My IRA Owns a House
Actually, by the end of the month it will own two houses. If you’re wondering how this is possible read on.
If you’re like most people with an IRA it’s probably held at Schwab, Fidelity, eTrade or some other traditional IRA custodian which offers the ability to invest in mutual funds, stocks, bonds or money market funds. With the demise of defined benefit pensions this is how most of us save and invest for retirement.
But you may be surprised to learn that your IRA can invest in almost anything. In fact the IRS only prohibits an IRA from investing in insurance contracts or collectibles. So investing in real estate is fine. And if you hold real estate in your IRA your income and capital gains are tax ‘free’, or actually deferred until you take a distribution from your IRA.
Of course if you call Fidelity and tell them to buy a house you won’t get far. You have to use an IRA custodian that’s set up to handle this type of service, and there are lots of them. I use Sunwest Trust, but there are several other popular choices such as Guidant Financial, Pensco Trust, and Entrust.
Once you have your account set up you can transfer money from your existing IRA to the SD-IRA and start looking for investments. If you decide to buy a house you just call your administrator and they will handle the transaction for you for a fee.
Keep in mind that all the money received from and spent on your investment property must flow through your IRA. And NO, you can’t buy a vacation home in Florida and spend your summers there. All transactions have to be arms length.
If you think you’ll have a lot of transactions and want more direct control you can go one step further and set up an LLC that you can use to manage your IRA asserts. Sometimes called a ‘checkbook IRA’ you are the manager of the LLC so you can open a bank account and write checks to buy a house or pay creditors.
You’ll need legal help to make sure that this complies with IRS guidelines. I used a company called Asset Exchange Strategies based in Leander TX to set up my LLC.
Finally, your LLC can actually borrow money as well. This gets a little complicated. Take a look at NASB for more information on borrowing.
Want to know more? Just search the web for ‘self directed ira’ or give me a call and I’ll be happy to share my experiences. And when you get ready to invest I can help with that as well.