Retiring is something that most people look forward to when they hit a certain age. They can’t wait to sit back and relax and not have to stress about working anymore. Some people get excited about it in their 20’s and others get excited about it a few years before they actually retire.
Now, why are we talking about retirement? Well, turns out there is a thing called an IRA and it can be very beneficial to you when it comes to real estate.
Let’s first talk about what an IRA is. An IRA is an individual retirement account that can be opened to save and invest in the long term. It differs from your everyday 401K that employers offer, but it is meant to do the same thing—save money to be able to retire comfortably. The difference between a 401K and an IRA is that the IRA can be opened without the involvement of one’s employer. So, you get all of the tax benefits that they offer.
Now there are quite a few different kinds of IRA, but the one that we are going to focus on is the self-directed IRAs, or SDIRAs. SDIRAs allow someone to be able to open a variety of different investment opportunities that aren’t normally offered when you open a regular IRA. So even though the account is administered by a trustee, the account holder is the person who is making all of the decisions about the account, hence why it is called self-directed.
There are two separate types of SDIRAs, a traditional one where you can make tax-deductible contributions or a Roth IRA, which you can take tax-free distributions. SDIRAs are really meant for the investment savvy people who really understand the ins and outs of alternative investments and want a diversified portfolio. So, in addition to the basic and limited common securities, an SDIRA can hold precious metals, commodities, private placements, limited partnerships, tax lien certificates and real estate.
Now, how do you open an SDIRA? It’s a little different than opening a regular IRA as you would need to have a qualified IRA custodian that specializes in this type of account. Every custodian offers different services on what they cover, so when looking at potential options you need to shop around to make sure that the institution you are looking at offers what you are specifically looking for. Traditional brokerages, banks and investment firms don’t generally offer SDIRAs to clients because the custodians aren’t allowed to offer financial advice, which is exactly the purpose of these three things.
There are restrictions that the IRS does put on SDIRAs. You cannot hold life insurance, S corporation stocks, any investments that constitutes a prohibited transaction (like self-dealing), and collectibles (like antiques, artwork, alcoholic beverages, baseball cards, memorabilia, jewelry, stamps, and rare coins).
What it all boils down to is that an SDIRA is one of the best options to use for all types of real estate investments.
