There are 11 types of IRAs; that’s correct Eleven! But do you know the Self Directed IRA and what are the benefits?

Most investors mistakenly believe that they have a “self-directed IRA” when in fact they have one that limits their options to a few investment types. Within your plan, you can choose stocks, mutual funds, or bonds. And while you may have hundreds or even thousands of options for where to put your money within that account, you probably won’t be able to invest in non-traditional retirement assets, especially if your IRA or 401 (k) transfer is with a brokerage firm. traditional.

So what is a true self-directed IRA? It is an account that allows you to invest in many other options within your IRA, including:

Real estate rental
Set up uppers to resell at profit (flip)
Private loans granted at higher interest rates to other investors
Discounted private notes
Tax ties or tax deeds
Private companies and startups
Precious metals
Leases and lease options
Direct options (real estate options, not stock options)
Associations

Such investments receive the same tax treatment as more traditional IRA assets. Any taxes owed are deferred until withdrawal, usually at age 70½, when you are asked to begin withdrawing your savings, or possibly earlier.

This is an account for practical active investors with unique knowledge of some of the asset classes on the approved list, not for a “set it and forget it” investor.

By using this type of account, it is possible to make considerable profits with a relatively small amount of money. Here is an example:

You have the opportunity to purchase a dilapidated home on a property that you would like a quick sale to do. You determine that the home is worth $ 200,000, after spending $ 40,000 on improvements. You contract the purchase of the property for $ 120,000. But in the absence of the $ 160,000 to proceed with the sale, he hires a partner who agrees to provide the full amount, as long as he handles all the details, including the closing, rehabilitation, and resale of the house.

Additionally, you determine that you would like your share of the earnings to go into your IRA for the obvious tax benefits. You only have $ 10,000 in your IRA to invest. The appropriate game given this set of circumstances is for your partner to purchase the property on your behalf or from an entity that you control, such as a limited liability company. You enter into an option agreement to purchase half of the ownership of this property. You pay $ 100 from your self-directed IRA, fill out the option paperwork, and submit all the papers to your plan administrator.

This deal is now moving forward, and the property is rehabbed and ready for sale in 60 days and is selling and closing quickly for $ 200,000. You have $ 10,000 in sales and living expenses, making a profit of $ 30,000 on this deal in five months. The owner of the title to the property agrees to pay you $ 15,000 to close your option. This $ 15,000 is a return on investment on the $ 100 option and is deposited back into your IRA tax-deferred or tax-free (for a Roth IRA).

Your investor contributed $ 160,000 and received $ 15,000 for a five-month investment. This represents an annualized return of more than 20 percent of your money, which is pleasing to almost all investors. If you used the money from your IRA for this investment, your earnings would also be tax deferred.

Rental income

Here’s another example: A New York investor became aware of the self-directed IRA and used part of his IRA to purchase four rental homes in the greater Detroit area. Each home was bought for around $ 55,000 and rents for around $ 900, with the cash flow going back to the IRA tax-deferred. If you sell them for big profits a few years from now, those profits will also be tax deferred.

Be careful: there are also some prohibited investments with your IRA (see IRS publication 590-B):

No money loans for you, your spouse or any member of your family in your direct linear family chain.
Do not invest in collectibles.

Your IRA cannot personally guarantee any loan in which you borrow money. This means that any money borrowed from your IRA must be “non-recourse” funds, meaning that only the asset can be placed as collateral and can be foreclosed for non-payment. The creditor cannot sue the IRA for any shortfall on the loan that becomes delinquent.