With a self-directed IRA you have more investment options. You can invest in more than the traditional stocks, bonds, and mutual funds at your current provider. The most popular investment in these tax advantaged accounts is real estate.
There are many ways self-directed IRAs can purchase real estate. It can purchase the property outright (a direct purchase) or it can invest through a private placement or private equity. If you have a smaller IRA, it can partner with other IRAs or monies, or it can take out a non-recourse loan. The types of investments and strategies are many but, there are also rules in order to maintain the tax benefits that self-directed IRAs offer.
It’s essential to educate yourself on what the IRS considers a prohibited transaction when investing in alternative assets such as real estate. Making a prohibited transaction in your IRA will strip away the tax-free or tax-deferred status of your self-directed IRA . You must be careful not to engage in transactions with what the IRS calls disqualified parties. This means that you or your lineal ascendants and descendants cannot benefit from the property directly or indirectly.
For example, if your self-directed IRA purchases a property and your son’s family moves in— this is not allowed. Your son is a disqualified person to the IRA. You would have an indirect personal benefit, and your self-directed IRA’s tax-status would be in jeopardy. You would be penalized and your self-directed IRA would be distributed, which could result in major tax consequences.
For a complete explanation of prohibited transactions in alternative assets, review our section on Self-Directed IRA Rules.
It is important to hire the right self-directed IRA custodian or trust company to help you maximize your retirement savings. Compare custodians before you commit. Once you have identified a self-directed IRA company, you need to open and fund an account.
To open a self-directed IRA at IRAR, you simply need to complete, sign, and submit an Application and Fee Disclosure.
Moving the funds from your current custodian can take some time if your current custodian does not process transactions timely. Make sure that the funds have been deposited before you make an offer, to ensure there are no delays during the purchase process.
You can transfer or rollover funds from an existing IRA or an old 401(k) to fund your new self-directed IRA. Or, you can make a contribution if you do not have any savings.
A transfer is when you move funds or assets from an IRA at another custodian directly to your self-directed IRA. Transfers are not taxable or reported to the IRS.
For a Transfer, you would initiate the process by contacting IRA Resources and completing our Transfer Form. You would submit the form to IRA Resources along with a statement (dated within 6 months) from your current custodian that holds the funds.
A rollover is when you personally take funds from a retirement plan and put them into another plan within 60 days. It is important to note that the IRS allows only one rollover in a 12-moth period, regardless of how many IRAs you have.
A direct rollover is when you move the funds directly from an employer-sponsored plan to your self-directed IRA with IRA Resources. You may make as many direct rollovers as you want in a year.
For a Rollover or Direct rollover, you would initiate the process by contacting your current custodian or plan administrator. You will complete their distribution paperwork to begin the process of sending your funds to your self-directed IRA.
Once your self-directed IRA account is funded, you can make an offer. To make an offer you will need to complete the purchase offer or agreement in the name of the self-directed IRA. The buyer is the IRA not you not you personally.
The name or title on the agreement will depend on your strategy: direct purchase, partnering, leveraging, or LLC. In this example we are using the direct purchase strategy to keep it simple.
Here is how the “buyer” or “offer from” on the agreement should read:
IRAR Trust FBO John Doe, Account #12345
If the agreement is not in the name of the IRA, you need to amend it. You can do that by changing the buyer’s name to the self-directed IRA, as indicated above. These types of errors will delay your purchase, but can be fixed if it does occur. IRA Resources can discuss this with your real estate agent if they are not familiar with self-directed IRAs.
IRA Resources needs to sign on behalf of your self-directed IRA wherever initials or signatures are required (see green example below.) Your IRA is purchasing the real estate– not you personally. But before we can sign, we need your approval. Our Real Estate Team will walk you through the forms necessary to get this done.
When all documents are in order, IRA Resources will review and sign these on behalf of the self-directed IRA within 24 business hours. It is important to note that IRA Resources does not conduct due diligence on the property. In a self-directed IRA, the IRA owner conducts due diligence and makes all investment decisions.
When a signature is required on your purchase documents, an IRA Resources authorized signer will sign on behalf of your self-directed IRA. The title or escrow company will request documentation validating that the IRA Resources signature is authorized. In the photo example below, Veronica Alvizar is an authorized signer for IRA Resources.
Also, when a social security number is required on documentation, you will need to use IRAR's EIN instead of your personal social security number. IRA Resources will provide you that number.
When it comes to inspections, appraisals, purchasing real estate in a self directed IRA is no different than when someone purchases a home. However, these documents must also be in the name of the self-directed IRA, though IRA Resources does not need to approve these documents.
Property insurance is a different story. The policy must be in the name of your self-directed IRA and IRA Resources must sign the policy.
When the closing documents are in order, you must review and approve all documents. IRA Resources must receive confirmation that you have reviewed and approved all documents. Do not sign the documents. Remember, IRA Resources must sign on behalf of your IRA.
You must read and approve these documents before your self-directed IRA funds the purchase:
IRA Resources will sign the documents on behalf of your self-directed IRA and return them to the title company.
Depending on the state where you are purchasing the property, IRA Resources may need the seller’s executed documents before funding the transaction. We will work with the title company to obtain these.
When all closing documents are in order, we will review, sign, and send the funds to title to finalize the purchase.
When escrow has closed, the title or escrow company must send IRA Resources the final executed closing documents for safekeeping. This step completes the self-directed IRA purchase.
Here are your immediate to-do’s after the close:
Investing in real estate with your self-directed IRA might seem complex the first time, but at IRA Resources we make it easy. We will be with you to assist and explain the process in plain English, every step of the way. We work with your agent, attorney, title company, and other parties to make sure nothing falls through the cracks. With more than 21 years of experience in the self-directed retirement industry, we have seen it all and we know what to expect.
For more strategies on alternative investments in IRAs download our white papers.