How to Open a Self-Directed Or Real Estate IRA

While it’s common knowledge that building the “nest egg” for retirement is a goal for many investors, most IRAs and employer-sponsored plans don’t allow the diversity needed to protect your hard earned money from the long-term ups and downs of markets and economies. Limited to stocks, bonds and mutual funds, investments through a traditional IRA can be volatile and unstable.

Real estate is a popular option to provide steady, passive income to meet retirement goals, but how do you fund those purchases when the majority of your savings are locked inside a traditional IRA or 401k? Self-directed or real estate IRAs can help solve that dilemma by “unlocking” the funds in traditional retirement accounts. Self-directed IRAs allow for diversification, protecting the account from economic instability and enabling account holders to invest in the real estate market using their IRA funds.

While it may seem intimidating, setting one up is usually easier that many other investment accounts. Keep reading and we’ll show you how.

Education

The key to success in any investment endeavor is education. The more one knows about what they’re doing, the more likely they’ll be to capitalize on prime opportunities.

The best time spent in research on self-directed IRAs is looking up specialized custodians and custodial firms. If you already have a traditional IRA, then you’re familiar with the role of a custodian, but with self-directed IRAs, it’s imperative to find someone that knows all the quirks of this unique account AND is a part of a reputable financial institution. It’s your retirement, so a little extra legwork is worth it!

A good rule of thumb to keep in mind is, “You get what you pay for.” Discount services may be available, but they may not fit your plan or have the knowledge needed to carry it out. A competent custodian can advise on the rules surrounding real estate purchases with IRA funds and help you avoid “rookie mistakes.” The cost may seem frivolous, but in the end, it will save you from making a mistake that could jeopardize the tax-advantaged status of your IRA.

Paperwork

When you find an individual or firm that you like, request an information kit and necessary forms for opening a self-directed IRA. There will usually be an IRA agreement, fee schedule, disclosure statement and various authorization forms required for any future real estate transactions. If you’re planning on rolling or transferring funds from another IRA, look for the IRA Transfer/Rollover Request form. There will be a lot to look over and it will all be very technical, but your custodian can help you if any questions or concerns pop up.

Carefully read all the documents and fill them out. Be sure to pay close attention to “beneficiary designation” i.e. who or what will reap the returns of your investments. If not specified, the beneficiary defaults to who or what the custodian has designated in their generic IRA agreement. If you have a specific beneficiary in mind, be sure to write it down.

When all your paperwork is completed and checked over, send the package in for processing. If you plan on using any funding from another IRA, let your new custodian touch base with the old custodian. They’ll work out the paperwork needs between them, and your new custodian will let you know if anything else is needed.

Funding

Now that your new account is open, you’ll need to fill it with funds. There are several ways to do this, but the most popular is to use money you already have in your existing IRA or employer sponsored plan. This can be accomplished through a transfer or rollover.

A transfer is a tax-free move of an account from one custodian to another. Your existing IRA becomes a self-directed IRA when transferred to your specialized custodian. It’s like taking a box full of money from one person and giving it to another person.

Rollovers are moving funds from one IRA account or qualified retirement plan to your self-directed IRA account. You have 60 days to get the funds into another IRA account before you have to pay taxes on the amount withdrawn. It’s like taking the money out of one box, putting it in your pocket without spending it, then into another box before the timer runs out.

Purchase Properties

Your self-directed IRA is now open and funded. Time to go shopping!

Once you find a property you want to purchase, let your custodian know. They’ll have you fill out an Investment Authorization form to give them permission to make the purchase. Once the purchase is initiated, it will be funded with the self-directed IRA, either through a check drawn on the account or via wire transfer to an escrow company.

Erika D. Napoletano is the Director of Communications & Content for InvestorLoft.com. As a former holder of multiple FINRA/SEC licenses such as the Series 7, 66 and 31 as well as being a former Registered Mortgage Agent, she possesses a deep knowledge of both investments and real estate. InvestorLoft.com ([http://www.investorloft.com]) is dedicated to providing the most relevant search results for the real estate investor on the web and offers the most comprehensive tool set available today. From smart, investment-centric property searches (search InvestorLoft listings by cap rate, cash flow, cash on cash return, down payment ad more) to the most in-depth, real-time financial calculators available online, InvestorLoft is committed to meeting the needs of the real estate investment community as well as the real estate professional.