It sounds almost too good to be true: IRA holders can use their retirement funds to purchase real estate before the age of retirement without incurring distribution taxes or penalties. And they can realize their real-estate investment profits tax-deferred in their retirement account.
But it is true, and growing numbers of savvy investors are taking advantage of the opportunity to build their portfolios while saving aggressively for their retirement years. Since 1974, IRA and 401(k) account holders have had the option to personally control the ways in which their retirement monies are invested, including investing in real estate. And because the investment is made on behalf of the retirement account (just like the IRA investing in stocks and bonds), the acquisition is made without triggering a taxable event. Accounts that enable holders to self-direct their funds into investments of their choice (including real estate, tax liens, personal loans, etc.) are known as “self-directed IRAs.”
Creating a structure for these self-directed transactions can be complex, so there are financial services companies throughout the country that set up these self-directed accounts. One such company, Guidant Financial Group of Bellevue, Washington, specializes in a variation on the traditional self-directed IRA: a self-directed IRA LLC. Basically, a self-directed IRA LLC is a self-directed IRA paired with a Limited Liability Company established in the account holder’s name.
This two-part structure gives account holders even more control enabling them to use a checkbook tied to their retirement funds. According to Guidant’s CEO David Nilssen, “The checkbook control of a self-directed IRA LLC enables you to literally write checks on the spot to purchase foreclosures, tax liens, and other timely investments. Additionally, you don’t have to suffer through the delays or costs of running each of your transactions through a traditional self-directed IRA custodian.”
Self-directed IRAs and the IRA LLC variation enable you to invest your retirement funds into a broad variety of purchases, including real estate (residential, commercial and international), tax liens, foreclosures, mortgages, gold bullion, private stock and more.
These remarkable accounts do come with some caveats. The primary one is: Every purchase/investment must be made with an eye to growing the IRA for your future financial needs. Consequently, you must avoid any transactions with parties that could create a conflict of interest, such as buying a home for yourself or a relative. These limitations are referred to by the government as “prohibited transactions” and “disqualified parties.” Nilssen reports that, while the guidelines are pretty straightforward, a good deal of his staff’s time is spent making sure Guidant clients clearly understand them so they can steer clear of questionable transactions.
As with every investment decision, the more informed you are, the wiser your decision will be. Thankfully, information about self-directed IRAs is getting easier to come by, and there are increasing numbers of Internet sources dedicated to the subject. So do your due diligence and remember: These retirement monies represent your future security!
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