More and more people are choosing self managed IRAs instead of or in addition to the more traditional retirement accounts. With the self directed IRA, account owners have more investment options, so it is easier to diversify.
Diversification in the portfolio is important, because when one market is down, another may be doing very well. The account owner that focuses on a single investment type like stocks or bonds may end up with a lot less money for retirement than one who invests in a variety of assets.
Take real estate for example. Some real estate investors are netting big profits for their self managed IRAs.
An article in Fortune Small Business tells the story of Dave Hanrahan who used his self directed IRA to buy a residential lot and flip it thirty days later for a “tidy profit”. Equity Trust reports that Sherman Ragland netted $93,500 for his self directed IRA by buying, renovating and reselling a two bedroom fixer upper.
Those are just two examples of the possibilities. With self managed IRAs, you can buy houses, undeveloped lots, apartment complexes, beach houses and other types of real estate. Of course, you want to use as much care as you would with other types of investments.
The easiest deals to make are cash deals, meaning that there is enough money in your self directed IRA to buy the property outright. It is sometimes possible to obtain a mortgage in the name of the account custodian, but fluctuating interest rates could cut into your profits.
The idea is to find a property that you believe will increase in value over time, can be resold for a profit after making some upgrades, or that can provide rental income for your self directed IRA. You see, you can either hold the property in the account for an unlimited length of time or resell it quickly. The choice is yours.
With self managed IRAs, all of the choices are yours. Real estate is just one of your options. Experienced investors are using their IRA for real estate investments because interest made and profits are not taxed. There are no capital gains taxes on deals made within the IRA.
The first step is to choose a company or brokerage that is experienced with the self directed IRA. There are tax laws and rules that need to be followed. Just one example is the rule about self dealing.
Self dealing means that you or a family member would personally benefit from the investment. So, for example, you cannot buy a house with IRA funds and then let your son move into it. You can’t take family vacations in a beach house owned by the IRA and you can’t invest in a company if you are the sole shareholder.
There are a number of dos and don’ts, so it is important to choose a custodian like Equity Trust, because they are familiar with all of them. They can help you avoid costly mistakes. There are also a small number of experienced real estate investors that are willing to help you find potentially profitable deals. It’s always a good idea to ask for help and take what is offered.
Trading real estate is only an option with self managed IRAs and only a small number of custodians offer the option. As you can see from the examples mentioned here, It might be worth your effort to find one that does.