Self-directed IRAs enable clients to invest in assets not available through traditional brokerages, including real estate, private equity and tax liens. But these investments require extra work in terms of vetting potential opportunities and avoiding prohibited transactions.
One misstep could result in costly IRS penalties, so it’s crucial that you follow all rules and verify information provided in IRA account statements – such as prices.
Real Estate
Real estate investments are one of the most sought-after options available through self-directed IRAs, though there are certain rules that must be abided by when doing so. For instance, your IRA cannot be used for personal residence purchases; additionally it cannot be rented to disqualified individuals nor used to perform work on it; doing so would constitute self-dealing which violates IRS regulations.
Another consideration for an IRA property investment is financing it solely with nonrecourse loans to prevent unrelated business taxable income (UBTI).
Clients must carefully examine any property they intend to purchase with their IRA and be mindful that annual management fees could add up quickly, eating into profits.
Tax Liens
Tax liens, like real estate, can be bought and held by your Self-Directed IRA as tangible investments that offer high returns – making them an excellent alternative investment strategy within your retirement account.
If a property owner fails to pay their taxes, their local government places a lien against it in order to collect unpaid debts. Liens are then sold at auctions at attractive interest rates; your IRA could purchase such auction-sold liens as potential investments.
Your IRA has two options when selling off a lien: either keep holding on to it, or sell it directly for even higher profits – both are fantastic ways of increasing profits in your retirement account.
Your IRA should take care to avoid engaging in prohibited transactions when investing in tax liens and deeds. A prohibited transaction occurs when an IRA transacts with disqualified individuals or companies – this could include immediate family members as well as closely held companies owned by you and/or your spouse.
Private Company
Many beloved companies such as Uber, Airbnb and Dropbox all started as private investments. A self-directed IRA enables you to invest in startups and private companies like these with tax benefits such as pass-through treatment – meaning profits flow directly back into the IRA without incurring UBIT penalties.
One common strategy involves joining other investors to purchase property. You then combine your IRA funds with those of the other investors’ to buy an undivided interest. When selling, your IRA receives its proportionate share of proceeds according to its percentage ownership in the property.
Business owners and investors both benefit from this investment approach; the business gains access to capital while you have the chance to reap high returns on your retirement account investments. Due diligence should always be performed when undertaking this kind of transaction as disqualified parties or prohibited transactions must be checked for and avoided.
Other Alternative Assets
Though it may be possible to use an SDIRA to invest in alternative assets, most IRA custodians do not provide this service. In order to get started with investing via self-directed IRA, clients need to find a custodian that allows self-directed investments as well as having relationships with dealers that specialize in that asset class.
Custodians who specialize in self-directed IRAs tend to be banks or trust companies, making comparison of prospective custodians important, since some dealers could misrepresent an investment’s quality or value, leading to fraud. Red flags to look out for include brand new investment companies with claims of unreasonably high returns as well as lack of third-party oversight.
SDIRAs offer many advantages over traditional IRAs when investing in real estate, tax liens, private companies or other alternative assets such as stocks. However, these types of investments tend to be more complex and require an in-depth knowledge of both IRS rules and any applicable local regulations as well as fees that may exceed those associated with traditional IRAs.
