Individuals saving up for retirement are currently exposed to numerous investment options apart from the conventional IRA (Individual Retirement Account) securities including stocks, bonds, ETFs, certificate of deposit, and mutual funds. SD-IRAs (self-directed IRA), however, tread on a more non-traditional path offering investments alternatives such as real estate, notes, precious metals, private placements, and tax lien certificates. Among these options, using IRA to purchase real estate has become highly popular. Considering this choice might sound appealing, although there are several factors to be considered before making such a huge financial commitment. Continue reading to know how SD-IRA real estate investing works and if it’s the right choice for you.
Understanding how a self-directed IRA can be used for real estate investments
For investing in real estate, you need to have a self-directed IRA arrangement. There are numerous organizations that assist individual investors to set-up such accounts. The structure and working of an SD-IRA is usually pretty complicated, therefore, you will need some counseling and direction to tackle the puzzling requirements of the IRS (Internal Revenue Service) code. Having an IRA custodian can help you make smart decisions in the long run. They can help you to start a limited liability company (LLC) or another entity to maintain the real estate assets. Certain IRA custodians have an intricate pricing format. So, before hiring one, ensure to ace your homework, and scrutinize if the services offered do justice to the fee demanded.
Pros and cons of using an SD-IRA real estate investment
One of the biggest benefits of using self-directed IRAs for buying real estate is the tax benefits you receive. Investment gains for traditional IRA are tax-deferred until you withdraw them. However, if your holdings are in a Roth IRA, then you don’t have to pay taxes on your rental income, capital appreciation, or money gained from the property sale. Moreover, if you overlook or defy any rules, it could lead to the disqualification of your IRA and deem your real estate purchase as taxable. Investing in real estate via IRA can be a more reliable choice as compared to volatile stocks. Therefore, using an SD-IRA for investing in real estate can protect you during inflation and fickle market trends.
However, investing in real estate using SD-IRA comes with its own set of drawbacks such as excessive paperwork, which can be overwhelming at times. Therefore, you will need to be consistently vigilant to ensure that your investments are on par with the IRS and other financial regulations. Likewise, having complete autonomy about investment decisions should be considered as an advantage; however, it comes with a lot of responsibility. Therefore, if anything goes awry, you have to manage the monetary repercussions. At the same time, many investors assume that real estate purchased with SD-IRA can be used as a primary or vacation home, but this is a huge misconception. Every SD-IRA real estate investment is barred from any personal dealings. Similarly, you can’t buy or sell this property to a family member as it will be considered as a taxable event.
Popular custodians for SD-IRA real estate investing
Here are some popular custodians of 2018 that can help you with SD-IRA real estate investing:
Advanta – For over 20 years, Advanta has been guiding its clients about self-directed IRAs. They are known for their personalized services and a wide range of knowledge base. As a custodian, they not only educate the clients about multiple retirement alternatives but also give them complete freedom to make their own investment choices. Furthermore, Advanta also offers useful resources such as webinars and additional support to aid clients to maximize their real estate wealth.
The Entrust Group – Managing retirement assets worth approximately $2.7 billion, the Entrust Group has experience in handling real estate investing via IRA for over 35 years. Apart from real estate, they also focus on assets like precious metals and private placements. This custodian assists clients in securing various real estate IRA benefits by exploring property and funding options. Moreover, they also aim at making the real estate purchase process smoother by proposing different strategies and familiarizing clients about various legalities surrounding the investment.
PENSCO Trust Company – With over $16 billion worth assets under their guardianship, PENSCO Trust Company deals with SD-IRA investing alternatives such as real estate, promissory notes, and private equity. This custodian helps you with all the paperwork required to acquire a real estate property through IRA. One can choose from a variety of real estate assets such as residential or commercial properties, farmland, mobile homes, and boat slips. Similarly, they have additional resources such as videos and other forms of media to educate clients about SD-IRA real estate investments.
