Alternative Investments With A Self Directed IRA
Whether you’re looking to avoid volatility in the stock market, or achieve independence in managing your investments, a self-directed individual retirement account (SDIRA) may be the solution for you. With complete control over your investments, SDIRAs offer opportunities for experienced investors to capitalize on alternative assets they know best.
What is a Self Directed IRA?
A self-directed individual retirement account is an individual retirement account (IRA) where the investor is in total control of the investment decisions and transactions. An SDIRA provides the investor with opportunities for diversification of assets beyond traditional investments like stocks, bonds and mutual funds. Self-directed IRAs can invest in real estate, private market securities and a wealth of other lucrative possibilities not available to traditional IRAs and 401(k)s. However, though the securities and investments are in your control, they are held in an account administered by a qualified custodian.
There are two types of SDIRAs, traditional and Roth style accounts, and each is slightly different. Contributions to traditional IRAs are generally tax deductible, and earnings in traditional IRAs are generally tax-deferred with earnings taxed upon withdrawal. Traditional IRAs are free of income limitations, however distribution is required starting at age 70 and a half.
On the other hand, Roth IRA contributions are not tax deductible, and earnings generally grow tax-deferred. Roth IRAs are not taxed upon withdrawal after a certain age, and distribution is not required at any age of the original account holder. Whether your SDIRA is a traditional IRA or a Roth IRA, choosing the correct type for your self directed individual retirement account will depend on your personal goals and retirement planning.
Managing Your SDIRA
Investing in a self directed IRA comes with higher risks than traditional retirement investments, but can also deliver higher returns if managed well. SDIRAs are most lucrative when investing in markets you are knowledgeable in, and are most effective when you have a history of investing in those areas. It is important then to understand what kind of investments are best suited for self directed individual retirement accounts, and to manage those transactions wisely.
SDIRA Investment Opportunities
Self-directed individual retirement accounts allow for more options than traditional IRAs. Beyond stocks and bonds, you are also able to invest in the following:
- Real estate
- Private equity
- Hedge funds
- Promissory notes
- Precious metals
- Startup companies
Why Choose Self Directed IRA Real Estate Investments
For those with experience investing in commercial real estate or buying real estate, a self-directed IRA can be a good place to build wealth while deferring some of the usual expenses and taxes. However there are some specific rules to watch out for when using an SDIRA for real estate investing. Failing to do so could result in costly penalties and additional taxes, offsetting the benefit of your SDIRA and damaging your investment.
Because the investments are controlled by you and your chosen custodian, it’s your responsibility to make sure you are in compliance with all IRS regulations for SDIRAs. Self-directed IRAs allow for an extremely broad portfolio, which means there is also a greater risk of breaching IRS regulations. Experience and knowledge is key in managing SDIRAs, because the investments and transactions require caution from investors. Because commercial real estate is bound by fewer rules than single family residential it’s often the better investment over the long term.
Where it gets tricky is the personal use of assets within your portfolio. The IRS prohibits the use of IRA investments to be used for personal applications until you reach the withdrawal period. This can specifically affect real estate portfolios as it does not allow the investor to invest in real estate for personal use. When considering using an SDIRA to invest in real estate, you will want to determine your goals for the property. If you hope to use the property to generate income immediately, an SDIRA would be the incorrect choice as you would likely breach IRS guidelines. However if the goal is the long term investment in property and real estate, as is the case with most commercial real estate investing, you are probably good to go.
Choosing The Right Custodian For Your Self Directed IRA
While self-directed IRAs give you greater control over choosing your investments, the IRS does require that IRA assets are held by a qualified SDIRA custodian. It’s technically possible to open an IRA at most financial institutions, but only a select few have true experience holding alternative assets in an IRA. Quality custodians will be able to advise and guide you through what can be complex nuances of an SDIRA, and provide you with helpful information about risks, potential fraud and prohibited transactions. The most important part of choosing a custodian for your SDIRA is finding a person or firm you can trust to lead you in the right direction.
At Crowd Street, most of our marketplace sponsors accept offers from a self-directed IRA account. Our experience in this area has seen our clients use SDIRAs to invest successfully in a variety of commercial real estate deals without complication. We offer simple tools for you to use and can help you through the process. To learn more about investing in commercial real estate with a self-directed IRA, Contact CrowdStreet today and see how we can help you gain access to commercial real estate deals that were previously out of reach.