Can you picture a reality in which you get to play golf, vacation or simply spend time with friends while covering the costs with passive income? This is how retirement should be and with a self-directed IRA checkbook plan, it is easy to create safe and passive income by investing in rental real estate. Owning a rental property in retirement creates extra work for some people, but people who use a retirement account to buy a rental property don’t have the day-to-day responsibilities. Instead of paying fund managers and financial advisors to manage mutual funds you can rely on property managers and contractors to handle the work for you.
Planning for retirement is an important goal. A recent report by the National Institute on Retirement Security showed most households on the cusp of retirement only have about $14,000 saved for retirement. While $14,000 is not enough to live on in retirement, it could be used for real estate options, lending, tax liens and deeds or it could even be used as a down payment on a rental property. Once you own a secure asset that can generate cash flow in your IRA everything goes back into your self-directed IRA. Because self-directed IRAs offer unique tax advantages 100% of your ROI can be re-invested to boost your overall returns.
Taking a non-traditional approach
While most people participate in 401(k) plans, Roth or traditional IRA plans, they can’t buy real estate with conventional accounts. In fact, most company-sponsored accounts only allow investors to choose designated mutual funds. Most self-directed IRAs are limited to stocks, bonds and exchange-traded funds. However, you can’t buy a rental property with a traditional or Roth IRA unless it’s a true self-directed account with checkbook control. With checkbook control you can write a check to bid on a foreclosure and compete as a cash buyer while other bidders are waiting on traditional lending or custodian approval.
With a self-directed IRA, you gain freedom to invest in what you want. At the same time your IRA custodian reports to the IRS to keep your IRA in tact. By choosing a passive IRA custodian you keep hold of the steering wheel. If you want to invest outside of real estate that is simple to do as well. As the checkbook IRA holder you have the authority to invest in an array of alternative investments. Some options include private banking, account receivable investments, trust deeds, private companies, joint venture co-investments, corporate debt, private businesses, gold/precious metals and much more.
Controlling your checking account
A truly self-directed IRA is one that gives you direct control over your financial future with a checkbook IRA. Using the checkbook setup means you can write a check on behalf of the self-directed IRA. Without checkbook control, you have to wait for your IRA custodian to process real estate or other transaction. While waiting is fine for some investments, a time delay can cause you to lose out on real estate deals of a competitive nature. Some transactions aren’t “administratively feasible” for IRA custodians and can get rejected altogether.
When investing in real estate, remember the unique rules related to retirement accounts. Your self-directed IRA account actually holds the title to the rental home or other real estate investment. Your retirement account pays all of your home improvement or maintenance costs. Also, just as dividends get paid back into retirement accounts, rental income you make goes back into self-directed accounts. The IRS is particular about what people do with their retirement accounts. Keep in mind you can’t live in a home bought with a self-directed IRA without triggering major tax consequences. The IRS treats that as a “distribution.” Of course, once you retire you could pay taxes on the property and turn it into your retirement home.
To get started taking advantage of a self-directed IRA concept, roll over an existing retirement account into a self-directed one. At New Standard IRA, we specialize in truly self-directed IRA accounts that give you more control. For more information about a self-directed IRA checkbook plan, please contact us.