Is anyone currently using a Self Directed IRA as a retirement investment vehicle? I’ve been looking into it and am thinking of rolling my 401K into one later this year. The option to directly invest in real estate with the IRA funds appeals to me. If anyone has any experience related, I’d appreciate hearing about it.
I also looked into it but my wife just didn’t get it. I’m looking at buying some adjacent land and Self Directed IRA was the ticket. Not many people know a lot about this.
I’m researching it as a means to diversify into real estate as well. Seems to be the only way to buy and hold rental properties, or to buy and flip foreclosure properties in a tax deferred retirement account.
The use of a self directed Individual Retirement Account for the purpose of holding real estate investments that are real property, ie. land, buildings, homes is a highly restricted vehicle. The rules defining approved properties, and the triggering of taxable events with such properties makes them highly impracticable for 99% of retail, retirement oriented investors. It is very easy to get in trouble trying to hold real estate in an IRA, and thus you won’t find much in the way of ethical advice recommending it(That’s why it isn’t common knowledge Dilly). True, it can be done, but it makes way more sense to invest in Real Estate Investment Trusts(REITS) for the purpose of diversifying your IRA portfolio with real estate.
The biggest advantage of rolling a 401K plan into a self directed Rollover IRA is the self directed part. The rollover IRA allows you to diversify your investment within and across markets(stocks, bonds, cash), products(Individual stocks, Individual bonds, Mutual Funds, REITS, CD’s, etc.), and risks. Usually a typical 401K plan sponsored by your employer is a package of mutual fund investments from a vendor like Vanguard, Schwab, Fidelity, Mass Mutual, Prudential, etc., and some independent players and banks. Your employer listens to the sales pitch from the various vendors and decides on one to offer their employees. The employees who then participate in the 401K are limited to the investment products that the vendor provides…usually mutual funds, and they may suck in comparison to other products and choices in the market. You just can’t do anything about it if they do suck, unless you rollover the plan to a Rollover IRA. To do that you would sell any investment choices in the current 401K, and convert them to cash. You would then rollover that cash amount to a Rollover IRA that you choose from Schwab, or Fidelity, or Vanguard, or TD Waterhouse, etc., etc. Hopefully you choose a broker or other vendor who doesn’t charge account service fees, or high trading commissions, and has a l
quote:
Originally posted by bossdog1The use of a self directed Individual Retirement Account for the purpose of holding real estate investments that are real property, ie. land, buildings, homes is a highly restricted vehicle. The rules defining approved properties, and the triggering of taxable events with such properties makes them highly impracticable for 99% of retail, retirement oriented investors. It is very easy to get in trouble trying to hold real estate in an IRA, and thus you won’t find much in the way of ethical advice recommending it(That’s why it isn’t common knowledge Dilly). True, it can be done, but it makes way more sense to invest in Real Estate Investment Trusts(REITS) for the purpose of diversifying your IRA portfolio with real estate.
The biggest advantage of rolling a 401K plan into a self directed Rollover IRA is the self directed part. The rollover IRA allows you to diversify your investment within and across markets(stocks, bonds, cash), products(Individual stocks, Individual bonds, Mutual Funds, REITS, CD’s, etc.), and risks. Usually a typical 401K plan sponsored by your employer is a package of mutual fund investments from a vendor like Vanguard, Schwab, Fidelity, Mass Mutual, Prudential, etc., and some independent players and banks. Your employer listens to the sales pitch from the various vendors and decides on one to offer their employees. The employees who then participate in the 401K are limited to the investment products that the vendor provides…usually mutual funds, and they may suck in comparison to other products and choices in the market. You just can’t do anything about it if they do suck, unless you rollover the plan to a Rollover IRA. To do that you would sell any investment choices in the current 401K, and convert them to cash. You would then rollover that cash amount to a Rollover IRA that you choose from Schwab, or Fidelity, or V
Seems interesting. I had not heard about this. Did some research after reading your post. It does seem that there is a lot of negativity on the topic, but it’s interesting for sure!
Dear Bound…My quote…“True, it can be done.” In my 18 years as a registered representative in the financial services business I never had a client make the choice to hold real estate in an IRA. Full disclosure of the rules and requirements was always enough evidence to convince them to not do it. I usually had inquiries around tax preparation time relative to these types of “Non-traditional” investment strategies, and I suppose that it was a seasonal effect on people who had not spent much time reviewing their financial circumstances prior to Uncle Sam’s intrusion into their lives. During my 12 yrs. with Charles Schwab, 6 as branch manager with over 10,000 clients and 1 billion dollars of investments, I had many opportunities to discuss this strategy, and quite a few others to boot. You have done your due diligence, and there are many, many individuals who have successfully navigated this strategy with qualified success. My personal experience was that the more complicated and regulated the investment, the more the average investor tended to avoid it, and with my blessing. It will be interesting to get the perspective from posters who have actually done it, as I have not.
Sol Mate
Mako 20B
225 Optimax
+1 on what bossdog says. I’m a Certified Financial Planner and have been a Registered Rep for 25 years, and I also have never had a client go this route, although many have started down the path. I’m certainly not saying that it won’t work for you mcvlbound, just make sure you do everything you can to make sure that all the hoops are jumped through and rules followed to keep the IRS off your back.
Separate point…I don’t know how old you are, but unless you are over 60 years old, and your plan allows for what are called “In Service Withdrawals”, you probably will not be able to rollover your 401(k) while you are still employed by the employer sponsoring the 401(k).
“People sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf.”
George Orwell
Thanks guys, I’ve not made up my mind, just pondering it and looking around. I’m going to be 62 this year and I’ve already made the decision that this will be the last year that I work full time in the career I’ve been in for the last 43 years. That means that sometime early next year I am going to have to find something to do with my time. I’m also going to have to determine what I am going to do with the money that I now have in my 401K.
I like the idea of the self directed IRA for a number of reasons, mostly because it allows someone who has the time, the means to use the IRA money for investments in a wider range of opportunities, like residential real estate. I know that the majority of people wouldn’t want the bother, and since they wouldn’t have anyone to blame besides themselves, the risk.
The self directed IRA is out there though, and supposedly becoming more popular over time. It’s definitely on my radar now.
The yearly valuation stops most from doing this. Also very few institutions will house non traditional IRAs because of this and the reporting issues that are related.
I have had clients inquire but only had one follow through. He had to unwind several years later with some pain.
I agree with the above comments regarding exposure to re. Anytime you dive into tax and accounting that is beyond the norm, get good advice from your CPA,and tax attorney .
big dog
Back at the office I’ve got contact info for a Custodian who was recommended for this type of IRA.
Well first of, all IRA’s are self directed that are not part of an employer plan.The fact that someone is calling it self directed does not mean it will be okay to buy individual parcels of real estate in an IRA.This is at best a grey area and just because someone else has been getting away with it doesn’t mean you will, and because you get the account set up you will in no way be grandfathered in, unless you can get a private letter ruling, which I doubt you could get.
Its funny that the only people who ever ask me about this are doctors or engineers, and if you ask me what two groups “outsmart themselves” on a regular basis, it would be doctors and engineers.[:I]
I’m not trying to be a smart ass, but when you try to beat the system you set yourself up for the system to beat you!
quote:
Originally posted by mckee16Back at the office I’ve got contact info for a Custodian who was recommended for this type of IRA.
Well first of, all IRA’s are self directed that are not part of an employer plan.The fact that someone is calling it self directed does not mean it will be okay to buy individual parcels of real estate in an IRA.This is at best a grey area and just because someone else has been getting away with it doesn’t mean you will, and because you get the account set up you will in no way be grandfathered in, unless you can get a private letter ruling, which I doubt you could get.
Its funny that the only people who ever ask me about this are doctors or engineers, and if you ask me what two groups “outsmart themselves” on a regular basis, it would be doctors and engineers.[:I]
I’m not trying to be a smart ass, but when you try to beat the system you set yourself up for the system to beat you!
I’m not seeing how buying a piece of real estate for rental or flipping is trying to beat the system. If I can double my money by investing in stocks in an IRA, I double the amount of tax deferred cash that eventually will be taxed. The same would hold true for real estate and for any profits or income generated. The government loses nothing. My take is that the “system” likes the easy “on paper” investments because they are just that, “easy”. Easy to buy, easy to sell, and easy to keep track of. The “system” is currently set up to guide people towards investments that are easy for them to handle for their clients. Investments like residential real estate, mortgages, rental income, buying into private companies, or gold bullion, involve a lot more effort than the “system” is generally willing to deal with. That’s why the “system” is for the most part negative regarding these investmen
If the intent of the individual is to enter into one of these self directed IRA vehicles to gain some type of tax advantage, or to have that vacation home that they’ve always wanted, or to provide work for their child’s construction business, they are probably going to be very disappointed with how it turns out. If that’s the kind of “beating the system” you are talking about I know what you mean, and agree 100%.*
You are seeking to gain a tax advantage by putting re in an Ira. Why else would you do it.
Good luck with your adventure.
big dog
There are still a few good deals on real estate. Not as many as in 2010 but still some very good ones if you are flipping and managing your details ethically. I estimate that my IRA money would have doubled in two years in a self-directed IRA real estate based on the success I’ve had with two properties I purchased over the past 3 years. I really appreciate all the ■■■■■■■■ here but I have to also throw in that I’ve seen plenty of IRA’s “tank” due to mismanagement of generic diversified mutual fund plans and one particular family trust I have been a party to. The fees due to selling/trading were insanely over managed. And, if the IRA goes down and back up, you get taxed again on the gains if it’s not tax deferred. These are the reasons the self-directed IRA is a consideration and viable at that.
Dear Dilly…Let me make the point that an IRA is an account, not an investment. IRA stands for Individual Retirement Account…emphasis on the Account part. There are savings accounts, and brokerage accounts, and checking accounts, to name several other account types. All IRA’s are self directed in as much as the account holder can choose to deposit cash into it and then use that cash to purchase a broad range of investment products. The account holder is not limited to a “menu” of pre-selected investments…they are “self directed” in the choice of investment products. Nobody ever lost any money on an IRA…they may have lost value on the investments held within the IRA, but an account is nothing more than a basket, and whether it’s full or half full or empty it’s still a basket. Question’s?
With regards to taxation, all IRA’s offer some form of deferment from annual taxation on realized gains within the account. Roth IRA’s offer tax forgiveness on realized gains if the assets within the account stay in the account a minimum of 5 years AND beyond age 59 1/2 for the account holder. This special treatment of IRA’s by the IRS allows realized gains to compound sans annual taxation thus accelerating the growth of the portfolio over time. Poor investment choices, excessive trading at high commission rates, paying a financial adviser a management fee, account service fees, and investing in mutual funds with up front sales loads(commissions)and high operating expenses are all detriments to long term success inside an IRA portfolio. All that being said the self directed IRA investor can choose to avoid those pitfalls, manage the asset allocation of investment choices within one’s own tolerance for risk, and in line with retirement goals as determined by the account holder, and compound growth faster than a fully taxable account. IRA’s are generally a good deal all the way around.
Sol Mate
Mako 20B
225 Optimax
quote:
Originally posted by Wando GrillIf the intent of the individual is to enter into one of these self directed IRA vehicles to gain some type of tax advantage, or to have that vacation home that they’ve always wanted, or to provide work for their child’s construction business, they are probably going to be very disappointed with how it turns out. If that’s the kind of “beating the system” you are talking about I know what you mean, and agree 100%.*
You are seeking to gain a tax advantage by putting re in an Ira. Why else would you do it.
Good luck with your adventure.
big dog
No more of an advantage than parking the money in a mutual fund, or any other standard investment strategy. Thanks.
quote:I think Wando is referring to gaming the system (as opposed to using it as a *true* vehicle for investing)... All of the examples that he listed are disallowed under the Self Directed IRA rules...
Originally posted by mcvlboundquote:
Originally posted by Wando GrillIf the intent of the individual is to enter into one of these self directed IRA vehicles to gain some type of tax advantage, or to have that vacation home that they’ve always wanted, or to provide work for their child’s construction business, they are probably going to be very disappointed with how it turns out. If that’s the kind of “beating the system” you are talking about I know what you mean, and agree 100%.*
You are seeking to gain a tax advantage by putting re in an Ira. Why else would you do it.
Good luck with your adventure.
big dog
No more of an advantage than parking the money in a mutual fund, or any other standard investment strategy. Thanks.
That being said, it sounds like you are wanting to use it as a true investment vehicle…
quote:
Originally posted by skinneejquote:I think Wando is referring to gaming the system (as opposed to using it as a *true* vehicle for investing)... All of the examples that he listed are disallowed under the Self Directed IRA rules...
Originally posted by mcvlboundquote:
Originally posted by Wando GrillIf the intent of the individual is to enter into one of these self directed IRA vehicles to gain some type of tax advantage, or to have that vacation home that they’ve always wanted, or to provide work for their child’s construction business, they are probably going to be very disappointed with how it turns out. If that’s the kind of “beating the system” you are talking about I know what you mean, and agree 100%.*
You are seeking to gain a tax advantage by putting re in an Ira. Why else would you do it.
Good luck with your adventure.
big dog
No more of an advantage than parking the money in a mutual fund, or any other standard investment strategy. Thanks.
That being said, it sounds like you are wanting to use it as a true investment vehicle…
I’m definitely looking into it as a possibility. With interest rates so low, real estate seems to be a good mix of income and appreciation, and unlike equities it’s a hard asset. I’m thinking if you can get 3%-4% in income, along with 4%-6% a year appreciation from a residential rental unit, you’re doing pretty good over the long term w
This bull market in equities has to run out of steam at some point!
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Originally posted by skinneejThis bull market in equities has to run out of steam at some point!
It’s coming in November, 20+% correction. Mark it down. Save your pennies to dump in the market as soon as it happens. That’s what I’m doing.
Disclaimer: Everything I learned about the market came from you and bossdog.
Lol
Redfish Baron Extraordinaire