How could you have sheltered your IRA to prevent losses and allow continued returns, while the storm raged on? There is a little-known strategy in real estate that might be the answer.
Even in the midst of the market conditions of 2008, there was a real estate investment strategy that would have made you look like the smartest investor around, had you repositioned your IRA funds to take advantage of it. By correctly adding real estate to your retirement account, you could have enjoyed predictable growth while sidestepping the volatility of traditional Wall Street investments.
Most people are not even aware they can invest in real estate with their IRA. The large financial institutions that act as custodians for retirement accounts do not offer alternative investments, so people assume IRA’s are limited to stocks, bonds, and mutual funds. The secret, however, lies in the Self-Directed IRA, a tool that lets you add the power of real estate to your retirement account.
Your Secret Weapon: The Self-Directed IRA
A Self-Directed IRA is a retirement account that gives you the ability to “direct” your retirement savings into alternative types of investments like real estate. As long as you understand the rules and align yourself with the right group of professionals to guide you, it can also be one of the smartest ways to diversify, grow, and insulate your IRA from market volatility.
But before you jump into action, you have to understand some basic principles and the areas where you should exercise caution.
First of all, understand that you cannot directly or indirectly benefit from your Self-Directed IRA, and your IRA cannot directly or indirectly benefit from you. That means, for example, that you shouldn’t fix and flip houses or manage rentals with your IRA. You certainly shouldn’t buy a vacation rental and let your family use it on the weekends. Those examples will likely be prohibited, could endanger your IRA’s tax-deferred status, and trigger tax due on your entire account.
More importantly, those strategies could turn managing your IRA into another job for you, something it definitely shouldn’t be. When you invest in real estate with your IRA, it should be an investment with minimal involvement on your part. The entire process should be handled by a professional real estate company who reports to you on a regular basis and, ideally, offers passive investments where you can purchase shares, just as you would purchase shares of company stock.
It is extremely important to align with the right professionals who understand the rules governing Self-Directed IRAs. At a minimum, this should include a Self-Directed IRA custodian and a professional real estate company with qualified legal and tax professionals in their stable. Feel free to ask a lot of questions before you enter into any business relationship. This is your retirement after all, and you will want to avoid both scammers and well-intentioned professionals who are not familiar with Self-Directed IRAs.
Before you can invest in real estate with your IRA, you will need to open an account with a one of a handful of reputable local and national companies that offer Self-Directed IRAs. Look for a company that offers simple, understandable flat fees, not a percentage of assets under management.
Once you’ve opened a new Self-Directed IRA, you will need to fund your account with a transfer from an existing IRA or with a rollover from a qualified plan, such as a 401(k). Be sure to follow the guidance of your custodian so you correctly move your IRA funds from one account to another. Failure to do it right could put you on the hook for a tax liability.
Finding Your Perfect Real Estate Strategy Sidekick
Next, you will need to find a professional real estate company that has a smart strategy for IRA investments. You will want to avoid the sales pitch of a “good deal” that is not backed by a company with a high degree of experience in both real estate and Self-Directed IRAs. The company you choose to work with should be skilled in all aspects of real estate, including finding the good deals. They should also be able to demonstrate proficiency in the areas of due diligence, property management, capital improvements, asset management, legal, accounting, and (the often overlooked) timely delivery of reports and tax documents, so be sure to ask about the company’s process related to those items.
The company should also understand the rules governing Self-Directed IRAs, including all aspects of prohibited transactions, self-dealing, disqualified persons, required minimum distributions, transfers, and rollovers. They should be able to demonstrate how they stay up to date with tax laws and changes in federal requirements and should be able to offer sound advice so you can feel extremely comfortable with your investment decision. Ask for references, and perform your own due diligence to be sure you’re putting your IRA in good hands.
Last, but not least, it is important to choose the right type of real estate. The right company to align yourself with will be able to offer a real estate strategy with a history of strong performance, even in market conditions like 2008. Not all real estate is a good fit for an IRA, so make sure to test the investment by asking these questions:
- Does it offer growth at a rate higher than inflation?
- In addition to growth, will it deliver an attractive dividend, even in a down market?
- Are there ongoing fees associated with the investment that will dilute the return?
- Will it insulate you from losses during a time like we described at the beginning of this article?
Ask good questions, you will be more informed and should be able to make a wise decision about your retirement nest egg.
Approached correctly, investing in real estate through a Self-Directed IRA could be the most powerful wealth building strategy your IRA will ever see, and you can look like the smartest investor around.