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Revealing the self-directed IRA

There are 11 types of IRAs; That’s right Eleven! But do you know about self-directed IRA and what are the benefits?

Most investors mistakenly believe they have a “self-directed IRA” when in fact they have one that limits their options to a few investment types. Within your plan, you can choose stocks, mutual funds, or bonds. And while you may have hundreds or even thousands of options for where to put your money within that account, you likely won’t be able to invest in non-traditional retirement assets, especially if your IRA or 401(k) is rolled over to a traditional account. stockbrokers house.

So what is a true self-directed IRA? It is an account that allows you to invest in many other options within your IRA, including:

rental real estate
Set tops to resell at a profit (flip)
Private loans made at higher interest rates to other investors
discounted private notes
Tax liens or tax deeds
Private companies and startups
precious metals
Leases and lease options
Straight options (real estate options, not stock options)
associations

Such investments receive the same tax treatment as more traditional IRA assets. Any tax due is deferred until retirement, usually at age 70½, when you must start withdrawing your savings, or possibly sooner.

This is an account for hands-on active investors with unique knowledge of some of the asset classes on the approved list, not for a “set it and forget it” investor.

By using this type of account, it is possible to earn considerable profits with a relatively small amount of money. Here is an example:

You have the opportunity to buy a dilapidated house on a property that you want a quick sale. You determine that the house is worth $200,000, after spending $40,000 on improvements. You contract to purchase the property for $120,000. But lacking the $160,000 to go through with the sale, he hires a partner who agrees to provide the full amount, as long as he handles all the details, including closing, rehab, and resale of the house.

Additionally, you determine that you’d like your portion of the earnings to go into your IRA for the obvious tax benefits. You only have $10,000 in your IRA to invest. The proper move under these circumstances is for his partner to purchase the property in his name or from an entity he controls, such as a limited liability company. You enter into an option agreement to purchase half ownership of this property. You pay $100 from your self-directed IRA and complete the option paperwork and submit all paperwork to your plan administrator.

This deal is now moving forward, and the property is rehabbed and ready for sale in 60 days and is selling quickly and closing for $200,000. He is worth $10,000 in sales and carrying expenses, making a net profit of $30,000 on this deal in five months. The actual owner of the title to the property agrees to pay you $15,000 to close your option. This $15,000 is an investment return on the $100 option and is deposited back into your IRA tax-deferred or tax-free (for a Roth IRA).

Your investor put in $160,000 and received $15,000 for a five-month investment. This represents more than a 20 percent annualized return on his money, which pleases almost all investors. If he used the money from his IRA for this investment, then his earnings would also be tax-deferred.

rental income

Here’s another example: A New York investor became aware of the self-directed IRA and used part of his IRA to purchase four rental houses in Metro Detroit. Each home was purchased for about $55,000 and rents for about $900, with the cash flow returning to the IRA tax-deferred. If he sells them for a big profit a few years from now, that profit will also be tax-deferred.

Be careful: There are also some prohibited investments with your IRA (see IRS Publication 590-B):

No loan of money to you, your spouse, or any family member in your direct linear family chain.
Don’t invest in collectibles.

Your IRA cannot personally guarantee any loan you borrow money on. This means that any money borrowed from your IRA must be a “non-recourse” fund, meaning that only the asset can be pledged as collateral and can be foreclosed on for non-payment. The creditor cannot sue the IRA for any shortfall on the loan that goes into default.

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