Self-directed retirement accounts provide a great way to invest in real estate and other asset types and grow your retirement fund without touching the money in your bank account. If you aren’t familiar with self-directed retirement accounts, you owe it to yourself to find out everything you can about this exciting investment option.
What is a Self-Directed Retirement Account?
With a traditional retirement account, you have a trustee or custodian who manages your money for you. You would typically have investment options, such as stocks, bonds or mutual funds. You and your custodian decide how to invest your funds in those three investment vehicles. In a sense, you can direct any retirement account. While your custodian will offer you advice and opinions based on their education and experience, you do have final say as to what percentage of your money you want to go into which stocks, bonds or mutual funds.
However, a traditional retirement account doesn’t offer you the breadth of diversification that’s possible with a true self-directed retirement account.
A true self-directed retirement account is also a 401K or an IRA, just like a traditional retirement account. But in this instance, you have many more investment options from which to choose. Also, you choose which particular investments to pursue. You still have a custodian, who implements your orders and oversees your financial concerns. You still have that guidance, and opinions and advice. But with a true self-directed retirement account, you gain a vast selection of investment assets that you can use to increase your retirement fund.
Why Hasn’t My Custodian Told Me About Self-Directed Retirement Accounts?
Frankly, you’d have to speak to your investment manager directly to get the answer to that question. But one possible reason is that money managers don’t make commissions off of self-directed retirement investments. They earn commissions when you trade things like stocks, bonds, and mutual fund shares.
Are Self-Directed Retirement Accounts Something New?
IRAs and self-directed retirement accounts came to be in 1974. Unless you’ve done your research or been fortunate enough to know someone educated in self-directed retirement accounts, it’s unlikely your traditional retirement money manager will have told you about them.
How the IRS Views Self-Directed Retirement Accounts
Of course, it’s vitally important to always stay compliant with the IRS Code with any financial transaction. As such, it’s crucial for you and your custodian to understand what is and isn’t permissible with self-directed retirement accounts.
First, the IRS looks upon self-directed retirement accounts the same as a traditional retirement account. In other words, you won’t be putting up a red flag or drawing negative attention to yourself by having a self-directed retirement account. They’re completely legal, and the regulations that are dictating such accounts are all outlined in the IRS Code.
As with other retirement accounts, the IRS sets limits on annual contributions for self-directed retirement accounts. Currently, for 401Ks in the tax year 2018, that limit is $18,500, and $24,500 for persons 50 years old and up.
The IRS dictates which types of investments are not allowed with self-directed retirement accounts. The IRS does not, however, list allowable investment types. However, if you choose a custodian that is competently versed in tax regulations, they and you will be able to easily stay within the allowable asset types for your self-directed retirement account investments.
Some Allowable Investments For Self-Directed Accounts
Self-directed retirement accounts provide for a more exciting and satisfying investment experience compared to traditional retirement accounts. It’s difficult to get excited about a stock price that moves upward a few points, or a mutual fund holding for a group of companies about which you know little. With a self-directed retirement account, you can enjoy a more hands-on type of engagement with your investment, which is unparalleled in traditional retirement funding. Here are just a few of the assets you can invest in with a self-directed retirement account:
- Real estate (land, commercial, multi-family, multi-use, single-family, etc.)
- Precious metals (gold, silver, gems)
- Tax lien certificates
- Private placements
How to Get Into a Self-Directed Retirement Account
In most cases, your employer is the one to speak to regarding offering a self-directed retirement account. If you’re self-employed or a partner in a company, the process will be uncomplicated, since you can simply choose an investment firm that will work with you to create and manage a self-directed retirement account.
If you already have a 401K or IRA established, you can transfer the funds, penalty-free, from a non-self-directed retirement account brokerage into one that will work with you. One thing to remember when choosing a firm is that some companies place additional restrictions on which assets you can invest in, on top of the IRS’s regulations. Before committing, ask about the availability of the specific asset types in which you’re interested.
Why Are Self-Directed Retirement Accounts so Great?
There are many aspects of self-directed retirement accounts that appeal to savvy investors. The most obvious is that they allow for greater control and diversity of retirement funds than other formal retirement funds. But the most exciting thing about self-directed retirement accounts is how much profit you can gain without paying taxes. Here’s an example:
You direct your custodian to invest in a single-family home in DFW (one of the hottest real estate markets in the country). When you turn around and sell that property at a profit five years later, your profit doesn’t count as capital gains. It gets rolled right back into your self-directed retirement account, tax-free. That’s tax-free money that you earned with your real estate prowess (plus a little help from the real estate experts). Or let’s say you want to hold onto the property and collect rental income. All that cash flow goes right back into your self-directed retirement account, tax-free, every month.
The same principles operate whether you opt to invest in tax lien certificates, precious minerals or something else. Your profits, which ordinarily taxed at the exorbitant capital gains tax rate, are entirely tax-free. Now that’s something to get excited over.
Self-directed retirement accounts are ideally suited for the potential real estate investor who is short on liquidity. If you’ve been longing to get into the real estate game, but you lack the funds, you can still move forward with your investment goals, using the power of self-directed retirement accounts. If you don’t currently have a self-directed retirement account, you can even make a move to a brokerage that will support your financial wishes. Talk to your employer about offering self-directed retirement accounts. Better yet, call us or visit us on our website. We’d be glad to help you better understand your options to get you steered in the right direction with real estate investing.