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Investing a Self-Directed Ira in Real Estate
Among the various Individual Retirement Account (IRA) options, one of the least discussed and most misunderstood is the Self-Directed IRA. Indeed, when they hear the term Self-Directed IRA, many people confuse this vehicle with the standard types of IRAs — the Roth IRA and the SEP IRA, for example — because those IRAs allow the investor to exercise some degree of control over the investments in their account.
But a Self-Directed IRA (SDIRA) is a distinct category of retirement account, different in several ways even from other IRAs.
This page will discuss what a Self-Directed IRA is, the potential benefits and risks involved in such an account, and what types of unique investment opportunities it affords.
What is A self-directed ira?
A Self-Directed IRA is an individual retirement account in which you, the investor, maintain total control over and responsibility for the investments in your account. And whereas standard IRAs offered through financial institutions limit your investment options — typically to stocks, bonds and mutual funds — with a self-directed IRA, you can invest in a wide range of investment vehicles, such as precious metals and real estate.
The Potential benefits of a self-directed ira
If you are a knowledgeable investor with a strong understanding of certain asset classes, or if you simply want to take an active role in managing your own retirement account to protect or grow your wealth, a self-directed IRA might be the right vehicle for you.
Additionally, if you feel positive about the long-term growth potential of certain types of asset — assets that are not allowed as investments in traditional IRAs — you might also find that a self-directed IRA is right for you. Indeed, a self-directed IRA might be the only way to invest in such assets while enjoying the tax and regulatory benefits of a retirement account.
Moreover, because SDIRAs allow for more direct investments — in real estate, in gold, in an early-stage company raising capital through a private placement offering — such investments allow for the possibility of larger profits.
Of course, these investments, like all others, carry risk, and no asset class or investment category can guarantee positive performance. This is one reason that self-directed IRAs might not be the best type of retirement account option for everyone, which leads us to the possible drawbacks of such IRAs.
The potential drawbacks of a self-directed ira
Self-Directed IRAs can carry a greater risk for investors in two ways. First, as just discussed above, a self-directed IRA allows the investor to make investments within her account in many sorts of non-traditional assets, Assets not allowed in the more standard IRAs. These types of investments can offer the potential for greater profit, but can also carry a greater risk of loss.
The second way self-directed IRAs might be riskier than traditional IRAs is in the lack of professional financial advice and guidance that often come with standard IRAs issued by financial institutions.
Indeed, when you manage a self-directed IRA, you are the sole party responsible for vetting any investment you make, and for learning about the tax or regulatory implications of that investment. If you make a mistake — for example, buying a rental property within your self-directed IRA and then renting a unit for yourself, which is not allowed — you are responsible for the penalties and other negative consequences that arise from that mistake. You cannot blame your custodian or anyone else.
Investing a self-directed ira in real estate deals
IIG Investors can gain exposure to real estate and enjoy the potential benefits of passive income in their retirement accounts. Additionally, in a move that can be particularly useful for the longer-term nature of investments made through self-directed IRAs, IIG also allows investors to automatically reinvest their dividends, thereby offering the possibility for compounded returns over time. Keep in mind there are risks to investing with IIG so it’s important to review the full offering documents for each Fund or Private Placement.
Frequently asked questions about retirement investing
Can I automatically reinvest my distributions?
Yes. You may elect to reinvest distributions via the Investor Platform, allowing you the potential to realize a compounded return.
Will the distributions I receive be taxable as ordinary income?
Distributions may be treated as ordinary income, capital gains, and/or return of capital for tax purposes, each of which may be taxed at a different rate for different investors. As each investor’s tax considerations are different, it is recommended that you consult with your tax advisor. You also should review the section of the offering circular entitled “U.S. Federal Income Tax Considerations,” including for a discussion of the special rules applicable to distributions in repurchase of shares and liquidating distributions.
Can I invest in IIG’s private equity funds and private placement offerings using a SDIRA (Self-directed IRA) or other type of retirement account?
Yes. We may accept retirement funds into our offerings. This means you can use your Self-Directed IRA (“SDIRA”) to make investments. The minimum initial investment using a retirement account is $25,000. Subsequent investments may be made at a minimum of $1,000.
What is a self-directed individual retirement account (SDIRA)?
A self-directed Individual Retirement Account is a retirement account that provides investors with certain tax benefits for retirement savings. Self-Directed IRAs are held by a trustee or custodian that permits investment in a broader set of assets than is permitted by most IRA custodians, such as real estate, promissory notes, tax lien certificates, and private placement securities.
How can I fund my individual retirement account prior to making my investment in an IIG offering?
You can fund your IRA account in three different ways:
- Transfer retirement funds from your current custodian
- Rollover funds from a 401(k) or another qualified plan
- Make a cash contribution within the annual limits defined by the IRS
What types of accounts are eligible for transfer into a self-directed IRA?
You can transfer funds from a 401(k), 403(b), 457, TSP, or other qualified retirement plans into a self-directed IRA.
What is a custodian, and which custodians may I use?
A custodian is defined as a bank, federally insured credit union, savings and loan association, or an entity approved by the IRS to act as a trustee or custodian. IIG works with a variety of custodians, including our preferred custodian, Madison Trust Company.