Investing in a Self-Directed IRA


Self-directed IRAs have seen more attention in recent years, and the growing interest is easy to understand. The traditional offerings associated with an IRA like stocks and bonds are reasonable enough, but retirement savers want flexibility beyond the average CDs, ETFs and mutual funds. SD-IRAs provide this flexibility. 

Expanding on that point, SD-IRAs allow for more diversified investment options, letting you place your money in everything from precious metals to real estate, notes to tax lien certificates. You'll enjoy far more freedom as an investor to pursue your goals and secure your financial stability as you near the end of your career.

So how do you get started? And what can you expect? We'll walk you through everything you need to know, simplifying the subject so you can manage both your property investments and retirement account, reaching a balance that'll sustain your income and keep you comfortable. 

To start, we'll define SD-IRAs in greater detail, then describe their function in real estate.

Self-Directed IRAs and Real Estate 

An SD-IRA is essentially a traditional or Roth IRA in which your custodian — the institution keeping records and reporting to the IRS — allows you to invest in a wide range of options permissible in a retirement account. At the end of every year, you'll have to measure the value of your investments and communicate those numbers to your custodian. As a note to help you in the investment process, these custodians can also provide guidance moving forward.

After you've decided on a reputable IRA custodian, you should also establish a limited liability company to hold your assets. As you invest in real estate, an LLC will serve as a precautionary measure to prevent potential lawsuits that might occur from injuries on the premises. From there, you can buy, sell and flip properties, but it's essential to remember you'll have to pay back all income you generate into your SD-IRA.

Neglecting to acknowledge the rules and regulations might result in penalties, so review them before diving in. They're easy to follow, and the benefits far outweigh any potential risks involved in the process. To give you a better understanding of what you can hope to gain through SD-IRAs, we'll touch on a few of the advantages, showing you why retirement savers have found them such an attractive option. 

Value of Self-Directed IRAs

If you're new to real estate investment, SD-IRAs provide a sort of safety net as you navigate the industry. The money you spend on properties isn't money you live on, drawn from your retirement account instead, and though you still depend on those funds, they'll provide a foundation on which to build.

You'll also enjoy tax benefits. Similar to any other investment in your IRA, your income is tax-deferred until you make a withdrawal, unless your holdings are in a Roth IRA, in which case you won't have to worry about taxes at all. That said, you'll have to wait to take out funds to avoid an early withdrawal penalty.

Beyond the realm of real estate, SD-IRAs provide you a level of portfolio diversification other options don't. We briefly mentioned this earlier in the article, but this point is important to stress for those who feel restricted in their choices. You'll have far more opportunities in deciding to pursue an SD-IRA.

As we conclude, we'll make a small — but essential— distinction between a traditional broker's self-directed account and one that lets you invest in real estate.

Final Notes for Clarification

Many IRA custodians and banks will only approve conventional investments. If you approach a traditional bank and inquire about their self-directed accounts, they'll usually show you available stock options instead of what you're truly looking for, which is the freedom to invest in properties.

You'll have to find an institution which provides SD-IRAs, and more than that, you should choose an institution with experience in your field of investment. Do your research on your chosen custodian as you proceed, ensuring they have the expertise you need to navigate the subject. 

Opportunity Awaits!

You want to retire with comfort and security, and you have few better options than an SD-IRA. Investing in real estate is one of the most powerful ways to grow your wealth, and with the assistance of an IRA custodian, you'll enjoy financial stability well into old age.

Check out our series on using a self-directed IRA for even greater detail!



Holly Welles is the editor behind The Estate Update, where she shares real estate tips and ideas for home fixes. She’s passionate about staying on top of recent market trends.