How do I set up a self directed IRA to invest in real estate?
I'm interested in setting up a self-directed IRA to invest in real estate for my husband and I. What should I consider when evaluating what company to use? What fees should I expect? How do I know if they are reputable?
Investing in real estate with your IRA is a great way to diversify your investments, especially if you have background experience in real estate investing. As Peter Lynch famously said, "Invest in what you know."
There are many things you will need to consider when setting up and investing in real estate in your self directed IRA.
- First, you need to understand the rules. Most people think investing in mutual funds in their IRA is the same as investing in alternative investments. While the rules are the same, the process can be quite different. If you don't understand the rules, you can easily create a prohibited transaction which can cause you to pay penalties and taxes on your IRA. This can easily be avoided by either learning the rules or finding a wealth manager that specializes in this field.
- Second, you will need to find a self-directed IRA custodian. This can be a challenge for most people. There are over 47 different custodians and administrators that specialize in self-directed IRA investing. So how do you choose? If you are going to do it yourself, then should be aware it will take some effort on your part to choose the right one. Each one is different. Each has their own fee schedule, assets they will accept, types of account they will open, customer service levels, etc. If you want to do it right, you will need to ask them a lot of hard questions. Here are some suggestions.
- Third, you will need to open and fund an account at this custodian. This will require that you either make a contribution or transfer IRA funds from another existing IRA to fund the account. (please note that IRAs require that your IRA assets be held at a custodian) Some advertisements tell you that you can buy gold and store it in your home... This is not allowed. You should also note that custodians cannot provide financial advice. They will all clearly state that, but for some reason, people take their responses to questions as advice. I have heard of a number of people getting themselves into trouble because they thought it was the custodian's job to provide them with advice. They are custodians, not broker-dealers. It is an important distinction. If you are unclear about this, then please seek the advice of a financial advisor.
- Fourth, you will need to complete the transaction. The custodian will work with you to do this. They will be the one signing for the real estate, you cannot do it. Ultimately the IRS will own the real estate, not you personally.
- Fifth, you will have ongoing maintenance of the asset (i.e. compliance, valuations, etc)
While this process can seem overwhelming, it is worth the extra effort if you have a good investment in mind. There are some notable people who have grown their IRAs quite large. Mitt Romney has an IRA worth over $100 million dollars. Peter Thiel and Max Levchin also have large IRAs. They created these large IRAs by using creativity and investing in what they know. You can do the same.
I hope you found this helpful
You will need to find an "alternative custodian" that allows you to hold alternative assets like real estate, physical precious metals etc.. in the IRA. You will need to get a valuation, usually annually. Ask for their time in business & knowledge of holding real estate, but you must compare fees as they can vary widely.
Best of luck, Dan Stewart CFA®
Yes, an IRA can legally own real estate and a lot of other alternative investments as well, ranging from private equity and promissory notes to gold, oil and gas and cattle. (It can’t own insurance, collectibles or stock in S corporations.)
Most financial institutions that act as custodians for IRAs generally limit investments to publicly traded stock, bonds, mutual funds and bank CDs. So you will first need to move your IRA to one of the smaller custodians offering self-directed IRAs. I have used NuView IRA which is a privately held company. It operates as a retirement plan administration company that also specializes in maintaining records for clients who would like to self direct their retirement plans for alternative investment. NuView IRA help clients invest in various assets such as real estate, private lending, private placements, precious metals, and joint ventures. I have found their fees to be very competitive relative to other similiar alternative retirement custodians.
Satisfying the requirements for IRA payouts can get more complicated with illiquid assets in your IRA. An IRA owner must take an annual required minimum distribution (RMD) starting at age 70½ unless the account is a Roth. Nonspouse heirs, regardless of age, must begin withdrawals from both regular and Roth IRAs by Dec. 31 of the year following the IRA owner’s death. I you miss an RMD, the IRS will hit you with a penalty equal to 50% of the required payout.
The RMD is based on the account balance on Dec. 31 of the previous year divided by life expectancy, as listed in IRS tables. If there are plenty of liquid assets in the traditional IRA to make the payout. But if there is no liquid cash, the IRA would have to distribute an interest in the LLC instead.
Whereas distributions from a traditional IRA are taxed at ordinary federal income rates. That includes long term gains. In other words, you might undercut the benefits of tax deferral by paying a much higher rate than needed on your gains. With a Roth, all withdrawals by you or your heirs are tax free. That is why an investment that has the potential to appreciate greatly (like real estate) is more appropriate in a Roth IRA.
For IRA owners a Roth also avoids the requirement to take yearly distributions after 70½. Not only can that leave more for beneficiaries if you do not use the money yourself, but with assets that are partly or totally illiquid it also avoids the cumbersome calculation of RMDs.
If you earn too much to make annual contributions to a Roth IRA (there are income limits), consider converting a traditional IRA to a Roth. To do this you pay tax on a traditional IRA, then shift the money to a Roth where all future growth is tax free. Inherited traditional IRAs aren’t eligible.
Please click on the link below to learn more about tax savings with a Roth IRA and real estate:
I think the answer to your question is easy, but you must understand the rules related to investing in real estate in your IRA. You have to treat the real estate the same as if it were a mutual fund in your account. In other words, you cannot have anything to do with the real estate property other than buy it from a third party unaffiliated in any way from you. It cannot be a brother, sister, father, mother, or etc. You cannot buy a flip house with your IRA and you do the work, for example. You cannot buy a vacation property to rent out and then you guys stay there 1 day or more. These rules are extremely complex and have a lot of peril to them. Your whole IRA can be subject to penalties and interest if you make a mistake. You cannot pay any real estate expenses outside of the IRA and you must have enough extra money in your IRA to pay any and all real estate related expenses. Also, you cannot invest in sure deals, like when you have a simultaneous buy and sell on the same day for a profit. There are many more complex issues to understand fully before you dive in.
I would be more concerned with why you want to do this and what kind of property you want to invest in first, before I would even be worried about finding a trust company to hold your IRA.
Equity Trust Company is one that does what you want, but I would be fully educated on this topic before splurging on a Self-Directed Real Estate IRA.
You are asking a simple question where the answer is nuanced and complex. As this is not my area of expertise, I provided a link to an answer which gives plenty of information. I suspect when trying to set this up, if you give yourself 3-5 choices, and do the research on each choice, you will get a pretty good idea of what seems to be a reasonable choice. I hope this helps answer your question.