Self Directed IRA Real Estate Investing – What Is It?
Have you been interested in IRA Real Estate Investing, but wondered about all the confusing terms and phrases? One of the terms often used to describe the type of IRA many investors use to buy real estate is “Self-Directed IRA.” But what does the term self-directed really mean, and why is this the best kind of IRA to use for real estate investing?
You most likely have at least a little bit of knowledge about real estate and income property, but you may have little or no understanding of IRAs. I’m going to assume you have a job where you earn a paycheck and contribute regularly to a 401K retirement account. Maybe your employer even matches a portion of those contributions, which are kept in a tax deferred account until you reach retirement age and begin withdrawals.
An IRA is also known as an individual retirement account, individual because instead of being related to your workplace, you can open an IRA for yourself, and deposit directly to it on your own. If you like, you can open an IRA in addition to your existing 401K, and you can contribute up to a yearly maximum (also mandated by the IRS).
You can also move the funds from an existing employer sponsored 401K into an IRA. This is called an IRA roll-over, and there are very specific rules for how these must be handled. I’m just giving you the basics in this article… good so far.
The problem is, neither the IRA or the 401K as they commonly exist can be used for investing in income property. Only the custodian of the account (normally a bank or financial institution) can designate what investments are purchased with these funds, leaving you on the outside looking in, with almost no control over where your own money is invested. About all you can do is state what percentages of your money you want to go into which funds the account is invested in. Not nearly good enough for my money.
There is a specific type of IRA however, called a self-directed IRA, which allows you to designate exactly which investments your IRA moneys are invested in. If you consider yourself to be an expert in residential income property, and you know you can generate a certain rate of return consistently, wouldn’t it be a good idea to be able to invest those tax deferred dollars in your 401K or IRA in something you know something about, rather than relying on some faceless fund manager in an office in some distant city? Of course it would!
The easy as 1-2-3 way to get a self-directed IRA of your own is to open one with a custodian who handles this specific type of IRA. Of course, there are rules governing this procedure, but the custodian will guide you every step of the way, allowing your investments to grow tax-deferred!
Believe it or not, there’s even a Socially Responsible Real Estate Investing company that will help you with all of the forms, paperwork, and hassles involved in setting up your self-directed IRA. They’ll take care of the property transactions too, including buying, selling, and even property management.
