The search for a secure retirement has become increasingly difficult. Given the current stock market uncertainty in light of corporate governance failure on a massive scale with the Enron and WorldCom scandals, the poor return on investment due to panic selling of stocks and bonds that have since risen again Reeling from bringing investors’ funds with them and the political and economic uncertainty brought on by the ‘war on terror’, it is no wonder investors are looking for alternative options to invest their retirement funds.
These days, many investors prefer a broader range of options and the ability to diversify their retirement fund investments away from so-called conservative stock and bond options and into other areas. This has resulted in a massive expansion in the market for self-directed IRAs.
The phrase self-directed IRA is often thrown around by prominent investment firms and is only understood to a limited extent by most IRA investors. Unbeknownst to many self-directed IRA investors, many investment firms would have them believe that the term self-directed IRA only refers to the ability to choose which stocks, bonds, and mutual funds they can buy. Fortunately, there is more to this narrative.
Instead, a growing culture of investors is educating themselves about their investment alternatives and are now beginning to invest in real estate and other non-traditional assets. In fact, any legitimate business investment is open to them both as individual investors and for group investment. If you know what you’re doing or have advice from experts in the area, it’s possible, even with low cash reserves, to diversify retirement portfolios and, in particular, capitalize on the growing real estate industry, for example.
Most conventional financial planners do not offer truly self-directed IRA plans, as they may operate under plan documents that only allow investors to invest in stocks, bonds, and mutual funds. They shouldn’t do it either. Their fee structures are set up to favor investing in the financial markets, whether in the best interest of the investor or not. Which means that their advice is not very objective.
Of course, this is not advising investors to abandon stock market offerings entirely, just not to keep all their eggs in one basket. Just as stock markets go up and down, so do real estate prices. However, diversifying your investments minimizes the risk in your returns.
Purchasing real estate for investment purposes with an IRA offers several favorable tax breaks. A Roth IRA allows the investor to benefit from tax deferral as it grows and be tax free on the distribution in contrast to a traditional IRA which is taxed upon distribution. There is also no minimum distribution and investors can also continue to pay for Roth IRAs, which can be beneficial if they intend to pass them on to their heirs (which can be done tax-free). Also, unlike 1031 exchanges, there are no specific investment deadlines or requirements to purchase “similar type” investments. Finally, the capital gains tax does not apply since the taxation does not occur until the distribution.
All of these factors contribute to making real estate investing with IRA funds very tempting. However, it is not something that should be undertaken lightly by investors, unless they are experts in their own right in tax and investment law, due to the strict and sometimes complex legislation imposed through the IRS. Otherwise, they may be exposed to penalties and taxes. Just as you choose a traditional financial adviser when looking for investments in stocks and mutual funds, you should also look for an appropriately qualified self-directed IRA adviser.
First, traditional financial advisors are often not the best people to give real estate investment advice. While they have a good understanding of stocks and shares, they have very little experience in the real estate market. Instead, you should seek out an advisor who can help you structure IRA and real estate entities, evaluate investment opportunities, and avoid violating self-directed IRA rules when establishing investments.
Your IRA adviser will need to have extensive knowledge of self-directed rules and experience implementing complex agreements, as well as a strong background in real estate and real estate development. Because while a single property investment is probably no more difficult than buying your own home, using private funds, especially self-directed IRA funds, to invest in real estate developments, real estate lots, purchase apartment communities, and other higher-end real estate Investment scale is something that most people do not have the knowledge to undertake.
A good example is the rehabilitation of individual residential properties. If you have never done this type of work, it can be a very risky business. Without a substantial amount of real estate investment experience, you can easily lose money in your IRA retirement. It is very important to have the right real estate advisor who knows where to find good real estate opportunities and knows what is a realistic real estate investment and a realistic rate of return and how to properly manage a real estate development or rehab project from start to finish. Major do-it-yourself TV shows featuring rehab projects are a good example, as most people go over budget during rehabs and most of the time lose money. Don’t let this happen to your retirement.
The ability to offer advice must be accompanied by the ability to offer advice. A self-directed IRA custodian (as opposed to a self-directed IRA adviser) cannot offer any investment advice to an investor. Is prohibited. They must maintain a neutral position and can only advise you on IRS regulations and your company’s investment policies. Therefore, an IRA custodian cannot offer advice on real estate transactions, which is a good thing because their primary goal is to hold account holders’ money.
In short, real estate investing is a realistic option for most investors looking to diversify their holdings, but the key to profiting from it is getting the right advice from the right source.