Do you have a retirement account? Do you know what type of investments are being made with your hard-earned money? Do you understand the fees you are paying?
Unfortunately, the majority of retirement account holders have been told to set it and forget it. We’ve been told that it’s a long-term play and even if there is a major economic crisis and we lose it all, it’ll eventually come back. We need to be more financially responsible than this. Waking up one morning and finding out that your retirement account has depleted by 40% overnight should not be something that you worry about. The good news is that this is all very preventable, and you have more control than you may think.
Did You Know That You Can Self-Direct Your IRA?
IRAs are typically administered by banks and investment brokers who want you to keep your money invested within the limited products they offer. Most investors don’t know that the IRS allows a much broader range of investments using a self-directed IRA (SDIRA).
As a multifamily syndicator, we consider SDIRAs a good source for capital. We encourage our passive investors who want more control of their future to consider this as a viable source of investment capital. Our investors are thrilled to know that this is possible and are anxious to understand how it works. Multifamily syndications are often an excellent fit for investment account holders, and you should know all your options.
Why Do People Choose to Self-Direct Their IRA?
Most IRA investors do not plan on touching the money in their investment accounts for years, so they don’t mind investing in longer-term five- to 10-year investments. Multifamily syndications offer much better returns without the risks associated with a potential stock market correction. Many IRAs are sitting in money markets/CDs earning 1% to 2%. In addition, SDIRA investors tend to appreciate that no outside approval is needed. The IRA owner makes all the decisions and then simply puts the wheels in motion for the investments of their choosing.
We find that passive investors looking to self-direct their investment accounts will fall into one or more of the following categories:
• The cash they have in an IRA retirement plan provides them with the needed capital for investment.
• They have stock market fatigue and are tired of and uncomfortable investing in conventional stocks, bonds and mutual funds.
• They like that they get the tax benefits of the rents, dividends and profits coming back to their IRA tax-deferred, or in some cases tax-free.
These plans are available to holders of:
• Traditional IRA.
• Roth IRAs.
• Simple IRAs.
• Individual(k) plans.
• Defined benefits.
• SEP IRAs.
• Former 401(k)s, 403(b)s, 457s and TSPs.
Many individuals are concerned that moving money will be taxable, but this is not the case. Moving funds to a self-directed account is fairly simple. This depends on the account you are moving from and the type of account you are moving to. Transfers and direct rollovers can be done an unlimited number of times and can be done in partial amounts as well, which are also nontaxable. In most cases, transfers and rollovers are done fairly quickly, with funds arriving in the hands of your custodial account manager within a few weeks.
Types of Assets Available
The funds in your SDIRA can be used to invest in multifamily real estate syndications, but they can also be used to invest in assets such as:
• Farm animals.
• Movie projects.
• Precious metals.
• Private stock.
• Equipment leasing.
• Forex accounts.
What You Can’t Do with a Self-Directed IRA
There are only a few prohibited investments. As explained by Investopedia, “the Internal Revenue Service (IRS) forbids a few specified investments in self-directed IRAs, whether it’s the Roth or traditional version. For example, you can’t hold life insurance, S Corporation stocks, any investment that constitutes a prohibited transaction (such as one that involves ‘self-dealing’), and collectibles.”
Opening Your SDIRA
Before you can invest, you need to get an account established and funds transferred or rolled over to the self-directed account with a reputable custodian. It is a three-step process:
1. Open an account with your custodian of choice.
2. Fund the account via a cash contribution or by transfer of funds from your existing IRA or 401(k).
3. Choose your alternate investment avenue from the list of assets described above.
Let’s assume that you have a former 401(k) plan through a previous employer and a few IRAs totaling $200,000. Your new SDIRA can now invest in rental or rehab property, lend money to friends, invest in multifamily real estate, etc. You understand after an in-depth conversation with your account custodian that any income that you receive from your investment must go back into your IRA, and any expenses related to the investment must be paid out of the IRA. You were also informed that your custodian, as the administrator of your account, will receive and deposit the funds into your account on your behalf and pay all bills at their discretion.
SDIRA custodians aren’t allowed to give financial advice (remember, the accounts are self-directed), which is why traditional brokerages, banks and investment companies usually don’t offer these accounts. That means you need to do your own due diligence.
When looking for avenues to build your wealth, don’t forget to look right under your nose. Your retirement accounts, when self-directed, can be your secret weapon.