Self-Directed IRA Real Estate for Retirement Diversity
With the equity markets particularly flat in 2018, more and more investors are starting to turn to a self-directed IRA to purchase real estate. This helps to diversify their investment portfolio. The financial crisis of 2008 is primarily responsible for the growth of the Self-Directed IRA industry. The 2008 financial crisis taught Americans about the advantage of diversifying one’s retirement funds. They can do this through real estate, notes, private investments and other non-traditional investment options.
Losing Faith in Wall Street
A growing number of Americans have lost faith in Wall Street. Now, they see the value of diversifying their retirement portfolio with real estate and other investment options. Unfortunately, none of the major financial institutions will allow investors to allocate IRA or 401K funds in real estate. In fact, they won’t allow investors to allocate funds in anything outside of Wall Street. The reason for this is simple. Banks don’t make money when you buy real estate or gold. They make money when you purchase the financial investment products they sell. This includes stocks and mutual funds. In other words, traditional investments.
However, companies like the IRA Financial Trust Company, a self-directed IRA, can help retirement investors legally use their retirement funds to invest in alternative assets. With a Self-Directed IRA, you can invest in real estate, cryptocurrency and much more.
Self-Directed IRA for Real Estate with Checkbook Control
A self-directed IRA (aka, a Self-Directed IRA LLC with checkbook control or a Real Estate IRA) is a structure that allows you, the investor, to use retirement funds for alternative asset investment. Additionally, you incur no immediate tax liability. The self-directed IRA Real Estate involves the establishment of a limited liability company (LLC) that the individual retirement account owns (IRA), care of the IRA custodian. You or any third-party then manages the LLC. As a result, you can control your IRA assets and begin to make alternative investments. You can also make traditional investments if you feel confident investing in Wall Street. However, you’re no longer restricted to making traditional investments.
With a Self-Directed IRA or checkbook IRA structure, you will have the power to invest in almost any type of asset you wish. The IRS and the Internal Revenue Code do not describe what a self-directed IRA can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain type of transactions, such as:
- Life insurance
- Any transaction directly or indirectly involving or benefiting a “disqualified person”
A “disqualified person” is essentially defined as the IRA holder and any of his or her lineal descendants, as well as any entities controlled by such persons.
The main advantages of using a Self-Directed IRA is that you can invest in assets you know and trust. Additionally, you can defer the taxes on the income or gains. Because an LLC is treated as a pass-through entity for federal income tax purposes and the IRA, as the member of the LLC, is a tax-exempt party pursuant to Internal Revenue Code Section 408, all income and gains of the IRA LLC will flow-through to the IRA tax-deferred or tax-free in the case of a Self-Directed Roth IRA.