Self Directed IRA: what do i need to know?

[Kenneth G.]

Hello Everyone, I am highly interested in applying some of 401k towards a self directed IRA. It seems like a good opportunity for me to get involved in real estate with out currently having a ton liquidity. However, I don’t know a ton about the process and what are the benefits and what are the risks. Also, any nuances I need to know about or be on the look out for? Thanks Kenneth

[Brian Eastman]

@Kenneth G.

Well, the answer is that there is a lot more to know than you will get from an internet forum, for sure.  But, this is a great place to start and there is a lot of good info at the top level here on BP.  The details of your specific situation and goals will be best to discuss with a professional.

A self-directed IRA is simply an IRA with broader investment choices. It is not a way for YOU to tap your retirement funds to invest in real estate, but rather a way for you to diversify your tax-sheltered retirement savings and include things like real estate as investments of the plan.

All IRA investments must be made at arm's length and exclusively for the benefit of the plan, meaning the plan is on title to the asset, all expenses are paid from the plan and all income goes to the plan - tax-sheltered just like returns in the stock market.

You can administer investments, but may not personally benefit such as by drawing income from a rental or paying yourself for providing services to the plan. The reverse is also true, in that you may not add value to the IRA via the provision of goods or services (such as performing work on a property).

The key benefit of a self-directed IRA is being able to invest in a different asset class such as real estate or private lending where the plan principal is secured by a real, less volatile asset, and where there is opportunity for income via both cash flow and appreciation. If you understand real estate, such plans provide the ability to invest in what you know, which can be a path to greater success.