Self-Directed IRA’s are a bit of an enigma because financial advisors rarely speak of them (they don’t get paid on them and most advisors can’t do them) so unless you specifically go searching for them, chances are you might not be familiar with them.

A self-directed IRA can be in the form of a traditional IRA or a Roth IRA and it allows you to invest in other investments outside of the traditional stock and mutual fund choices. A custodian (the company that sets up and “holds” the investment) will dictate which types of investments they will allow you to hold in your self-directed IRA. Income producing real estate properties, precious metals, mortgage notes are just some examples. Several years ago, I heard about a farmer who purchased a herd of cattle inside of his self-directed IRA.

A few years ago, my sister and brother-in-law bought an ocean front condo in Myrtle Beach through a self-directed IRA. The rent they receive stays in their IRA for growth, and the condo is appreciating over time. Once they are ready to retire, they will have the funds from the rent and the equity that was built in the real estate. I referred them, and many others over the years, to Equity Trust out of Ohio. I’ve found them to be extremely competent in getting you setup and keeping you out of trouble with the IRS.

Although self-directed IRA’s have been around since 1974, these are still relatively “unknown” to many. Much like a traditional IRA, the rules are pretty strict, and you want to be very careful that you work with a company that is extremely knowledgeable on how to set these up. Back in 1994, I was working for a large brokerage firm and got word of a self-directed IRA that went bad.  Instead of finding an expert in self-directed IRA’s, a gentleman used his local attorney who had very little knowledge in this area.  The gentleman ended up having his whole $250,000 IRA become taxable because it was setup wrong thus, he was subject to federal, state and the 10% early withdrawal penalty. Not good and not fixable.

Some things to keep in mind:

  • The fees to setup and maintain a self-directed IRA will be higher than your normal annual fees on your traditional or Roth IRA’s.
  • You can do a 72T on a self-directed IRA. Read more about rule 72T here
  • Be aware that there are rules in place that might prevent you from purchasing your own home or building for your business inside of a self-directed IRA.
  • You’ll not be able to claim the depreciation on your real estate purchase because you do not own the real estate, your self-directed IRA does.

A self-directed IRA can give some flexibility to invest your retirement money in a more non-traditional way. It’s possible that this could be your funding source to jump in and start buying some real estate. Just make sure you contact a company that knows what they’re doing and ask lots of questions before you make the leap.

Live free my friends