An IRA, or individual retirement account, is an excellent strategy for people hoping to save for retirement and reap tax benefits while doing so. They provide a way for people to accumulate wealth by investing and enjoying the rewards of those investments after they reach retirement age.
Unfortunately, many IRAs only allow individuals to focus their money in mutual funds, stocks, bonds, and similar investments. This is why many real estate-savvy individuals often set up a self-directed IRA to purchase investment properties. It allows them greater control over their investments and means that they can skip the roller coaster ups and downs of traditional stocks, as well as the slow-moving growth of many bond investments.
Here are some of the common questions people have when looking into using a self-directed IRA to purchase investment properties.
How Long Have Self-Directed IRAs Been Around?
For those who have never heard of this form of investment, using a self-directed IRA to purchase investment properties may seem like a brand new strategy. In fact, people have been using them since the IRA was first established back in 1974. In fact, the IRS has always allowed individuals to set up IRA investments in areas other than mutual funds, stocks, and bonds. Since many banks and investment firms only offer traditional IRA investments, many people are unaware that this option exists.
What Are the Benefits of This Strategy Over More Traditional IRAs?
People often choose to use a self-directed IRA to purchase real estate properties because it involves less volatility, the hope for higher returns, and the chance to diversify one’s investment portfolio. For people who are savvy real estate investors, a self-directed IRA allows them to invest in an area where they already have a large base of knowledge, rather than handing over their money for someone else to manage. It also allows them to insulate their investments from unexpected market volatility and earn passive rental income that’s tax-deferred.
Who Manages a Self-Directed IRA?
Typically, the plan owner is responsible for managing a self-directed IRA (thus the name). This is why they aren’t available through traditional brokerage firms that also act as the custodian for the plans they offer. They’re a popular option for do-it-yourself investors who want to play an active role in managing their accounts. This provides greater flexibility than other types of investment accounts.
How Do I Open a Self-Directed IRA?
You’ll need to work with a brokerage or a company that specializes in self-directed IRAs. Getting guidance from professionals is beneficial because the laws governing these types of investments can be quite complex. When you meet with a professional to discuss a self-directed IRA, it’s important to be certain that the specific types of investments allowed in these accounts is the kind of asset that you’re interested in acquiring.
What Rules and Restrictions Should I Be Aware of When Using a Self-Directed IRA to Purchase Investment Properties?
When using a self-directed IRA to purchase investment properties, it’s important to know that those properties can not be for your own personal use. This means that you’re not allowed to rent out any of the properties to yourself. This is prohibited by the IRS and if you get caught doing so, you’ll lose all of your tax benefits.
Investors in self-directed IRAs should also be aware that although this can be an excellent way to build long-term wealth, the assets contained in these accounts are illiquid. This means that you can’t access them if a sudden financial emergency arises.
Investing in self-directed IRAs isn't for everyone, but for those with an interest in real estate and a desire to be proactive in managing their investments, they can be a fantastic way to minimize risk and reap long-term wealth and rewards.
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