The Self-Directed IRA is often overlooked as an investment vehicle. This is a way for you to own assets that are not stocks or bonds in your retirement account. Most often these are used for rental real estate. You can also use them for many other asset types. However, most people use them for rental property. So that’s what we’ll focus on in this post.
Let’s say you are looking for an investment property and you see it as a way to earn income in retirement. Perhaps you view rental real estate as a “forever” investment that will provide you income during retirement and you have no intention of selling. Or, maybe you are near retirement and you aren’t sure if the stock market or bonds are a great vehicle for you to earn actual income over time throughout your retirement. Perhaps if these circumstances fit you then a self-directed IRA may be a fit. You should talk with an adviser if this is you.
One other aspect that is often overlooked is that, at least in today’s market, you can have a mortgage on a piece of rental real estate that is held solely by your self-directed IRA. This is a mortgage that will be a little different than your primary residence in ways (talk with an IRA provider about the differences) but it is actually held by the IRA solely and should be non-recourse. This means that it’s a stand alone investment still within the IRA.
There are restrictions on how the transaction itself and the ongoing management of the property must look if you go forward with this approach but overall the concept is that it must be a passive investment, much like owning a stock or bond would be in an IRA. Keep in mind also that you could fund the self-directed IRA with money from an existing account if it meets the requirements, perhaps your 401k. So if you would like for real estate or other alternative assets to more traditional stocks/bonds/etc. to be in your retirement portfolio this could be an option for you to consider. It can also be used for private company stock, physical gold, property flips, lending, etc. Talk with you CPA or Enrolled Agent about your options.