Self Directed IRA's

What is a Self Directed IRA? The answer is in the name. It is technically a trust. Instead of investing your retirement funds in stocks, bonds and mutual funds; you take control of where your money is invested. You can transfer from Traditional, Roth, HSA, SEP, SIMPLE IRA's and 401(k) plans. There are a number of categories available to invest in, the best of course being Real Estate. There are strict rules to follow but they are fairly simple. The most important thing to remember is all dealings must be "arms length". Meaning no direct contributions from the account holder or Disqualified People (DP's).

Disqualified People

Who are Disqualified People? Mainly anyone related to the account holder or their spouse. Grandparents, Parents, Aunt and Uncle, Siblings, Cousins, Children, Niece or Nephew and Grandchildren are all Disqualified People. A fiduciary of the account as well as any service providers (CPA, financial advisor, etc).

What can the DP's not do? Sell something to or buy from the IRA. Lend money or extend credit to the IRA. Provide services for the IRA - No sweat equity. (This one is the one that gets most people, if the toilet is broken you must hire someone to do the work, you cannot do it and if your bother is a plumber he cant be the one either)

Real Estate Investment Choices

  • Single family and multi-unit homes
  • Apartments
  • Condo's
  • Commercial Property
  • Land
  • Fix and Hold
  • Fix and Flip
  • Hold for appreciation

Steps to Buy Real Estate in an IRA

  1. You must have an account custodian. There are many choices and most have good online systems to enable you to sign up and direct funds transfers and account maintenance. Once you have an account set up and funds transferred in, it is best to wait one week as there is a seven day right of rescission. The process can take several weeks so getting this started early is best.
  2. Now with an account setup you can look for properties and make offers. All contracts must be in the IRA's name and the custodian must sign it. Example "Custodian/Administrators Name, For the Benefit of (FBO) Clients Name, Type of IRA or IRA #". This will require you to fill out a purchase authorization form and submit it to your IRA custodian
  3. Once you have an accepted contract, escrow information and instructions are provided to the custodian. Earnest Money must come from the IRA or a non DP.

One of the most powerful tools your IRA has is its ability to get a loan. You read that right. It must be a non-recourse loan. Meaning the only collateral the lender has is the property, they cannot come after the assets of the account holder, as that would be a prohibited transaction. Reach out to lenders early to understand eligibility, down payment, interest rates and other details.

That's the basics. Contact Me for a more detailed conversation and to get started.

As always please consult the appropriate professional for advise in that arena.