Traditionally, retirement savers choose to invest their retirement funds in traditional investments, such as bonds, stocks, mutual funds, etc. However, many are now becoming aware of the fact that it is not the only choice.
You can actually use your Self-Directed IRA and SOLO 401K for real estate investing! It's super easy to do and you are not tied to the stock market.
The main thing is that the profits you make in your real estate business is not taxed until you pull it out.
Self-Directed Individual Retirement Accounts (SD-IRAs or self-directed IRAs) are a growing alternative to traditional IRAs. They do not allow for non-traditional investments, such as notes, precious metals, crypto coins, and real estate, among others.
How to Use a Self-Directed 401k
So, how to use a self-directed 401(k)? Well, the self-directed accounts work just like IRAs in the sense that you can choose between a traditional IRA and a Roth IRA, which have different tax benefits.
A traditional self-directed IRA is set up with pre-tax money. This means that you can deduct your tax contributions the year that you make them and the gains from your contributions are tax-deferred.
The withdrawals you make in retirement will be taxed.
A Roth self-directed IRA, instead, is set up with after-tax money, which means that your gains will grow tax free and that any withdrawals you make in retirement will also be made tax-free.
However, you won’t be able to deduct your tax contributions in the year that you make them.
Now, the big difference between a SD-IRA and an IRA is that, with a SD-IRA there are no banks, investment companies or brokers that will make your investment decisions for you.
Instead, in order to make alternative investments, a self-directed IRA custodian will have to sign off on your decisions.
You make the financial decisions, and the custodian will carry them out for you. They will only be in charge of the paperwork, not offer advice on how to manage our holdings.
What is a Custodian for Self-Directed IRA?
In the simplest terms, an IRA custodian is the company or financial institution that will take care of record-keeping and carrying out all of the requirements established by the IRS.
The IRA custodian is there to take care of all the paperwork and the administrative side of things for you, but all financial decisions will be made by you.
You are also still responsible for valuing your investments every year and reporting that value to the IRA custodian that is taking care of your SD-IRA account.
If you want to invest your retirement savings in non-traditional assets, like real estate, a self-directed IRA is a great option, but it comes with its own complications. IRA custodians will help you navigate the maze of the IRS code.
However, this service does not come free. Different IRA custodians have different fee structures.
It is important to dedicate some time to analyzing all of the potential expenses that come with a SD-IRA account, and how they will affect the return of your investment.
A good rule of thumb for self-directed IRAs is to generate a cash flow that will cover all the fees and expenses that will affect your investment without having to inject more cash every year.
Self-Directed IRA for Real Estate
Many investors have turned for real estate as a growingly popular option for their retirement savings. Now, you can actually use your self directed 401k for real estate investing.
Investing with self-directed IRAs in real estate is not always the easiest way of investing your money, but it does have several benefits.
As always, the most important benefit of using a self-directed IRA to invest in real estate are the tax benefits. The kind of tax benefit will depend on which kind of IRA you’ve chosen.
As we know, a traditional IRA has the benefit of tax-deferred income: your investments grow tax-deferred as they are only taxed when take distributions in retirement.
Or, with a Roth IRA, your investment gains grow tax-free, as they were made with post-tax money, and any distributions you take in retirement will also be tax-free.
While it is not recommended that you make any withdrawal before you reach retirement age, as any previous withdrawals will be subjected to penalties, you can still use that money to invest in real estate.
Investors use their self-directed IRAs to buy, flip, or sell properties while still maintaining the tax benefits of their investment accounts.
If you are already familiar with real estate investment, this is a great way of making sure your money is invested locally in a market that you know.
Rules for Self-Directed IRA for Real Estate Investing
However, investing in this way is not as easy as it sounds. Are there specific self-directed IRA real estate rules?
Yes, there are. And breaking any of these rules can mean that you are subject to pretty hefty taxes.
The first thing you need to know is that your IRA is a separate entity for the purposes of property ownership. If you invest in real estate through a self-directed IRA, you are not the owner of the property, your IRA is.
Now, the first and most important rule is that the property you purchase must be an investment property.
You can’t use it as a second home, a vacation property, as an office for your business or as a home for your children.
This rule also applies to your family and people which are defined as “disqualified” by the IRS. Who is disqualified according to the IRS?
Your spouse, your parents and grandparents, your children, grandchildren and great-grandchildren, and any entity that owns 51% or more of the investment property.
Similarly, you can’t buy the investment property from one of these people, and the IRA cannot purchase a property that is already yours.
Another rule to consider is that you cannot reap the benefits of this investment until you reach retirement age.
Also, as the IRA is the property owner and it is not owned by you personally, you cannot pay for any cost incurred by the property out of your own pocket.
All of the money for repairs, for example, must come from the self-directed IRA. This is an important point to keep in mind as you need to consider the contribution limits.
Can a Self-Directed IRA for Real Estate Be Checkbook Control?
Yes, a self-directed IRA with checkbook control is an IRS approved structure.
If you want to invest in alternative or non-traditional assets, like real estate, and have full control over your investments, you have the option of establishing a checkbook IRA LLC.
A big advantage of establishing a checkbook IRA LLC is that you skip custodian control and reduce the often high custodian fees.
The first thing you need to understand about this structure is that you need to set up a Limited Liability Company (LLC). This LLC will be owned and operated by the self-directed IRA, not by you personally.
This also means that you need to set up a new bank account for the IRA LLC.
Once you establish a checkbook self-directed IRA for real estate LLC, you remove any delays caused by an IRA custodian having to sign off your investments. When you find a great opportunity, you will be able to wire the funds straight from your IRA LLC account or write a check.
You can use this self-directed IRA LLC with checkbook control to invest in real estate rentals or any other alternative assets without having to go through the IRA custodian.
If you think that a self-directed IRA with checkbook control is the retirement account for you, you can easily set one up with a platform like Rocket Dollar. Here’s how!
How to Set Up a Self-Directed IRA for real estate at Rocket Dollar
Opening a self-directed IRA account with Rocket Dollar is fairly easy and you can do it all from home. You just need to create and account, provide some documents, and you’re set to go. Here’s an overview of the process.
1. Sign Up
First step is signing up to Rocket Dollar. This should take about 5 minutes, and then the Rocket Dollar team will take care of setting up your IRA account.
Use the Rocket Dollar Promotion Code: MASTERPASSIVEINCOME22 to get $100 off the services at Rocket Dollar
2. Documents for Account Creation
A few days after you sign up, you should receive and email with some documents that require your signature in order to open your IRA account.
You will e-sign the documents and the IRA will be opened by Rocket Dollar.
3. Fund Your Account
Once your account is set up, you can start getting funds in. You’ll be asked to provide some additional documents, such as account statements and information about the account releasing funds.
Once that is all in order, a transfer will be requested.
4. LLC Bank Account
Rocket Dollar will provide a LLC checking account through a bank partner. Don’t worry, they’ll assist you with the process as well.
5. Fund Your LLC Account
Once again, you will receive the documents you need to sign in order to provide funding for yout IRA LLC bank account.
6. Start Investing
Once you receive your funds in your new LLC bank account, you are ready to invest. You will need to leave record of your transactions with the investment tracker, but you’ll be ready to go!
IRA and SOLO 401K Conclusion
I personally think IRA's and 401k's are scams.
BUT… If you set up your own self directed IRA, you totally can make it successful by investing in real estate!
Be sure to start your own self directed 401k here and use my promotion code to get $100 off when you sign up.
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