self-directed IRAMost individuals saving for retirement look toward the traditional types of investments like bonds and stocks.

But there are other ways to invest for retirement that can generate just as much cash flow.

A popular investment among individuals who own a self-directed IRA account is real estate investing, especially for people who are looking for alternative investments that can help them save up for retirement.

A great thing about real estate investing through your self-directed IRA account is that the profit you make stays untaxed until the time you withdraw it.

You can fund the account with either pre-tax or after-tax money, which both have different benefits upon the withdrawal of the investment.

Because of this flexibility, the number of individuals who make use of this option has been increasing for investors who aim to build their retirement savings.

Real estate can generate a great return if the process is done right. With the use of a self-directed IRA, the investment can grow better by having a deduction on its tax.

How to Use a Self-Directed 401(k)

A self-directed 401(k) works similarly to IRAs, wherein you can choose to have a traditional IRA or a Roth IRA to get different tax-related benefits.

Traditional self-directed IRAs are set up with pre-tax money, which means you can deduct your tax contributions in the same year you make them.

Take note that the gains you get from your contributions will be tax-deferred, and the withdrawals you make in retirement will be taxed.

On the other hand, a Roth self-directed IRA is set up with after-tax money wherein your gains and the withdrawals you make after retirement will be tax-free.

However, deductions to your tax contributions cannot be made in the year they are made.

One thing about self-directed IRAs to note is that banks, investment companies, and brokers are not available to make your investment decisions.

Your self-directed IRA custodian will need to step away from your decisions in order for you to make alternative investments.

Simply put, you will be making the financial decisions while your custodian will be carrying out these decisions on your behalf. This means they will be responsible for paperwork and the like, but they won’t provide managing advice and opinions.

Rules for Self-Directed IRA for Real Estate Investing

Using your self-directed IRA for real estate comes with certain rules, which can result in a great deal of taxes if any of the circumstances are broken.

These rules are listed as the following:

  • The purchased property cannot have any indirect benefits.

This means that you cannot use the property for personal use (e.g., a second home, office for your business, vacation home, etc.)

The main purpose of the IRA is for retirement sometime in the future. If it engages in a transaction that benefits you or a disqualified person, the situation is considered an “indirect benefit.”

  • You cannot buy an investment property from people who are “disqualified,” and you are not allowed to purchase a property you already own under your IRA.

People who are considered disqualified, according to the IRS, are spouses, parents, grandparents, children, grandchildren, or any other person who owns over 50% of the investment property.

The IRS doesn’t allow transactions that are self-dealing, which means you cannot buy or sell the property from disqualified people, including yourself.

  • The investment is not directly your investment.

Your IRA is a separate entity from you made for ownership of property purposes.

Therefore if you invest in real estate through your self-directed IRA, it means your IRA is the owner of the property instead of you.

  • You can only obtain the benefits from the investment when you reach the age of retirement.

The property is initially purchased because of retirement purposes.

This means the benefits that come with it are made for retirement and, therefore, should only be taken out during that time.

  • The property doesn’t need 100% funding from your IRA to make the purchase.

You can purchase the property without having to pay off the full amount through your IRA.

Another option is to use undivided interest or partnering with others. With proper structure, you can successfully finance an investment with your IRA.

  • UBIT applies for IRA investments that use financing.

Purchasing real estate using financing is allowed with a loan that is non-recourse.

When financing is used, unrelated business income tax (UBIT) will be applied.

  • The income made from the real estate IRA must be returned to your IRA.

Any of the income that is generated by the property owned by your self-directed IRA should be paid back into your IRA.

  • The costs incurred by the property cannot be paid with your own money.

This is because you don’t personally own the property. Even if you are the owner of the IRA, the property is in ownership of the IRA.

Therefore, the cost for repairs and the like will need to come from the self-directed IRA. Through this, you should consider your contribution limits to have it shoulder these extra costs.

What Is a Custodian for a Self-Directed IRA?

The self-directed IRA custodian is the company or financial entity that is in charge of keeping records and carrying out the requirements needed by the IRS.

They will be responsible for all the paperwork and the administrative related tasks. However, you will be making the financial decisions that your custodian will be working on.

When you are valuing your investments yearly, you will report the value to your IRA custodian since they are the ones taking care of your self-directed IRA account.

IRA custodians will help you navigate through the IRS’ regulations. However, some IRA custodians will offer this service for a price.

While a self-directed IRA is ideal for individuals who want to invest in retirement savings in non-traditional assets, it can also come with a few cons. This is something an IRA custodian can assist you with.

By analyzing the potential expenses that come with your self-directed IRA account and the effects it has on the return of your investment, you will be able to identify how much cash flow your IRA should generate in order to cover certain expenses affecting your investment.

The Company I Recommend for A Self-Directed IRA

Rocket Dollar is the best company for Self-Directed IRA for investing.

I personally invest in real estate and a Self-Directed IRA with Rocket Dollar is a great way to invest your retirement money into real estate.

rocket dollar