This is a guest post from our friends over at Sense Financial. You can check them out here: https://www.sensefinancial.com/
“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid in full, and managed with reasonable care, it is about the safest investment in the world.” ~ Franklin Roosevelt
If you’re a real estate investor, you’re quite likely to be in favor of what Franklin Roosevelt said. In the previous part of this post on self-directed retirement plans, we discussed the benefits of investing retirement money in real estate.
But, how do you do that?
You can start by choosing a qualified self-directed, or SD retirement plan that allows alternative investments.
What is a self-directed IRA?
If you didn’t have a chance to read about an SD IRA, here you go.
It is a qualified retirement account that allows alternate investments, and offers investment discretion to the plan owners, depending upon the plan providers.
Self-directed IRAs have gained attention over the past couple of decades. When choosing the plan, make sure to understand the transaction fee charged by the plan custodian and the average transaction processing time.
A self-directed IRA allows annual contributions of up to $6,500.
Potential investment options
What are its pros?
What are its cons?
If you have an interest in real estate investing with your retirement funds, chances are that you already know the term IRA LLC or Checkbook IRA.
What is a checkbook IRA or IRA LLC?
A checkbook IRA is an investment vehicle suited for investors who want to have greater control. It is a special purpose LLC, which is owned by your IRA, with you being the manager of the LLC.
When it comes to contributions, a checkbook IRA stands equal to a self-directed IRA, allowing annual contributions of up to $6,500 (for both Traditional and Roth IRAs).
Potential investment options
What are its pros?
What are its cons?
Self-directed Solo 401k retirement plans have gained popularity over the last decade, thanks to its flexibility and ease of maintenance, but they are among the least known of the available self-directed plans.
What is a self-directed Solo 401k plan?
A self-directed Solo 401k plan is a qualified retirement plan that allows self-employed professionals to contribute towards retirement while allowing complete discretion over their investment decisions.
Self-directed Solo 401k retirement plans stand above its peers in terms of annual contributions, allowing plan owners to make annual contributions of up to $60,000 in 2017.
Potential investment options
What are its pros?
What are its cons?
Step 1: Open self-directed retirement account and fund it through qualified rollovers or regular contributions. Choose a plan provider that allows alternative investments.
Step 2: Just like a regular real estate transaction, choose a property for your SD retirement plan. It is important that your choice of investment (residential or commercial real estate) aligns with your retirement goals.
Step 3: Once a property is selected, you can pay directly with your retirement account by writing a check. Your SD retirement plan will hold the title of the property and you will sign on its behalf.
Note: You can finance the property with a non-recourse loan.
Step 4: Any maintenance or repair cost associated with the property must be paid by your retirement account only. Similarly, any income generated by the property must be redirected to the plan itself.
Step 5: Any income or gains received from the property enjoy tax-deferred growth for several decades. You can make qualified withdrawals after retirement by paying the due taxes.
Note: If you purchased the property with a Roth account, your withdrawals are tax-free.
After taking a close look at SD retirement plans and their ability to generate returns while offering diversification, it is quite safe to mark them as efficient investment vehicles. However, you may need to have a decent understanding of the rules governing investing retirement money.