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What “Self Directed IRA Investing” Really Means
By Tom Dunn | September 17, 2008
Have you been interested in IRA Real Estate Investing, but wondered about all the confusing terms and phrases? One of the terms often used to describe the type of IRA many investors use to buy real estate is “Self-Directed IRA.” But what does the term self-directed really mean, and why is this the best kind of IRA to use for real estate investing?
For the purposes of this article, I’m going to assume you know a little bit about real estate, but next to nothing about IRAs. Let’s assume you have a job, and you have a retirement account through your job, called a 401K retirement account. If you’re like most employees, you contribute to your 401K out of each paycheck, and the money you contribute (up to certain government mandated maximums) is tax deferred. Your employer may or may not match a portion of your contributions. Simple enough.
Also called an Individual Retirement Account – because an individual can open an IRA unrelated to their employment situation – the IRA is an account you can contribute directly to yourself. You can open an IRA even if you also have a 401K at your workplace, and deposit up to an annual total specified by the IRS.
The possibility also exists to “roll-over” your 401K funds into an IRA… roll-over is the term used for transferring funds between these types of retirement accounts, and the IRS has specific rules which must be followed to handle these transfers or roll-overs. Keep in mind, I’m just giving you the basics here.
The problem is, neither the IRA or the 401K as they commonly exist can be used for investing in income property. Only the custodian of the account (normally a bank or financial institution) can designate what investments are purchased with these funds, leaving you on the outside looking in, with almost no control over where your own money is invested. About all you can do is state what percentages of your money you want to go into which funds the account is invested in. Not nearly good enough for my money.
There is a specific type of IRA however, called a self-directed IRA, which allows you to designate exactly which investments your IRA moneys are invested in. If you consider yourself to be an expert in residential income property, and you know you can generate a certain rate of return consistently, wouldn’t it be a good idea to be able to invest those tax deferred dollars in your 401K or IRA in something you know something about, rather than relying on some faceless fund manager in an office in some distant city? Of course it would!
It’s simple and easy to open your very own self-directed IRA for real estate investing. Just find a custodian who specializes in these accounts, and they will guide you through the process, and help you abide by all the government rules. Then, your tax-deferred account will grow the way you want it to.
You can even let a company with a Socially Conscious Real Estate Investing program help you set up your self-directed IRA, including all the forms AND whatever fees there may be. They will even take care of all the details of buying and selling the property within the IRA, as well as all of the property management.
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