Tag Archives: Self-directed IRA

IRA’s – What you need to know

IRA

Many have heard of an IRA but do they really know what it is or how the different types work?  An IRA is an Individual Retirement Account.  IRA’s are a way for you to save for retirement; something like a savings account but with limits on deposits, tax deferral, and restrictions & penalties on accessing the funds. Also, an IRA is an account and not an investment. The money is in the account and applied to different investments depending upon your choice of investment. Typical investments are stocks, bonds, mutual funds and/or other assets depending upon the type of IRA you opened.

Here is a breakdown of different IRA’s:

  • Traditional IRA – Generally, you pay taxes on the money (what you put in) when you begin your withdrawals; the money you initially put in is therefore tax deferred. The thought process on this is when you begin your withdrawals (currently mandatory at age 70-1/2 but can start as early as age 59-1/2 penalty free) your income will be less so your tax bracket is lower therefore you will owe less in taxes than if you paid them as you earned the money. With the advent of the 401k many people that leave their employer with a 401k then move the money into a Traditional IRA account.

There are annual limits on how much money you can contribute to a Traditional IRA based upon your income and age. As an example, currently in 2016, if you are under age 50 you contribute $5,500 annually. If you currently contribute through an employer plan consult a tax advisor before contributing to your IRA as it many impact your tax deductions allowed.

You can request an early withdrawal from your account however it will be taxed and you will pay a penalty (currently 10%) if it is requested before age 59-1/2.

  •  Roth IRA – With a Roth IRA you pay the taxes on the money going into the account and then your future withdrawals, including earnings, are tax free. However, the account must be open for at least five (5) years and the distributions begin after age 59-1/2. There are allowances for penalty free withdrawals such as for a first time home buyer.  Also, other withdrawals can be made tax-free; however, you might still have to pay a penalty. Always consult a tax advisor before making a withdrawal.
  • SEP IRA – Generally just referred to as a SEP this is a Simplified Employee Pension IRA. The SEP IRA is used by business owners with one or more employee’s, those that are self-employed or have freelance income for a simplified method to save and contribute to the employee’s and their own retirement. A SEP IRA is opened for each individual and contributions are made to the IRA by the employer. The SEP IRA follows the same rules as a Traditional IRA.
  • SIMPLE IRA – This is also for small business owners/employers and provides a simplified method for them to contribute to their and their employee’s retirement. SIMPLE stands for Savings Incentive Match Plan for Employees. This differs from the SEP IRA. Here employees may chose to make salary reduction contributions and the employer then makes matching or non-elective contributions. Each employee has their own SIMPLE IRA set up and contributions are made directly to that account.
  • Self-Directed IRA – This is similar to the Traditional IRA. However, the big difference is that you have control of the investments.  To open a Self-Directed IRA you must contact one of several companies out there that act as the custodian for your account.  You work through the custodian on where you want the money invested.  There are many more options for investing using this type of IRA.  Some options are real estate, tax lien certificates, precious metals and so much more.  However, there are strict rules on the self-directed IRA so be sure to do your research. For example: No loaning of money to yourself, your spouse or any family member in your direct linear family chain.

If you are interested in knowing more about IRA options you can check out information available on Roth Conversions and a Perpetual Pension that I have available for you.  Also, there are two great videos from Frontline and 60 minutes for you to watch.

The Secret IRA

Self-Directed IRA’s are, unfortunately, a well kept secret… Well, this is one secret I won’t keep!

Do you know what at Self-Directed IRA is?  What it can own?  How it is different from a Traditional IRA?  I share with you some information on the Self-Directed IRA in this short video.

 

New Article in Florida Realtor Magazine

My new article published in the Florida Association of Realtors® state magazine. Got a cover mention and 4 pages in the magazine itself. Great read for investors, entrepreneurs, as well as real estate agents and brokers.

FLRealtorMag Aug2015

The Secret IRA

Types of IRA's

Do you know which kind of IRA you have?

Most investors mistakenly believe they have a “self-directed IRA” when in fact they have one that limits their choices to a few investment types. Within your plan, you can choose stocks, mutual funds or bonds. And while you may have hundreds and even thousands of choices of where to put your money inside that account, chances are you won’t be able to invest in nontraditional retirement assets — especially if your IRA or 401(k) rollover is with a traditional brokerage house.

So just what is a true self-directed IRA? It’s an account allows you to invest in many other options with your IRA, including:

  • Rental real estate.
  • Fixer uppers to resell at a profit (flip).
  • Private loans made at higher interest rates to other investors.
  • Discounted private notes.
  • Tax liens or tax deeds.
  • Privately held companies and startups.
  • Precious metals.
  • Leases and lease options.
  • Straight options (real estate options, not stock options).
  • Partnerships.

Such investments receive the same tax treatment as more traditional IRA assets. Any tax due is deferred until withdrawal, typically at age 70½, when your are required to start drawing down your savings, or possibly sooner.

This is an account for hands-on active investors with unique knowledge of some of the asset classes in the approved list, not for a “set it and forget it” investor.

By using this type of account it is possible to make some sizable returns from a relatively small amount of money. Here’s an example:

You have an opportunity to buy a rundown house from an estate that would like a quick sale. You determine the house is worth $200,000 — after you have spent $40,000 in upgrades. You contract to purchase the property for $120,000. But lacking the $160,000 to proceed with the sale, you enlist a partner who agrees to provide the full amount, provided you handle all the details, including closing, rehabbing and reselling the home.

You further determine that you would like your share of the profits to go inside of your IRA for the obvious tax benefits. You only have $10,000 inside your IRA with which to invest. The proper play given these set of circumstances is to have your partner buy the property in his name or an entity he controls, such as a limited liability company. You enter into an option agreement to purchase half ownership in this property. You pay $100 from your self-directed IRA and fill out option paperwork and give all the papers to your plan administrator.

This deal now moves forward, and the property is rehabbed and ready for sale in 60 days and sells and closes quickly for $200,000. You have $10,000 worth of sales and holding expenses, netting a $30,000 profit on this deal in five months. The actual title owner to the property agrees to pay you $15,000 for you to close out your option. This $15,000 is a return on the $100 option investment and is deposited back inside your IRA tax-deferred or tax-free (for a Roth IRA).

Your investor put up $160,000 and received $15,000 for a five-month investment. This represents more than a 20 percent annualized return on his money, which is pleasing to almost every investor. If he used his IRA money for this investment, then his profit would be tax-deferred as well.

Rental Income

Here’s another example: An investor from New York became aware of the self-directed IRA and used some of his IRA to acquire four rental homes in Metro Detroit. Each home was purchased for around $55,000 and rents for about $900, and the cash flow goes back to the IRA on a tax-deferred basis. If he sells these for big gains years from now, that profit will also be tax-deferred.

Be warned: There are also some prohibited investments with your IRA (see IRS Publication 590):

  • No loaning of money to yourself, your spouse or any family member in your direct linear family chain.
  • No investing in collectibles.
  • Your IRA can’t personally guarantee any loans in which it borrows money. This means that any money borrowed by your IRA must be “non-recourse” funds, which means that only the asset can be put up for collateral and may be foreclosed upon for nonpayment. The creditor may not file suit against the IRA for any shortfall in the loan goes delinquent.