I’m all about keeping more of all things that are good, especially when it comes to my hard-earned money. I also know that even the best financial advisors can’t offer their clients, or have expertise in, every type of investment. Many financial advisors won’t always tell you about a strategy for retirement is that is growing quickly in popularity. It’s called a self-directed IRA, sometimes a checkbook IRA, and by having one, you are able to take advantage of a myriad of opportunities that may be outside of the options that your financial advisor is able to offer.
Basically, with a self-directed IRA you can take all or part of your retirement account and roll it over into an account where you control the investments instead of the company that handles your IRA. If you are careful and do your homework, you can often save thousands of dollars on fees while diversifying from the stock market.
I first converted some of my IRA holdings to a checkbook IRA about six years ago, and it’s how I began investing in passive multifamily real estate syndications. Multifamily, value-add syndications are a great type of investment for a checkbook IRA because most are held for two to seven years while small improvements are made. During that time they generate passive returns and then are liquidated for a bottom-line profit. That profit is usually taxed as a capital gain, but if it happens within your IRA, you won’t pay taxes until you actually retire and begin to withdraw income from that IRA. It’s also possible to use your IRA to invest in crowdfunded real estate, in which you are actually loaning money to people for their real estate projects, and then they pay you back at very favorable interest rates. I’ve had success with this option, too.
In addition to real estate, you can also invest your IRA in precious metals, oil and gas, private hedge funds, the list goes on and on. However, you need to be cautious. The IRS has very strict rules about what you can and cannot do within your IRA. You should definitely consult your tax advisor for full details, but be aware for starters that some of those IRS-prohibited transactions are things like buying a vacation home that you use yourself, or buying a fixer-upper and doing the work yourself and investing in real estate that a relative then rents from you. When using your IRA on an investment it’s a good idea to make sure that it is 100% passive, that it isn’t anything that you personally can “use” to your benefit and that none of your relatives can use it either.
Whenever you are presented with an investment opportunity for which you might like to use your IRA, the very first thing you should do is consult your tax advisor. He or she can first determine if what you want to do is allowed by the IRS, and then advise you as to whether it would be better to use non-IRA funds or your self-directed IRA. He or she may be able to help you evaluate the investment as well.
I recently wrote about the fear I had about investing in private real estate opportunities, because it went against most of what I was taught as a child about investing — that is, to “get a job and put as much in a 401(k) as you can, stick to the tried and true, there is a reason that everyone else is doing it.” Using my IRA to make my first couple of passive real estate investments took some of the risk out of taking those baby steps into real estate syndications, and it consequently opened up a whole new investing world that I didn’t even know existed.
I encourage everyone to explore the power that a self-directed IRA can provide. After all, at the end of the day it’s your money and your future.