Self-directed IRAs offer the best of many worlds. That includes having full custodianship over the IRA trust and the ability to make any decisions concerning the trust. For instance, buying and selling a property can be as easy as writing a check. Any gains made from the sale are paid to the trust tax-free.

The one thing that an investor needs to be aware of is UBTI (Unrelated Business Taxable Income Rules), which is sometimes also known as UBIT. Under UBTI, non-taxable entities such as IRAs may be treated as for-profit entities (and thus taxed) given certain conditions. The question then becomes: what re those conditions and do they apply to house flipping?

Firstly, UBTI applies to the taxable income of “any unrelated trade or business regularly carried on” by an organization that would otherwise be subject to the tax. There are three aspects to this that need to be understood. Those are:

• Trade or business
• Regularly carried on
• Unrelated

The language itself is ambiguous. The actual law is less so.

UBTI Income Rules Explained

In terms of an IRA or 401(k), any trade or business may be deemed unrelated to the general function of a retirement fund. The UBTI, however, is only interested in preventing businesses that are engaged in a competitive market with other businesses to gain an advantage by using tax-free or tax-deferred status. Strictly speaking, the UBTI is never going to be triggered by income derived from passive gains, such as interest, rent, royalties, and dividends.
But a business like a store or restaurant would be subject to taxes, even if held in an IRA. How, then, does this apply to house flipping?

UBTI and House Flipping

The question most people ask themselves is: “what exactly is the threshold for regularly carried out?”  The truth is, there isn’t one. The IRS is likely to employ a three-factor test in determining whether or not an individual’s house flipping activities cross the line. Those include:

• The frequency of transactions
• The intent of the individual
• Other activities claiming tax-exemptions

The main factor is whether or not the flipping of the houses constitutes a business. It would, of course, not be ok to have a business that you’re actively engaged in the management of trying to get out of paying taxes. On the other hand, buying a house, fixing it up, and then selling it off is unlikely to trigger a visit from the IRS.

Ultimately, the IRS will make a determination based on whether or not you’re attempting to use your IRA to get out of paying taxes. If you’re operating a business from your IRA, then the IRS is likely to frown upon that. If you flip one or two houses a year using IRA money, then the IRS is unlikely to care.

Clearly, IRAs were not designed for the purpose of flipping houses. Nor does that mean that an individual would be prohibited from using their IRA to do so. So what exists is a legal gray area that, under the proper circumstances, can be exploited fo the purpose of padding your retirement account. For those who are interested, working with a tax professional will help avoid triggering a UBTI audit.

An IRA rollover is the transfer of funds from one account into an IRA. A Rollover IRA is a retirement account capable of accepting those funds. The Employee Retirement Income Security Act (ERISA) permits a number of ways for individuals to transfer funds from one qualified plan to another. However, the provisions for these plans can get somewhat complicated, and navigating your way through them can be a headache.

The provisions in ERISA basically cover transfers from one type of retirement account to the next. They are designed to make it easier for those who are switching from one job to another to move their money without cashing out their 401(k) or IRA. In addition, there are a number of qualified plans that can be rolled over into an IRA, including Health Savings Accounts (HRAs).

While there are a number of reasons why someone would be interested in doing this, the most common reason is when someone changes jobs. They can either have two 401(k)s that exist in their name or roll over their old 401(k) into an IRA that would then receive distributions from their current 401(k).

Rolling Over Funds From One Traditional IRA To Another

While this is perfectly acceptable under the law, there is one stipulation that you should be aware of. Funds withdrawn from one IRA to be deposited in another must be reinvested within 60 days. Failure to comply with that requirement could open an individual up to losing their non-taxable status and perhaps being penalized for cashing out the IRA prematurely.

In addition, the IRA must be transferred in its entirety into the new account. If even a small portion of that money is withheld, then the funds could be treated as taxable.

Lastly, the action of rolling one IRA over into another can only be done once per year.

Rolling Over Funds From A Qualified 401(K) To A Traditional IRA

Funds can easily be rolled over from a 401(k) to an IRA but again there are certain restrictions. Most importantly, an individual cannot roll over any funds distributed from a 401(k) that are part of a payment schedule once the plan has kicked in. The payment schedule may be due to a hardship provision, or the individual has cashed out their 401(k) early. Either way, that money cannot be rolled over into an IRA.

This is one of a multi-part series on the Self-Directed IRA. Depending on how familiar you are with the account type already, you may already know that the Self-Directed IRA one of the best retirement solutions. This is particularly true for experienced investors and self-employed individuals. Even if you're neither of these yet, you'll still want to read on.  A whole world of profitable investment opportunities is just waiting for…YOU!
 
Think of your Self-Directed IRA as a “retirement investment vehicle” which allows you to use your retirement funds to invest in all varieties of investments. This includes, fortunately for my fellow real estate empire builders out there, real estate.  But regardless of your preferred investment types, the best part for all account holders is that if you form and execute your Self-Directed IRA properly, your money grows tax free and you don’t need to take orders from a custodian. This will also free you from the expensive custodian fees that may have been a burden on your retirement account savings for years.

Below, we'll talk about how to take advantage of some of the Self-Directed IRA's best features, but focusing first, of course, on how to get a loan for your investments.

Why Traditional Loans Won't Work For Your Self-Directed IRA

Most investors using retirement funds to make an investment will use cash to make those deals. Whether the investment is in the form of stocks/bonds, gold, or real estate, most investors will not borrow any funds to make an investment.
One significant reason why retirement account investors will generally not borrow money (also called debt or leverage) as part of an investment of real estate acquisition is the IRS. This should come as no surprise, as most Americans fear the IRS--and with good reason.
Internal Revenue Code Section 4975 prevents you, the IRA holder, from personally guaranteeing a loan made to your IRA. This applies to your Self-Directed IRA,  because you are barred from using a typical loan or mortgage loan as part of an IRA transaction. The IRS considers such loans prohibited transactions, which can trigger major consequences and fees for the investor who runs afoul of prohibited transaction rules.

The bottom line is simple: you just can't get an ordinary loan with Self-Directed IRA. But you may still need one to cover your early investments. Don't worry though. You, as a newly empowered Self-Directed IRA investor, do still have a financing option: a non-recourse loan.
 

What is a Non-Recourse Loan and How Does it Work?

Non-recourse loans differ wildly from traditional loans in a major way. Non-recourse loans aren't guaranteed by anyone at all. Rather, they're secured by collateral, such as a valuable property or other asset. While in theory any asset could be used for collateral, lenders in this case are typically securing  the loan via the asset or property that the loan will be used for.

So if you, the borrower, are unable to repay the loan, the lender’s only recourse is against the asset, such as the investment property you intend to use the loan for. They can't come after you personally.  That's the simple definition of "non-recourse."
 
On average, non-recourse loans are tougher to obtain than a traditional loans or mortgages. Fortunately, this is a common enough strategy for investors that you will have your pick from a wide variety of reputable non-recourse lenders. But you should be aware of the fact that interest rates on non-recourse loans do tend to be slightly higher than those of personal loans.
 

IRS Rules Regarding Non-Recourse Loans

The IRS has some strict limits on how these types of loans may be used in retirement accounts. The main thing you should know is that Uncle Sam allows IRA and 401k plans to use non-recourse loans solely for financing purposes.

The rules covering the use of non-recourse financing by an IRA can be found in Internal Revenue Code Section 514. Section 514 requires debt-financed income to be included in unrelated business taxable income (UBTI or UBIT), which can trigger around a  40% tax for 2017 and 2018. If non-recourse debt financing is used, the portion of the income or gains generated by the debt-financed can also get you hit with the approximately 40% UBTI tax.
 
So for instance, if you choose to invest 60% IRA funds and borrow 40% on a non-recourse basis, 40% of the income or gains generated by the debt financed investment would be subject to the UBTI tax.
 
Let's keep it simple and imagine for the purpose of this example that the investment property you wish to buy is $100,000. This means that as a  Self-Directed IRA investor, if you invest $60,000 IRA funds and borrow $40,000 on a non-recourse basis and the IRA investment generates $1,000 of income annually, 40% of the income or $400 would be subject to the UBTI tax.
 
But don't stress it too hard. There are ways to reduce the $400 base tax. It should be clear from this example that using as little non-recourse financing as you need is ideal, but that's not the only way to lower your base tax.

How To Save On Taxes By Avoiding the UBTI

You can use a Solo 401k Plan, if you already have one, to dodge the UBTI.  This is one reason that Solo 401ks and Self-Directed IRAs are such attractive investment vehicles. Used together, or using strategic rollover methods, you can reduce your need for financing, but the news gets even better.
 
If you use non-recourse financing to invest in real estate through your Solo 401k Plan or your Self-Directed IRA, you will “escape” UBTI/UBIT tax due to an exception. This exception can be found in the Unrelated Debt Financed Income (UDFI) rules found under IRC 514(c)(9). If you're curious, you're welcome to learn about how this works, but due to space reasons, I'll just tell you that many of my clients have used this exception to save thousands in tax dollars while securing the loans they need for their Self-Directed IRA investments.

And there's no reason why you can't do this too. That's all for now, but if this subject interests you, keep your eyes peeled for many more upcoming pieces on the Self-Directed IRA and its "big brother" account, the Self-Directed IRA LLC. These will also be discussed in an upcoming book I'm authoring and giving away for free for Bigger Pockets. Stay tuned for updates on that, and happy investing!
 

The self-directed IRA is a widely popular option for real estate investing. Investors can enjoy high yields, while hedging themselves against stock market uncertainties. However, there are some pitfalls to avoid. Knowing these common pitfalls can help make managing your investments easier and more cost-efficient.

Common Pitfalls

Pitfall One: Prohibited Transactions

“Self-dealings” are defined by the IRS as any transaction that involves the self-directed IRA and a disqualified person. A disqualified person includes the IRA holder, but also anyone with significant authority over the account. This includes plan custodians. Family members are also disqualified. A good rule of thumb for defining “family” is to ask yourself if they are lineal descendants, spouses or forebears.

Family members include: Spouses, parents, grandparents, children and their spouses, and grandchildren.
Even if a prohibited transaction isn’t intentional, it can lead to tax penalties or even worst early distribution of your account. Here’s an example of a seemingly harmless transaction that is prohibited:

Sarah owns a real estate investments. She notices that the yard could use some work. Her son- in-law does some landscaping work, so she figures why not pay him to do repairs? Since Sarah’s son-in-law is a “disqualified person,” this transaction would be considered prohibited. In fact, if Sarah herself was a landscaper she would also be prohibited from doing the landscaping work herself. This is considered “sweat equity.” In both these cases, a disqualified person is benefiting from conducting the landscaping work on the IRA owned asset.

Pitfall Two: Unrealistic Expectations

The self-directed IRA owner usually has enough common sense to avoid any claims of “guaranteed returns” or “risk-free investments.” However, I’ve seen a few smart investors fall prey to unreal expectations, especially when it comes to the administrative work and costs required to maintain their investments. The IRA owner must review and sign off on transaction related documents. She must keep up with fees associated with these transactions and fulfill IRS required reporting requirements. While we can’t get rid of most of these requirements, we can make it easier. Our online platform gives investors “checkbook control” and allows transactions anywhere with an internet connection.

Pitfall 3: The Wrong Structure

Investors can reduce fees and gain more control over their IRA account by choosing the right self-directed IRA structure. Investors who who use a custodian managed account, sometimes deal with costly custodial fees and delays. Using an LLC self-directed IRA can reduce custodian involvement, however it can result in additional fees during tax time. We offer a self-directed IRA connected to an FDIC insured asset trust. The trust reduces tax fees while also giving investors “checkbook control” over their account.

Avoid Costly Mistakes

Using the wrong structure, having unreal expectations and participating in prohibited transactions are all common pitfalls self-directed IRA real estate investors face. We’ve helped several clients avoid these pitfalls, while enjoying the benefits of tax-deferred real estate gains. We’d love to help you do the same. Contact us today to address your personal concerns.

When you have an individual retirement account (IRA), you may believe your investments are protected. After all, if you are not a doctor, corporate executive or professional in a litigation-prone field, you may feel there is little that could cause you to lose your assets when it comes to investing.

Are My Assets at Risk?

Unfortunately, there are a lot of ways in which your assets, IRA-related or personal, can be at risk. Filing for bankruptcy, divorces, and civil lawsuits are all possible ways to lose your assets. In fact, if your minor causes a car accident, you will likely be the one to pay the price. You are also considered at fault even for accidental injuries that occur on your property, like a slip and fall.

Protecting Your Investment Assets

Fortunately, there are state and federal laws that enable you to protect many of your assets from certain types of situations.

• IRA Protections: Whether you have a traditional or Roth IRA, you have certain inherent protections. In particular, the contributions and gains in your IRA are protected from bankruptcy proceedings through an inflation-adjusted cap. In other words, up to $1 million of your IRA funds can avoid bankruptcy judgements and remain in your account. If your contribution steps from the rollover of a qualified plan, like a 403(b) or 457(b), they are completely protected, regardless of amount.
• Qualified Employer-Sponsored Plans: Plans that are employer-sponsored, like SEP and SIMPLE IRAs, are exempt from bankruptcy garnishments as well. If your plan is also subject to the Employee Retirement Income Security Act (ERISA), it is protected from any case that may award your assets to another party.

Business Trusts: Protection that Goes Deeper

Additional asset protection is a smart way to further ensure your property and finances stay in your hands, regardless of the legal situations occurring in your life. To do this, most financial advisors recommend you create a legal entity, of which you are the manager or trustee, through which you invest your IRA funds. This IRS-approved strategy separates your personal assets from those owned by your trust.

Full Confidentiality

When you form a business trust, there is no legal requirement to publicly file. The trust agreement, also referred to as a Declaration of Trust, can remain private. There is also no automatic publication of the trustee’s name, ensuring your identity remains private as well. This is important because it allows you to prevent creditors and lawyers from easily identifying your full net-worth should a lawsuit be filed against you.

Disregarded Entity

For federal and state income tax purposes, a business trust is classified as a partnership. However, partnerships that have a sole owner are “disregarded as an entity separate from its owner.” Once this occurs, the entity becomes exempt from filing federal income taxes. As a business trust, vice a LLC, earnings are also exempt from filing state income taxes as well.

We’ve already went over the finer points of Bitcoin investing using a self-directed IRA. However, cryptocurrency is such a new retirement investment that even those with prior experience face questions. Today, we’re answering three major questions in this handy Q and A guide. Don’t let your questions stop you from this whole new digital world of investment potential.  

Question 1: Is Cryptocurrency Investing With a Self-Directed IRA Allowed?

The short answer is, yes. The only types of investments the IRS specifically forbids is collectibles and life insurance. However, the IRS doesn’t specifically list cryptocurrencies as an alternative investment. But this shouldn’t cause concern, as the IRS has been historically hesitant to endorse investments, as this can backfire later on.

Question 2: What Entities Are IRS Approved to Administer My IRA?

Just like real estate or other alternative investments, cryptocurrency must go through a custodian administered self-directed IRA. With this structure, you’re handing over a transaction fee and access to your cryptocurrency wallet PIN. This risks safety and increases administrative cost.
Another option is to invest using an LLC as an extension of the IRA. This gives you "checkbook control" over your investment funds, since you become the manager of the LLC. However, like an LLC for any other purpose, it requires legal work to establish. Plus, you have to establish a checking account to link with the LLC. Lastly, investor confidentiality isn't maintained since LLC agents must have their names filed with state records. We eliminate some of these pain points by establishing an IRA linked trust, where you as the trustee gain immediate access to Bitcoin and other cryptocurrency investments.

What Factors Influence Cryptocurrency Prices?

We can examine this question using Bitcoin as an example. According to Arthur Hayes, CEO of the BitMex cryptocurrency exchanges, Bitcoin prices can reach $50,000 in 2018. Here are some price factors to consider:

• Remember Bitcoin’s limited supply of 21 million units. When that limit approaches, prices are expected to soar as supply becomes limited.
• Understand Bitcoin’s unique features and how they can impact growth. As an open source program, expect rapid and sometimes unexpected changes. Also, Bitcoin relies on a huge community of Bitcoin miners. Their actions can positively or negatively impact prices.
• Expect Bitcoin’s adoption rate among merchants and rival cryptocurrencies to influence prices.
• Stay up-to-date on critical IRS decisions. The IRS already established that profits from IRA owned Bitcoin sales aren’t taxed at the time of those gains. Instead, they are taxed at the time of retirement. Further favorable regulations can spur Bitcoin demand and prices.
• Expect world-wide regulations to cause volatility. When Japan accepted Bitcoin as legal tender,  global prices rose by 160 % over the next few weeks. In contrast, when China banned initial coin offerings prices went down nearly 30 % over a day.

Streamline Cryptocurrency Investing

We’ve answered some important questions regarding regulations, pricing factors and how to structure and administer your self-directed Bitcoin IRA. We can answer more of your questions and walk you through our online platform, which streamlines the entire setup and investing process. Contact us today if you have additional questions.

Rolling your IRA over into a self-directed IRA isn’t for everyone, but those who take the time and effort to oversee their investments can cash in on a number of benefits that others can only dream of. Here, we’ll review some of the pros and cons of using your self-directed IRA for investing.

Pro: Self-Directed IRAs Allow for Tax-Free and Tax-Deferred Status

Traditional IRAs typically allow for a few very safe, very low-yield options. But one of the major benefits of an IRA is that it allows you take advantage of a special tax status. Roth IRA’s, for instance, allow your investments to grow tax-free. Non-Roth IRAs are tax-deferred (for example, you only pay taxes once you begin cashing in on your IRA). With Roth IRAs, the taxes are paid beforehand on deposit.

Roth IRAs are an excellent opportunity to store lucrative investments for your retirement. In addition, with a Roth IRA, there is no set age at which you are absolutely required to begin taking withdrawals. Roth IRAs are thus a great place to store investments.

Con: Self-Directed IRAs are More Costly than Traditional IRAs

While this may be a con for some, the truth is that you can make a lot more money with a self-directed IRA than you can with a traditional IRA. The catch is that yearly fees are more expensive, and they cost more to set up.

Pro: IRAs are Generally Safe from Creditors

IRAs are some of the safest places in which to store assets. While individual laws will differ from state to state, IRAs are technically considered trusts making them very difficult to sue and even immune to bankruptcy.

Con: IRAs are Complicated and Subject to Regulations

The legalities of using an IRA as an investment bucket are subject to regulation. That is the price paid for having preferred tax status. Self-directed IRAs offer you a lot more options in terms of what you can invest in, but there are some restrictions. For instance, you can’t fund your own or your family’s business with your IRA account. You can, however, invest in businesses in which you don’t have any active involvement.

Pro: Self-Directed IRAs Give Your More Options and More Control

For obvious reasons, this is a bit of a mixed blessing. You can save more money for your retirement by investing in ventures with higher yields, but you also have to do your research and keep on top of how your investments are performing.

Just a few of the interesting things that you can invest in with a self-directed IRA that a traditional IRA would not allow for:

• Gold and silver
• Cryptocurrencies and ICOs
• Business equity
• Real estate
• Mortgage notes
• Commodities
• Hedge funds
• Natural resources
• Land

Basically, rolling over your IRA to a self-directed IRA allows you to invest in anything that is legal to invest in. It’s a great opportunity for those that want to take control of their future, and enjoy the tax benefits of their retirement account.

Real estate has been a popular investment over the last 50 years. Today, many investors are choosing the self-directed IRA as a vehicle for their real estate investments. There are a ton of resources on the tax benefits and compliance guidelines associated with this type of investment. However, some valuable information can get lost amidst those lengthy resources. I’ve highlighted some of this overlooked information in this handy do’s and don’ts guide.  

Self-Directed IRA “Do’s”

Use Trusted Self-Directed IRA Custodians and Services

This may seem like a no brainer, but the sheer amount of funds in IRAs make it a target for scammers. Also, the advantage of tax deferrals can turn out to be a curse. I’ve seen scammers use this as a lure to keep investment funds under their fraudulent activity for decades. A legit self-directed IRA custodian should be IRS approved and use safety protocols to secure your financial information. We set-up self-directed IRAs for real estate and other private investments, using an FDIC insured IRA trust. Our online platform uses Amazon’s trusted Web Services and our servers our audited regularly.

Compare Administrative Cost

The obvious costs to watch out for are recurring fees. For the typical self-directed IRA, these include a transaction fee on each asset sale or purchase. Transactions on real estate assets can incur even higher transaction fees. There are also some lesser known costs. The IRS requires real estate in a self-directed IRA to be valuated annually. Getting this valuation can be costly. A common pain point investors cite in IRA real estate investing is lack of transparency around costs. We provide a clear, cost-effective method of real estate investing with your self-directed IRA.

Self-Directed IRA “Don’ts”

Give Up Too Much Control

Self-directed IRA real estate investments can go through custodial delays. Mailing forms and transferring funds can take time and are subject to external factors. These extra layers of administration mean less control for the self-directed IRA owner. We provide real-time access to your funds, giving you more control over your real estate investments.

Limit Your Investment Options

Portfolio diversification is what attracts several investors to a self-directed IRA. Real estate, in particular, takes this advantage even further since there are so many different types of real estate. We’ve seen investors enjoy high yield returns on a variety of assets from raw land to condos. Mortgage notes and other lesser known real estate investments are often overlooked, but can also help with diversification.

Start Investing Today

A self-directed IRA for real estate is a good way to diversify your retirement portfolio. However, using a trusted and cost-effective service is important. Gaining checkbook control over your account and accessing a diverse variety of private investment options are equally important. Our online platform meets all these investor needs. We can help you set up a self-directed IRA for real estate and other high-yield investments. Contact us today at (425) 449-4554 for a consultation.

A lot of real estate investors tell me they are hesitant to sign up for the self-directed IRA, also known as a SDIRA or solo IRA. They’re usually not sure they have the investment chops to see decent returns.

Here's why I disagree: Self-directed IRAs offer a great variety of investment choices. Traditional IRAs are quite limited by comparison, and one of the most lucrative investments right now is real estate.

The value of real estate has steadily increased since the housing collapse of 2008—a collapse that had little to do with the real estate itself. It had more to do with the quality of mortgages that were being offered to homeowners.

Real estate investing through your self-directed IRA can be a sure thing when done properly.

Finding a Sure Thing for Your Self-Directed IRA

One of the reasons that so many investors lost so much money was because they invested in the debt associated with mortgages. When millions of homes were foreclosed on all over the country, much of the anticipated returns evaporated into the thin air.

You don't want to leave your SDIRA money to chance. One surefire way to get a return on your investment is to rely on distressed properties.

In case the terminology is new to you, a distressed property is one which, for whatever reason, is run-down to the point of being uninhabitable. It may fail housing inspections or a housing authority may deem it unsafe for renters. In that event, the property is still valuable, but the original owners may be unwilling to put more money into the property. An investor then buys the property and fixes it up. This entails both bringing it up to code and making it desirable to tenants for the purpose of inhabiting.  

The capital that’s invested there then needs to be replenished. That’s where passive investors come in.

Real Estate As An SDIRA Asset

With a traditional IRA, holders are left to choose from a set of handpicked mutual funds. A self-directed IRA offers a much larger set of options, and one of those options is real estate. For the aforementioned reasons, real estate offers investors an excellent opportunity for returns. An investment in an already performing asset offers the holder of an IRA excellent security.

For investors that may be leery about taking on the responsibility of a self-directed IRA, opportunities to become a passive investor should not be overlooked. A qualified professional can help you spot and exploit these.

Self-directed IRA real estate is among the most popular alternative assets. However, it’s not for everyone. We’ve already given you a helpful overview of what a self-directed IRA for real estate investing is. Below is a closer look at the pros and cons of this type of investment. Read on to find out if this growing investment option is right for you.

Pros

Higher Returns

Real estate as a non-traditional asset can lead to higher returns. According to Investopedia: “Real estate has outperformed the stock market approximately two to one since 2000, earning 10.71% annually versus 5.43% for stocks (1).” This is not always the case. However it can explain why according to a 2014 Morgan Stanley Survey, real estate is the most popular alternative asset class among millionaires (2).

Tax-deferred Gains

Real estate investment gains are tax deferred. When real estate is purchased outside of a self-directed IRA, gains are taxed at the federal and sometimes state tax level. In contrast, gains on self-directed IRA real estate are taxed when those funds are withdrawn. This can occur after decades of unhindered growth.

Control and Stability

Unlike traditional IRAs, a self-directed IRA real estate investment can be more familiar and manageable. Global conditions and political factors often increase the uncertainty of stocks. Real estate as a physical and often local asset offers a more manageable alternative. Plus, when combined with checkbook control through an LLC or business trust, transactions aren’t subject to administrative control from a faraway custodian.  Investing can be as easy as writing your own personal check.

Cons

You Must Do Your Own Due Diligence

A self-directed IRA doesn’t include a separate entity who will perform due diligence on each transaction. The custodian’s role is as a “passive custodian.” She may have real estate investing experience, but this doesn’t mean that your investments are vetted. We can help simplify self-directed IRA access to real estate and other private investments, so you can focus on performing your due diligence.  

You Must Learn Complex Rules and Regulations

A common mistake when dealing with this particular form of investment is “self-dealing.” This includes any transaction that unfairly benefits the owner of the IRA or any of her family members. Examples include renting out an IRA owned rental property to a child or paying yourself for rental property management. A mistake like this can lead to a taxable event or even worst jeopardize the status of your IRA.

A Streamlined Self-Directed IRA Approach

The self-directed IRA real estate investment can offer high returns, tax deferrals and an increased sense of control over investments. However, these benefits come with a responsibility to complete due diligence on all transactions and be aware of “self-dealing” rules. We’ve streamlined the self-directed IRA investing process so that you can focus on these responsibilities. Contact us today for more information.

If you’ve ever wondered how far your self-directed IRA can stretch, the answer is probably further than you think. The answer is also probably different than you’re expecting. IRAs can be passed from one generation to the next enjoying tax-deferred status and accruing value the entire time.
This strategy, known as an IRA stretch, allows generation after generation to accumulate capital using an IRA established by the previous generation.

What is a Stretch IRA?

A stretch IRA does not refer to any specific kind of IRA. Rather it’s a strategy that allows an IRA to enjoy its tax-deferred status longer than it normally would. By stretching out the life of the IRA, the funds attached to the account are given decades to accumulate wealth. By contrast, a traditional IRA requires that the holder of the account take the required minimum distribution (RMD) by the time they turn 70 ½.

The RMD is determined by dividing the total value of the account by the number of years left in the average person’s life expectancy. So if there is an account worth $100,000, and an individual’s anticipated life expectancy is 85, the RMD would be 100,000 ➗ 15 at 70 years old.

The IRS provides a “Uniform Lifetime Table” to come up with the life expectancy number. Those who inherit the IRA would be expected to do the same thing, although the rules differ depending on whether or not the heir is a spouse.

How Do You Implement a Stretch IRA?

There is a simple and brilliant solution to making the most out of an IRA. As we said before, the IRS comes up with a table to determine the yearly payout for an IRA based on the life expectancy of the beneficiary. The younger the beneficiary, the smaller the yearly payout. While this number is recalculated each year, it will remain considerably lower for a younger beneficiary. In many cases, the annual tax-deferred gains on the IRA will exceed the yearly benefit.

Stretch IRAs and Other Considerations

Not every IRA plan will allow the holder to stretch out the IRA in this manner. It’s best to check with a financial advisor before implementing the stretch. If you want this idea in your back pocket, you’ll need to set up an IRA that allows the stretch strategy. The best choice for some in this situation is a Roth IRA because distributions are themselves tax-free. Other IRA distributions are considered as ordinary income and thus subject to taxes.

Future legislation may pose a threat to stretch IRAs. There has already been legislation proposed that would do away with the “loophole” that allows IRAs to grow tax-deferred from generation to generation. On the same token, the Supreme Court ruled that inherited IRAs did not constitute “retirement funds”, but general income.
So whether or not the stretch strategy will be there in the coming years remains uncertain.

But for the time being, those that are in a good spot for their own retirement have the option of naming the youngest member of their family the beneficiary of their IRA to allow it to grow tax-deferred for another generation.

It’s hard to think of a lot of good reasons to tap into your retirement fund before it’s matured and you’ve hit the ripe old age of 59 ½. This is because you’ll incur a 10% penalty and that money will be immediately subject to taxes.
There are, however, certain instances in which an individual can withdraw money from their IRA without incurring the standard penalty.
The Taxpayer Relief Act of 1997 made it possible for folks to raid their IRAs under certain circumstances. Here, we’re going to discuss a couple of those circumstances. Money from your IRA can be used toward the purchase of a new house or even to pay off a mortgage on a house you already own. Under the right circumstances, that money can be withdrawn without penalty and retain tax-privileged status.

Incentives for First-Time Home Buyers

One good reason you might want to raid your retirement account is if you’re a first time home buyer. The IRS offers a number of incentives for first-time buyers, and one of them is a withdrawal of up to $10,000 without penalty. You’ll, of course, need to use that money to buy your first home, but so long as your paperwork is in order, the IRS won’t be beating down your door.
In order to be considered as a first time home buyer, you must (obviously) have not owned a home within the last 2 years. Nor can you have had, within the last 2 years, a financial interest in a home. So if you owned a home 3 years ago, it’s possible you can still qualify as a “first-time” homebuyer. In addition, your spouse is also allowed to withdraw $10,000 from their IRA.
Rules can differ depending on the kind of IRA you have. For those that have a Roth IRA, the money can be withdrawn tax-free because taxes have been paid on deposit. But you’re still on the hook for the 10% penalty for raiding the IRA early. That is, unless, you’re using the money for a first-time home purchase. If the Roth IRA is at least 5 years old then the withdrawn earnings themselves are also tax-free.

Using Your IRA for Mortgage Relief

Another good reason for tapping into your IRA early is medical hardship. For an individual who has gotten behind on their mortgage payments, the IRS makes a concession on a withdrawal so long as it can be shown that there is a serious medical condition that is preventing them from working.
In order to do that, an individual will have to meet very specific requirements. Namely, a physician must declare that you are unable to currently work due to either physical or mental disability.

The Bottom Line

For obvious reasons, the best-case scenario for any individual is not to raid their IRA simply because they need the money for a house or a mortgage. Nonetheless, it’s possible, under the right circumstances, to use that money without incurring the 10% penalty early withdrawal penalty.
Before doing this, however, you should contact an advisor and ensure that all of your ducks are in a row with the IRS.

Real estate is a hot investment for all the right reasons. Housing markets across the U.S. have caught fire in the past five years and while mortgage rates remain low, banks are much more cautious about who qualifies. With inventory low and demand high, real estate represents a great investment not only for homeowners but for those seeking to rent the properties as well. Indeed, some of the investment opportunities involve upscale apartment complexes that cater to young professionals.

But many are wondering how they can break into these investments. One possibility involves using your IRA.

Self-Directed IRAs

Most IRAs are set up around a handful of mutual funds. They’re very conservative investments that offer minimal returns but aren’t likely to lose value either. In other words, they're safe.

Another option that real estate investors love involves rolling over the traditional IRA into a self-directed IRA. Self-directed IRAs (SDIRAs) offer far more choices for investment, including real estate.

Not only can you use your SDIRA to invest in residential and commercial real estate in the United States, but you can also invest in foreign properties. There are plenty of reasons to invest in property, aside from the potential profits.

Using Real Estate to Fund Your IRA

One of the major upsides of this approach is that the income generated by real estate can be added to your IRA without being taxed. The one caveat there is neither you nor a loved one can directly profit from it.

Here, the use of non-recourse loans can be beneficial. A non-recourse loan is a loan that is not guaranteed by anyone. There are a number of reputable non-recourse lenders. These loans allow an investor to purchase a property with 35% of the money down. For the price of one property, an investor can purchase three and use the income from that property to pay off the remainder of the debt. While it takes a bit of a hands-on approach to accomplish this, the gains are usually superior to more conservative investments like mutual funds. This allows investors to buy up more properties using their IRAs than they would otherwise be able to.

Real Estate Investments for Those that Don’t Want to Deal with Tenants

So you don’t want to deal with tenants. Fair enough. There’s another option that is available that allows you to still cash in on the thriving real estate market. Essentially, you can pool your IRA money with other investors who furnish private loans to those who do. These individuals are responsible for vetting the property, making the necessary repairs and renting it out to tenants. This strategy allows you to earn a passive income while cashing in on a fantastic real estate market.

Your individual retirement account (IRA) is a great way to invest in your golden years. An IRA allows you to invest in stocks, bonds and mutual funds, often in a tax-deferred setting. If you decide to invest in your future through a self-directed IRA (SDIRA), you can diversify your portfolio even more. The professionals at Royal Legal Solutions have the experience to help you avoid legal mistake that could be costly. If you decide to invest in real estate through your SDIRA, below are a few tips you may want to consider or speak with your IRA manager about.

Understanding the SDIRA Hoops

While SDIRAs come with much higher potential gains, they do have several hoops you need to jump through first. The Internal Revenue Service (IRS) has several regulations in place to ensure your SDIRA gains are made fairly and legally. Because the IRS requires SDIRA owners to conduct their investments through a custodian or trustee, making sure you hire a professional, experienced and specialized firm is vital.

A Required Separation of Entities

The IRS mandates that your SDIRA real estate investment cannot, in any way, have your name on it. By creating a separation of entity, the IRS prevents owners from taking advantage of real estate-related tax breaks, such as “Like Kind” exchanges and depreciation exemptions.

The Use of Non-Recourse Loans

The IRS also dictates the types of loans you can use for your SDIRA real-estate investment. In fact, it outright limits you to the use of non-recourse loans only. Non-recourse loans are those that list only the investment property as collateral. While there is no way to recover the funds if you fail to pay on your loan repayment, a non-recourse loan protects you from the lender in the case of a default. Using a non-recourse loan means the lender cannot pursue other funds contained in your IRA or personal bank account to collect on the defaulted balance. (However, you will be unable to retain the property should you default; this makes the risks much higher if you are unable to afford the repayment sum.)

Avoid Disqualified Individuals

The IRS does not allow you to invest in property that you or other disqualified individuals own. Known as “self-dealing,” the IRS views this as a means of taking advantage of your real-estate investments. Disqualified individuals include your parents, siblings, and children. If you are married, it also extends to your spouse and their parents.

More on Non-Recourse Loans

Creating a separation of entities and avoiding disqualified individuals are typically actions that you and your custodian can handle upfront. However, the non-recourse loans require a bit more of an understanding. When you use your SDIRA to invest in real estate, taking out a non-recourse loan means you will not be held personally responsible for repaying it. It is your IRA that must make those payments directly as it is considered the borrower instead. Non-recourse loans typically have a much higher loan-to-value ratio (50% to 70%). In the case of a default, the higher interest rates associated with this will help to ensure they recover more of their investment.

Talk to a Professional Today

At Royal Legal Solutions, our experts have the professional experience to help you make legal decisions regarding your SDIRA. SDIRA real estate investments can be complex and involve more regulations than a typical IRA account. From avoiding accidental illegal activities to helping you find the best lender for a real estate loan, our custodians can help you make the most of these high-risk accounts.