First Western Federal Savings Bank has posted many blogs outlining what self-directed IRAs are and how you can utilize its advantages and the benefits of property investing. There is a wealth of knowledge within these blogs, but the facts may still be elusive to those who are starting out in their investment ventures and want to know more about self-directed IRAs before they get their feet wet. In this blog, we aim to debunk some of the commonly-held misconceptions about self-directed IRAs and investing. This industry does its best to educate and inform, but there are still prevailing thoughts and beliefs among retirement investors that just aren’t true. For more information, or to speak with a non-recourse loan lender to start the process, contact First Western Federal Savings Bank now.
A Self-Directed IRA is Different from a Traditional IRA
There are some differences between a self-directed IRA and a traditional IRA, the main being that you are able to control the investments you make and the timing in which they are made. All IRAs, however, follow the same rules that are created by the IRS. A self-directed IRA could be a traditional IRA, a Roth IRA, a SEP, or a simple IRA.
A self-directed IRA is an account that allows investors to save for retirement. It essentially lets you use your retirement funds for investments that generate tax-deferred or tax-free growth on income. Further, a self-directed IRA allows you to make alternative investments that include real estate investing, peer-to-peer lending, and private business. When you choose to invest in alternative funds and assets, you will need a trustee or custodian that specializes in these investments. With a self-directed IRA, you are able to receive high returns while still diversifying your portfolio. With any investment opportunity, there are also some risks.
You Can’t Use Your Self-Directed IRA to Invest in Real Estate
This statement is just unequivocally false. You can, in fact, invest in real estate, as it is the most popular alternative investment for those with self-directed IRAs. Real estate is a popular choice because it offers a vast array of choices, and the potential for real estate is limitless. Investing in real estate provides a great way to diversify your portfolio that produces consistent cash flow and also provides long term gains.
Many institutions might try to convince you otherwise because they won’t be able to make any money off of real estate investments, but as long as no prohibited rules are broken, you are able to invest in nearly anything with your self-directed IRA. If you do choose to invest in real estate, however, you are unable to use it yourself. Buying an investment property creates countless benefits, including an additional source of income, flexibility in your income, and it even provides a long-term real estate value that appreciates over time.
While the upfront cost of purchasing an investment property is tremendous, you can use a non-recourse loan to acquire properties. Renting out the property will give you huge potential for extra income that is also flexible because you essentially are able to make money while you sleep. While you do need to keep up with the property’s maintenance and respond to tenant’s needs, there are no day-to-day financial commitments. What’s more, the additional income that real estate offers generally appreciates over time. You can leverage the real estate with a non-recourse loan to accelerate the return on investment, which can lead to a greater cash flow and wealth each time this is done. The greater returns on your investment go back into the account tax-deferred or tax-free, allowing you to optimize your investment!
Some properties that work for self-directed IRAs in correspondence with a non-recourse loan include houses, townhomes, and certain condominiums — essentially, the properties need to have their own roofs and need to be at least $70,000 in value. Properties that don’t work for a self-directed IRA and a non-recourse loan include international properties, homes that were built before the 1940s, properties that are less than $70,000 in value, properties that are used for construction purposes, row homes, or primary properties.
IRAs Have an Annual Earnings Limit
Regardless of the type of asset or account structure, self-directed IRAs have no annual limit. Your IRA can grow to any limit within any given year without tax liabilities or penalties. While your account itself may have annual contribution limits — each IRA account type has different annual contribution limits that are designated by the IRS — there is no cap on earnings. Earnings from your self-directed IRA can grow year-to-year without penalties.
You Can’t Buy Vacation Property With Your Self-Directed IRA
Just like other forms of real estate, you are also able to invest in vacation property, but you are also unable to live in these vacation rental properties. Vacation Rentals typically provide all the furniture, appliances, and amenities that apply to today’s lifestyle needs, and any extra luxuries you include would make it a worthwhile investment when renting to interested tenants. Whether you own a vacation rental near the beach or in an urban dwelling, you will be setting yourself up for financial success.
Owning a vacation rental property is no small decision, and indeed a lot of work. In order to reap all the benefits, like an added income, asset diversification, and future security, you will need to put in the work to ensure that your property is well-kept, clean, and in excellent condition. Just like any investment opportunity, cash flow is critical. If there is no cash flow, then it was not a great investment.
You Can’t Contribute to a 401(k) and an IRA at the Same Time
This also is not true, as you may make IRA contributions even if you also contribute to an employer plan. You can maximize your savings by combining different tax-advantaged accounts. The more you stock away in all available retirement plans, the better. Participate in a 401(k) plan and your income will decide if you are able to deduct your IRA contribution. Roth IRAs are a bit different, as they can only be made directly if you are under the income threshold Once you earn too much money, you are no longer allowed to contribute directly to a Roth.
Self-Directed IRAs are Convoluted and Difficult to Set Up
While we do not directly set up self-directed IRAs, the application process is simple, and if you have any questions at all, then feel free to contact us! We are more than happy to provide our personal contact information to make the loan application available to you. Be the owner and creator of your future financial success, build your investment portfolio, and start building your relationship with First Western today.