Why have a Self-Directed Roth IRA and invest in Real Estate?

Question

I don't have an IRA yet.My question is: What's the point of having a Self-Directed Roth IRA and invest in RE? Isn't an unnecessary middleman having the IRA in this case? Maybe I'm overthinking this.

Daniel Chang · Answer

Taxes! An IRA acts as a tax sheltered entity. Hence the gains within the IRA, whether it's from stocks, bonds, RE, or other investments will not be taxed. (If traditional IRA, it is pretax dollars and tax deferred. If Roth IRA, it is posttax dollars and will be tax free).Yes there will be a "middleman", the IRA custodian.

Scott Lymburner · Answer

Brian,I keep seeing responses about how to do it. The real question is ,"should you do it?". You stated that you don't have an IRA yet. I think many people already have money in IRA/Roth/401k so looking at investing in real estate with that money vs other investment options is a good idea. However, if you don't already have money in these retirement accounts I think it is better to invest with after tax money not in a retirement account. When you invest inside an IRA the cash flow goes back into the IRA so you don't have complete control of the cash flow. If you purchase investment property properly using leverage then the cash flow is tax free. An IRA doesn't add any benefit and could be worse if the distributions are taxed at your ordinary income tax rates. If you have capital gains outside an IRA you can use the 1031 exchange to defer taxes indefinitely. Inside the IRA you could also use the 1031 exchange, but if you don't then again it is taxed as ordinary income when taken out and you have to wait until 59 1/2 to take it out. I guess it depends on what your goals are. My opinion is to do it outside an IRA since it has tax advantages already and you can use the cash flow without any restrictions.Scott Lymburner

Edward B. · Answer

The middleman is both good and bad, though. Obviously middlemen will not do this work for free. On the other hand it is not particularly difficult to get out of line with the IRS and there are complicated rules when investing tax advantaged funds in non traditional investment vehicles like real estate and notes. A misstep could cost you. A good middleman will help ensure you do not violate any of the rules. Much like anything, if it is not worth your time and effort to do it properly, do not hesitate to pay someone who does this for a living. Just make sure to vet them properly because there are both good and bad custodians out there.

Bryan O. · Answer

Read about an IRA LLC. You get rid of the middleman there as well (mostly). Nothing beats the solo-401k, but if you can't do that, the IRA LLC is the next best.

Mark Nolan · Answer

@Brian LaceyAdding to Daniel's response, a lot of people don't know that IRAs and retirement accounts can be invested in real estate. The following IRS page affirms that an IRA can hold real estate it is just a matter of finding a trust company that will allow for it.https://www.irs.gov/Retirement-Plans/Retirement-Pl...

Brian Lacey · Answer

That's what I ended up deciding to do.Since I posted this, my research, and what/who I deem reliable sources of information, I decided to do exactly what you proposed. Seems redundant at best, and almost a double negative in a sense to use IRA for real estate.I prefer the liquidity, and what not over the tax deferral which done right, as you stated, is possibly forever.For me the big deal breaker was the introduction and advocation of the new MyRA. I knew once I saw that, that it was most definitely something I wanted nothing to do with.

Roland Thomas · Answer

Yes, you can roll it over from a previous employer and/or you can start a new one. They are limits to your yearly contribution, but not your gains. What you know about IRA still holds true the only difference is the custodian. Most custodians limit your investment because let's face it, they have products to sell. But a neutral custodian doesn't, all you simply tell them is what you want to invest in and they put your money into that investment and charge a process fee. This secondary custodian, allows you to "Self Direct" your IRA funds.Here is one of the secrets...some accounts like Health Savings and Education Accounts have additional taxes benefits.l, but they still act the same as and IRA, the fund allocated and/or contributed can be used for real estate investing.Again, I'm now expert check everything with your custodian. Us folks in Texas, try to minimize our taxes, lol.

Michael Lee · Answer

Hello! It is my understanding that you can defer taxes by having a self directed IRA. Then you have to either pay for it all up front or get yearly fees. I am pretty sure it has to be from past job. You are the trustee and you do not have to pay commission. Good luck!

Roland Thomas · Answer

I would say, the middlemen can help navigate the multiple advantages of using IRA, health account, education accounts and etc. to save on taxes, defer, and/or possibly not pay taxes on real estate investments. The middleman is your expert in assisting you to build a wealth system that last for multiple generations. The key is to find a good knowledgeable middleman!

Justin Windham · Answer

I'll add that a self-directed 401k (unlike an IRA) does not have to have the middleman at all. There is no custodial requirement for a 401k.