Self Directed IRA: what do i need to know?

Question

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

Dmitriy Fomichenko · Answer

@Kenneth Gibson,Self-directed IRA is a frequent discussion on the BiggerPockets forum. There are many different categories, but most discussions related to self-directed IRA can be found in this category "Tax, Legal Issues, Contracts, Self-Directed IRA", here is direct link:https://www.biggerpockets.com/forums/51-tax-legal-...There is ton of content there, you can also use search feature to look for specific keywords, the results will keep you busy reading for hours.

Kenneth G. · Answer

@Justin Windham thank you sir.

Justin Windham · Answer

@Kenneth GibsonWhen considering self-directed IRAs and Solo 401k plans, you'll want to have a good understanding of the prohibited transaction rules. It's helpful to work with a provider that can help you develop a good working knowledge of what can and can't be done.Being able to diversify between traditional assets such as index funds and alternative assets such as real estate is a key benefit, especially in the current market.If you're self-employed, the Solo 401k will likely be the better choice compared to a self-directed IRA. You can reach out to a few providers who post here on BP to learn more.

Brian Eastman · Answer

@Kenneth GibsonWell, if I had a crystal ball to tell you where the stock market is going, I could answer your first question. At some point, the market will decline. When and by how much is the question. Real estate values are generally less volatile, and even when property prices may flatten or decline, the rent keeps coming in each month.There are a wide variety of plan types and providers, and many active providers including ourselves here on BP contributing to the community. What will be the best fit for your needs is the question.For relatively singular and static investments such as crowd funds or syndicated real estate partnerships, a self-directed IRA custodian can be a good route. Such firms are basically "E*Trade with different paperwork", and have the ability to hold IRA accounts and document an investment on behalf of the account. Because such firms are the processing layer, and need to sign every document, cut every check and receive every deposit, this model can become cumbersome and expensive for more time-sensitive and transaction intensive investments such as direct ownership of a rental property.There are also two plan types that will provide you with Checkbook control over the funds, meaning the ability to directly transact out of a bank account of your choosing under the umbrella of the plan. This eliminates the paperwork, processing delays and per-transaction fees that come with the custodial model. The IRA LLC version starts with a custodian held IRA that makes one investment into a LLC that you control. A Solo 401(k) is a specialized implementation of a 401(k) retirement plan designed for an owner-only business. So, if you are self-employed and have no full time employees, this format can be a good option.The following forum category has many posts on these topics:https://www.biggerpockets.com/forums/51-tax-legal-...

Brian Eastman · Answer

@Kenneth GibsonWell, 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.

George Blower · Answer

@Kenneth GibsonAs long as you have a former employer 401k or if you are over age 59 1/2, you can transfer some or all of the 401k funds to a self-directed IRA. An IRA custodian that has been offering self-directed IRAs since the late 70s is IRA Services Trust Company so you may want to reach out to them.

Kenneth G. · Answer

@Brian Eastman you’re on it! Thank you sir. Let me know when you get your hands on that crystal ball 😉

Kenneth G. · Answer

@Brian Eastman great high level overview of the process, thanks! You bring up another question I am wrestling with, which is:because returns in the index market are so strong at this moment does it make financial sense to move the funds into a self directed IRA? Also, are there any products/provider that I should check out?