valid real estate license. To obtain this license, you must attend real estate classes and pass a final exam which shows a certain level of proficiency in the laws and governances regarding real estate.
This means that you shouldn’t expect to buy a few houses in your self directed IRA and sit back to watch the dollars start rolling in from rental properties. It simply doesn’t work that way. A testament to the seriousness and detailed involvement that real estate presents may be noted by the fact that only about 2% of the 40 million U.S. households that have IRAs have investments in real estate.
With the volatile nature of the forces that have swept through Wall Street, tearing down iconic businesses such as Lehman Brothers and AIG, it comes as no surprise that people are looking for alternative ways to protect and grow the retirement funds that are supposed to secure a safe and reasonable lifestyle upon retirement. We’ve heard the news about the fact that the government social security program for retirement isn’t slated to cover those who have already paid into it. And with so many other challenges facing a U.S. economy that has slid into a recession, visiting nontraditional investment options for your self directed IRA just makes sense.
Once the self directed IRA holder has decided to invest in an opportunity, a self directed IRA account must be opened with a self directed IRA custodian such as Pensco Trust Company, Click here for Pensco Self Directed IRA Application http://www.penscotrust.com/account/ira_establish.asp The investment is made by the custodian in the name of the IRA. The custodian’s obligation is to maintain all necessary paperwork, monetary transfers and accurate, timely reporting. After all the decision making is completed, individually we are more than the sum of our investments, we are all attempting to build our investment portfolio into a handsome retirement nest egg.