While truly self-directed IRA accounts are not nearly as common as regular IRAs, these accounts are not difficult to set up and establish. Nor does it take much time to get started with investing in these types of accounts.
In order to get started investing in real estate via your IRA, it will first be necessary to set up a self-directed IRA account. It is important to ensure that the self-directed IRA is not one where you are simply allowed to choose from a limited selection of stocks, bonds, mutual funds, and CDs, but rather a truly self-directed account where you have the freedom to purchase and sell nearly any type of tangible or intangible asset.
Opening a self-directed IRA account can be fairly straightforward, and there are only a few steps that are involved. In order to move forward, it will first be necessary to work with a self-directed IRA custodian.
Once you have chosen a custodian, the account paperwork must be completed in order to establish the IRA account. Establishing an account with a self-directed IRA custodian is also quite easy, and the process will typically only take a few minutes in order to fill out the application.
When doing so, you will need to determine which type of self-directed IRA account you are opening – a traditional or a Roth – as the tax related rules and benefits can differ between these two types of accounts.
When opening an IRA account with a custodian, you will (or should) typically be provided with information such as the following:
- IRA Custodial Account Agreement and Disclosure Statement
- Financial Disclosure
- IRA Fee Schedule
- Privacy Notice
You will also need to provide the IRA custodian with proof of your identity. This can be done with a valid state-issued driver’s license or by providing a copy of a valid government-issued photo ID.
In addition, the custodian will also need to know what type (or types) of investments you intend to purchase in the IRA account. For example, precious metals, equities, private equity, private debt, structured settlements, and / or real estate.
Once the self-directed IRA account has been opened, it can be funded. This can take place in a number of different ways. These include making a direct cash deposit, transferring funds into the account from an existing IRA account, and / or moving money into the account by way of a direct rollover from a retirement account such as a 401(k).
Likely the quickest way to get funds into a self-directed IRA account is by making a cash deposit. Each year, investors are allowed to deposit up to a maximum amount of money into an IRA (or multiple IRAs). In 2017, the maximum allowable IRA deposit for those who are under age 50 is $5,500 and for those age 50 and over, it is $6,500.
There are some additional stipulations with regard to making IRA contributions, depending on whether or not you are a participant in an employer-sponsored retirement plan, the type of IRA account you have, your annual adjusted gross income amount, and / or your tax filing status.
For example, if the IRA is a Roth account, the annual contribution limit – and even the eligibility to have this type of IRA – is dictated by the amount of annual gross income (AGI) that you earn, and the way in which you file your taxes.
The amount of annual income that you earn is not a factor in contributing to a traditional IRA account. However, not everyone will be able to qualify for a tax-deductible contribution. In this case, if you are eligible for a retirement plan via your employer, then you may or may not be able to take the traditional IRA contribution deduction.
If you already have a regular (not self-directed) IRA account set up and funded, you could also opt to directly transfer some or all of the money in that IRA to a new self-directed IRA. In this case, you typically just need to complete a transfer request form through your new self-
directed IRA custodian.
The new custodian will then forward the form to your current IRA custodian(s) in order to initiate the transfer. Going this route can usually take between one and four weeks, depending on your current custodian.
If you have a 401(k) or other qualified retirement plan that is sitting with a former employer, these funds can also be moved into your new self-directed IRA account. Here again, you will have to contact your plan’s administrator and request the necessary forms to initiate a direct rollover to an IRA account. Depending on the current plan’s administrator, this method may also take anywhere from one week to one month.
When investing in a self-directed IRA account, the custodian that you work with must typically grant permission for each investment that you make in the account. This requirement can pose some challenges due to the time that it can take for obtaining this permission – particularly if you are investing in highly time-sensitive assets like real estate deals and / or tax lien
So, while a self-directed IRA can provide you with a great deal more flexibility than a regular IRA account can, it will still be necessary to obtain custodial approval for the assets that enter into the account, and there is the issue of custodial fees.
One type of self-directed IRA account that can offer you more flexibility and control – and that does not require custodial permission for investments – is an IRA LLC structure. A self-directed IRA LLC invests in and owns an LLC, or Limited Liability Company. As the owner of the LLC, you – the IRA account holder – can set up you own personal strategy for the buying and selling of assets in the account.
When investing through an IRA LLC, the IRA owner will also have what is referred to as “checkbook control”. This refers to a self-directed IRA investor’s ability to simply write a check from the IRA LLC’s checkbook when purchasing investments within the IRA LLC.
An IRA LLC can provide you with the ultimate freedom to invest in a long list of assets, while at the same time, only having to pay a few hundred dollars (on average) each year for a custodian to hold the IRA account.
In order to move forward with an IRA LLC, a self-directed IRA account must be established. In addition, a Limited Liability Company must also be set up, along with a bank account for the LLC. This LLC will be owned by the IRA account.
Once the LLC has been established, the IRA will invest in the LLC by purchasing members units of the LLC, and then rolling some or all of the investor’s IRA funds into the bank account of the LLC. In doing so, the money will no longer be held with the IRA custodian.
After this has been set up, the LLC will be able to invest in a wide array of assets – including residential and commercial real estate – while giving the IRA investor much more hands-on control over the assets that flow into and out of the account.
In addition, because the IRA investor will have checkbook control, there is also more immediate access to the IRA LLC funds, which in turn, can allow the ability to move forward on time-sensitive deals much more quickly and seamlessly, and without the need to obtain custodial approval, as well as having to pay transactional fees, holding fees, and / or other asset based fees.
Just as in any other facet of investing, it is important to have advisors in several different areas in order to help ensure that you are working within the parameters of IRS regulations, and that you are able to maximize your tax-advantaged
With that in mind, some key members to include on your self-directed IRA advisory team would encompass the following:
- IRA Custodian
- Accountant or CPA
- Real estate agent or broker
When you are selecting a self-directed IRA custodian, it is important to be sure that they deal specifically with these types of accounts. There is not a very long list of self-directed IRA custodians to choose from in this area. One reason for this is because self-directed IRA accounts can require many more hours to complete asset purchases such as real estate as versus traditional equity investments.
Due to the increased amount of time that can be involved with self-directed IRA transactions, custodians may have various charges and fees that are associated with buying and selling assets within these types of accounts.
However, if you have your account is structured as an IRA LLC, you may not be subject to many of the fees that are oftentimes associated with self-directed IRA investing. This is because an IRA LLC typically eliminates custodial involvement with the investment transaction. In this case, for instance, an IRA LLC account holder will essentially work as his or her own broker – which in turn, can save both time and IRA custodian-related transaction fees.
When choosing all of your other advisory team members, it can be extremely beneficial if they don’t just have experience in their own respective fields, but also that they have experience in working with self-directed IRA investors.
There can be some key differences between a self-directed IRA and an IRA LLC structure. For this assignment, list two of the primary differences between these two types of accounts.
• Checkbook control