One of the most underutilized ways to invest using your self-directed IRA is to purchase tax liens and deeds. Any assets purchased with your IRA are, as always, tax-deferred. As more people come to realize that liens and deeds are a lucrative option, they’re becoming more popular as an investment. Still, there are a number of investors out there who haven’t even considered the possibility using their IRA this way. Tax liens and deeds themselves became popular around 2009 right after the housing bubble burst. Numerous foreclosures led to vacant houses which, in turn, led to unpaid property taxes. Even amid the chaos of that period, savvy investors saw an opportunity. So how does that work?Purchasing Tax Liens for Profit Using Your IRAThe mechanics of the process may differ slightly from one state to the next. However, the process has more similarity than difference between states. Generally speaking, a tax collector will auction off a lien on the property for the cost of the unpaid property taxes or some portion of them. Some states auction to the highest bidder, while others use a bid-down process on the amount of interest. Deeds, on the other hand, transfer ownership of the property directly to you. The tax collector uses the money they receive on the purchase of the real estate to pay off the delinquent taxes. You can use your IRA to purchase tax liens and deeds and reap the rewards tax-deferred.Tax Liens and Deeds are Low Risk and High RewardLet’s say a property owner falls behind in the payment of their property taxes. After a certain period of time has lapsed, or after a certain amount of money is owed, (this number will differ from state to state) the government will force the sale of or put a lien on the property. This will be done through auction. The actual value of the property is fairly irrelevant. Although, for obvious reasons, there will likely be more competition for liens and deeds on highly valued property rather than lower valued property. In either event, properties can sometimes be purchased in this fashion for only a few thousand dollars. While the particulars differ from state to state, tax liens generally have precedence over other liens, even mortgages. If the owner defaults on their payment, the property becomes yours. If they don’t, then you receive the interest. It’s hard to go wrong with that arrangement.How to Purchase Tax Liens and Deeds Using Your IRAThere is no special method for purchasing tax liens or deeds using your IRA. First, of course, you will need to roll over your funds into a self-directed IRA. For those who have chosen to be their own custodian, the process simply involves finding out when and where the auctions will be, purchasing the tax lien, and then ensuring that it’s held in the IRA trust where it will not be taxed. For those with an established custodian, speaking to them about your interest in investing in tax liens is the first step. All payments for the lien or deed must be executed by the IRA’s custodian. Interested in Using Your IRA to Invest in Tax Liens?You should be! They offer a very low-risk investment with a very high payout potential that can grow tax-deferred until you’re ready to retire.