IRA Real Estate Investing - What Does “Self-Directed” Mean?
Sep 18, 2008 Real Estate
You may be wondering what all the confusing language surrounding IRA Real Estate Investing really means. Perhaps you have heard the term “self-directed” applied to IRAs used to invest in real estate, but the question is, “What does self-directed really mean, and why is it the best IRA for real estate investing?”
For the purposes of this article, I’m going to assume you know a little bit about real estate, but next to nothing about IRAs. Let’s assume you have a job, and you have a retirement account through your job, called a 401K retirement account. If you’re like most employees, you contribute to your 401K out of each paycheck, and the money you contribute (up to certain government mandated maximums) is tax deferred. Your employer may or may not match a portion of your contributions. Simple enough.
An IRA is also known as an individual retirement account, individual because instead of being related to your workplace, you can open an IRA for yourself, and deposit directly to it on your own. If you like, you can open an IRA in addition to your existing 401K, and you can contribute up to a yearly maximum (also mandated by the IRS).
You can also move the funds from an existing employer sponsored 401K into an IRA. This is called an IRA roll-over, and there are very specific rules for how these must be handled. I’m just giving you the basics in this article… good so far.
The problem is, neither the IRA or the 401K as they commonly exist can be used for investing in income property. Only the custodian of the account (normally a bank or financial institution) can designate what investments are purchased with these funds, leaving you on the outside looking in, with almost no control over where your own money is invested. About all you can do is state what percentages of your money you want to go into which funds the account is invested in. Not nearly good enough for my money.
There is a specific type of IRA however, called a self-directed IRA, which allows you to designate exactly which investments your IRA moneys are invested in. If you consider yourself to be an expert in residential income property, and you know you can generate a certain rate of return consistently, wouldn’t it be a good idea to be able to invest those tax deferred dollars in your 401K or IRA in something you know something about, rather than relying on some faceless fund manager in an office in some distant city? Of course it would!
It’s simple and easy to open your very own self-directed IRA. Just find a custodian who specializes in these accounts, and they will guide you through the process, and help you abide by all the government rules. Then, your tax-deferred account will grow the way you want it to.
You can even let a company with a Socially Conscious Real Estate Investing program help you set up your self-directed IRA, including all the forms AND whatever fees there may be. They will even take care of all the details of buying and selling the property within the IRA, as well as all of the property management.
Source: Finance
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