Is it worth setting up a self directed IRA for real estate?

[Wendy Busa]

I am looking to become a private lender and have heard about setting up a self directed IRA so that the interest can go back to the IRA and grow tax free, but....

What about the set up fee, which I understand can be $1200+ and then quarterly fees? I am already 58 years old and would only be able to contribute $7000, does this make sense?

[Jeff S.]

I can't imagine who you are talking to about setting up your self-directed IRA but their fees shouldn't be anything close to what you quoted. Perhaps this is for an IRA LLC? You don't need that to loan retirement money. Any experienced plain vanilla self-directed IRA custodian should be able to help you. The setup and ongoing fees should be relatively minimal.

If you and/or your spouse are self-employed with no full-time employees, you can open an SD 401k plan and contribute over $60k each, compared to an SD IRA. That might be irrelevant at this point and neither has a benefit over the other with regard to lending. The lending process is the same.

The bigger problem is that $7000 is not enough to do a safe loan, @Wendy Busa. We’ve been lending out of our retirement plan for years and safe to us is first position purchase money. No gimmicks like gap or transactional funding and nothing in second position, out-of-state, or even far from home. After a few years, you might be able to build up enough to do a fractional loan (participate with others on one first position loan) if legal in your state, especially if both you and a spouse can contribute $7000 each per year for a while.  Of course, you are not limited to lending.

Start going to some local real estate clubs to learn what others are buying, borrowing, lending on, or otherwise investing in. There is almost nothing in real estate that can't be done through an SD IRA. Even if you can't lend yet, there are many safe options to enable you to grow your money tax-free or at least tax-deferred.