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What is a Self Directed Individual Retirement Account and Why Should You as a REO Professional Care?

First, you need to know what an individual retirement account is before you can truly appreciate what a self directed individual retirement account is.

Per the Internal Revenue Service, you basically have two types of individual retirement accounts. Those are Traditional IRA or Roth IRA.

A Traditional IRA is just a way for you to save money for retirement with tax advantages. Some of those advantages are tax deductions for contributions and the fact that generally speaking, you aren’t taxed on those earnings and gains till the money is distributed. For more information on IRA, please visit the IRS website here: http://www.irs.gov/Retirement-Plans/Traditional-IRAs

A Roth IRA is a IRA with a few exceptions. Some of those are…..

  1. You can’t deduct contributions to a Roth IRA

  2. You can contribute to your Roth IRA after age 70

  3. You can leave amounts in your Roth IRA as long as you live

My list of exceptions above is not a complete list. For a complete list of exceptions, visit the IRS website link here: http://www.irs.gov/Retirement-Plans/Roth-IRAs

Now, the biggest single difference between a IRA and a SDIRA or Self Directed IRA is the fact that a IRA is set up with a bank, life insurance company, mutual fund or stock broker whereas with a SDIRA, they are set up with a Trustee. This difference is very important for you to understand because, this difference goes t the very nature of what makes a SDIRA so different than a IRA.

You see, with a Traditional IRA or Roth IRA, the bank or organization you set it up with manages the money for you. Your bank will have different funds that you can pick from and those funds have all kinds of disclosures, prospectus and degree of expectations on performance. Sure, no investment is ever 100% safe and anytime you invest, you really should know your risk however, my point is, you aren’t doing any leg work. The bank you set up your IRA is doing everything for you and all you had to do was pick the fund to put your money in. This is where a SDIRA is different.

As I said before, with a SDIRA, you set up your account with a Trustee. This Trustee is nothing more than a place to hold your money. They do not offer you investment advice and they don’t make investments on your behalf. They aren’t going to send you a list of funds you can choose from….because they don’t have any. You aren’t going to get a prospectus telling you what to expect when you invest because, they have nothing for you to invest directly in. Think of the Trustee as a holding house for your money. That is really all they are. There purpose is to be a middle man between you and your retirement money. The reason they exist is to provide transparency, accountability and to enforce regulations over your money.

Finally, with a SDIRA, you don’t make money unless you get out there and invest it. Like I said, the Trustee is nothing more than a holding house, they don’t make investment on your behalf so, if you don’t get out there and find opportunities to invest in, your money will not make gains, it won’t grow. This is the attraction for many because it gives the owner of the money much more control of what gets invested in and likewise, the possibility for much greater gains……with much greater risk.

For many who decide to get a SDIRA, the typically already have substantial experience in one of the areas of allowed investments. For example, I am a Realtor and I have access to many different tools and substantial experience that allows me to assess value on real property pretty accurately. I can use my tools and experience to invest my SDIRA funds into real estate. That’s right, real estate is just one of the many SDIRA investment options. As a Realtor, naturally I would be drawn to invest my retirement in real estate that will create gains and grow my retirement funds, using my own knowledge and experience. The reason I do this is because, I realized I can use my expertise in my career field and create gains for my retirement much more substantially than some bank, insurance company, mutual fund or stock broker every could.

Granted, some people don’t have any experience in one of the approved investment areas however, those people partner with experienced investors in the field of interest they want to invest in. For example, maybe the only experience you have in real estate is buying and selling your own home however, you would like to invest in real estate. What you would need to do is find a real estate investor who has a proven track record of success and let them teach you. Maybe you know a Realtor who has a proven track record of success that would be happy to get out there and find you money making opportunities to invest in? My point is, just because you may not have experience in a particular investment opportunity, don’t let good opportunities pass you by. You can always find the expertise you need, just stand up and look around.

Finally, it’s important to know that I am not an Investment Advisor, Attorney or Tax Professionals. I am a Realtor who has used my own SDIRA to invest in real estate. What you have read above is my own experience and opinion and you should not consider it Investment, Legal or Tax advice because, it’s not. If you need Investment, Legal or Tax advice, go seek out licensed and insured professionals in your state.

To join a social network of other like minded investors, visit www.MatherNetwork.com

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How to Buy Investment Properties with an IRA - Step by Step (Part 4 of 4)

Using a self-directed IRA to buy real estate is a sound investment strategy for many people. The ability to buy assets that can provide strong returns is appealing to a wide range of people. Listed below are the basic steps necessary to buy a property in compliance with the IRS rules governing the use of an IRA account.

photo credit: roberthuffstutter via photopin cc
photo credit: roberthuffstutter via photopin cc

1. Contact a financial firm that has experience with self-directed IRA’s. Working with a firm that is familiar with these accounts and the real estate transactions is the most important step.

2. Understand the IRS rules. A property bought via the IRA must be an investment home. Second homes, vacation homes and primary residences are strictly prohibited. Furthermore, distributions from the account are not allowed until the owner of the IRA is at least 59 ½

3. Deposit funds into the account. One of the important rules about buying property with an IRA is that all funds for the purchase as well as any other expenses has to come directly from the IRA. The owner cannot chip in extra money to help cover property tax or replacing the roof, in example.

4. All revenue received on the property must be deposited to the IRA account. The revenue cannot be given to the IRA owner or relatives.

5. Take time to preview multiple properties. It is wise to enlist the assistance of a real estate agent who has knowledge with these types of transactions. An agent can recommend properties in areas that have strong rental history. Furthermore, the agent can help calculate the return on investment based on average rent payments for the area.

6. Once you have picked out an investment property it is time to put down an offer. Contact the custodian for your IRA account and tell them you want to buy a property. The custodian will then fill out the necessary forms and sign all real estate documents on the behalf of your IRA account.

7. It is a wise idea to get a contract with a property manager to handle the finances of the property. This will prevent you from collecting the rent payments and making any necessary repairs yourself. A property manager can keep all the transactions clean and legal and free you from the headache of property management.

It is important to understand the rules concerning using an IRA to buy and manage real estate investments. Failing to follow the rules can lead to penalties and possibly loss of the tax advantages associated with an IRA account. When in doubt consult a tax professional before making any decision or transaction with the IRA funds.

This is Part 4 of a 4 Part Series.

Part 1: How a Realtor® can help you invest in your IRA

Part 2: Purchasing Investment Properties for your IRA

Part 3: How to invest in real estate using an IRA

Part 4: Step by Step Guide to Buying Homes with your IRA

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How to invest in real estate using an Individual Retirement Account, IRA (Part 3 of 4)
Traditional retirement accounts, like a 401(k) or an IRA, can be powerful when the economy is strong and businesses are experiencing growth. This is due to the stocks and bonds that are typically bought and sold through these typical investment strategies. However, what happens when the economy is not so strong and stocks are struggling? This is when a self-directed IRA can come into play.
More Flexibility
photo credit: Neil Kremer via photopin cc
photo credit: Neil Kremer via photopin cc
A self-directed IRA gives individuals a chance to buy other assets such as gold and even real estate. These accounts charge an annual fee that can reach up to $300 per year. The ability to buy and sell real estate has led to the growth in popularity of these accounts in the past few years.
The real estate decline from the last several years has led to many homes being rented out instead of selling at top prices as the owners had hoped. This is a great environment for investors to come in and make a fair offer on a property and add the home to their portfolio.
Ignorance of Tax Law Can Be Costly
This is not to say that a self-directed IRA is just a large checking account to be used to buy assets. The complexity of these accounts makes any financial mistake quite costly in the form of penalties assessed by the IRS.
A person cannot receive any type of benefit from the account prior to age 59 ½. This sounds vague, and it actually covers quite a bit of territory.
For instance, the owner of the self-directed IRA cannot live in a property owned by the account nor can they receive rent payments from the property. If the rental property is in need of a repair or property tax payment that money must come from the IRA.
Self-directed IRA’s also prevent the use of a mortgage to purchase a home.
Cash is King
Because of these restrictions most transactions that occur through a self-directed IRA are handled with cash. The majority of individuals will have a small number of properties in their portfolio. It is quite common for people to purchase either a duplex or a four-plex in order to maximize the rent payments coming to the account.
This is advantageous in two ways. First, a cash deal makes the whole process much quicker. There is no waiting on a mortgage approval from a lender. The person buying the home can choose the appraiser and title company and make their own decision based on the information provided. Secondly, buyers are in a very strong position when they can offer all-cash payment, right now, to an interested seller. Many sellers are willing to offer a discount for the promise of cash.
This is Part 3 of a 4 Part Series.
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A Realtor® can help you invest in an IRA (Part 1 of 4)
Using a self-directed IRA can be a great way to start your journey to owning real estate as an investment. However, being familiar with the rules and regulations associated with these accounts will prevent you from making expensive mistakes. Here are some helpful tips from Realtors® that you should consider before you start investing in real estate with an IRA account.
photo credit: 401(K) 2013 via photopin cc
photo credit: 401(K) 2013 via photopin cc
* Loans can be hard to find – A loan used in an IRA are required by the IRS to be a non-recourse loan. Basically, the owner of the IRA cannot sign as guarantor on the loan. This will require a minimum of a 40% down payment to acquire the property and possibly 50%.
* Do not put a good-faith deposit on a home with your personal check – In the eyes of the law an IRA account and its owner are considered two separate entities. Writing a deposit check from a personal account to secure a home and then transferring the home to the IRA is a no-no. It is best to set up the IRA account first and use that account for the real estate transactions.
* Choose the right Self-Directed IRA account – Various financial firms offer custodian service for their self-directed accounts. However, it may not be necessary for you to have a custodian. It is important to research the firms and decide which one offers the best account for your needs.
* In the event of a loan, credit does not matter – One of the best things about these accounts is the lack of credit scrutiny. If you need to finance a home purchase with the IRA account the lender will mostly be concerned with the condition and location of the home. This means your existing credit will not play a part in the loan.
* Custodian signs loan papers, not you – This is the main sticking point in IRA real estate transactions. Since an IRA is set up to benefit a person, the person cannot sign real estate transactions. The custodian will need to handle the signatures.
Working with a Realtor®
When you partner with a Realtor® to help guide you through the process of buying a home through your IRA account, there are several benefits that the agent brings to the table.
* Investment advice – Your agent can obviously help you find a home to be used as a rental property. But the agent can do much more. Based on current rent information you can see what type of return you should expect on the property and see if it meets your long term goals. You can also compare rent levels across multiple areas to see which places have the best return.
* Diversity of portfolio – Stock managers routinely advise their clients to spread their money around multiple accounts. This prevents major losses from having too much tied up in one stock or bond. A real estate agent can help you spread your investment across multiple types of properties to help you maximize your growth and minimize the loss.
Using a Realtor® that understands the intricacies of a self-directed IRA and one that has experience with investment properties can make a big difference in how your portfolio performs over the long term. This is Part 1 of a 4 Part Series.
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