With the equity markets essentially flat in 2018, more and more investors are starting to turn to a self-directed IRA real estate as a means of diversifying their investment portfolio. The financial crisis of 2008 was the primary catalysts for the growth of the self-directed IRA industry. The 2008 financial crisis taught Americans about the advantage of diversifying one’s retirement funds through real estate, notes, private investments, precious metals and other non-traditional investment options.
A growing number of Americans have lost faith in Wall Street and have recognized the value of diversifying their retirement portfolio with real estate and other investment options. Unfortunately, none of the major financial institutions will allow one to allocate IRA or 401K funds in real estate or anything essentially outside of Wall Street. The reason for this is simple. Banks do not make money when you buy real estate or gold. They make money when you purchase the financial investment products they sell, such as stocks and mutual funds. they market. Accordingly, companies like the IRA Financial Trust Company, a self-directed IRA custodian as emerged in order to help retirement investors legally use their retirement funds to invest in alternative assets, such as real estate and cryptocurrencies.
A self-directed IRA also called a self-directed IRA LLC with checkbook control or a Real Estate IRA is a structure that allows one to use their retirement funds to make real estate and other alternative asset investments without incurring any immediate tax liability. The self-directed IRA Real Estate involves the establishment of a limited liability company (“LLC”) that is owned by the IRA (care of the IRA custodian) and managed by you or any third-party. As manager of the IRA LLC, you will have control over the IRA assets to make the investments you want and understand – not just investments forced upon you by Wall Street.
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, collectibles, or 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 one can invest in assets one knows and trusts as well as 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.