More and more people are realizing that traditional retirement advice, like using a 401k or relying on Social Security, is severely outdated. This old school advice once helped generations before us create a comfortable retirement plan, but it can no longer keeping up with our modern world where the cost of everything is rising. Your 401k and similar account types can really take a beating in times of inflation.
At Morris Invest, we love educating investors about the freedom a self-directed IRA can provide, but the self-directed IRA is not a free-for-all. Like any investment type, it’s critical that you know what you’re getting into before you jump in. So today, we’re going to dive into 10 rules for building wealth with a self-directed IRA.
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- If you want to buy a rental property inside your self-directed account, it must be an investment property. You cannot put your personal home or a vacation home inside of your retirement account.
- To go a step further, the self-directed IRA does not allow any personal benefit at all. So, you can’t even use the garage at your rental property to store your things. This is just one example, but only your self-directed IRA can benefit from your investment, not you personally.
- The self-directed IRA funds are for retirement purposes only. So if you want to buy real estate inside a self-directed account, cash flow will not be available to you. Because the self-directed IRA is a retirement account, any profits from your investments go straight into the account.
- Not only do profits go into the IRA, but any expenses also must come out of the account. If your investment property needs anything—from a plumber to a doorknob, a tax bill, or HOA fees, the bill must be paid straight out of the IRA.
- Disqualified persons. Just as you cannot benefit from your account, there’s also a list off disqualified persons that you cannot lend to or deal with. This includes your spouse, your children, your parents, and more.
- There is a list of prohibited transactions. For the most part, a self-directed IRA gives you a lot of freedom when it comes to choosing your investments. But there are a few things you can’t invest in collectables like art or antiques or life insurance.
- No sweat equity. If you own a rental property inside of your self-directed IRA, you won’t be able to do repairs yourself. The IRA must hire and pay a contractor to do the work.
- The IRA must hold the title on your investment property. This means you can’t have the property under your name, your LLC, your trust, or anything else. The investments inside of your account must be owned by the IRA. Even if you’re using a loan in combination with your self-directed IRA, the IRA still must be on the title. Which leads me to my next point…
- Any loan used in conjunction with a self-directed IRA must be non-recourse. Here’s an example. A lot of our investors use the funds inside of their self-directed IRA as a down payment on a rental property. They then finance the rest with a non-recourse loan. The loan must be non-recourse because you personally cannot guarantee the loan.
- Early distributions will result in penalties. The IRS wants to discourage withdrawing from your account before age 59 ½. If you take a distribution before then, you can be subject to a 10% early distribution tax.
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DISCLAIMER: I am not a financial adviser. I only express my opinion based on my experience. Your experience may be different. These videos are for educational and inspirational purposes only. Investing of any kind involves risk. While it is possible to minimize risk, your investments are solely your responsibility. It is imperative that you conduct your own research. There is no guarantee of gains or losses on investments.
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