Individual retirement accounts that feature self-directed real estate purchases have become more understood in recent years, and consumers now a have speedier avenue to time-sensitive investments.
Many providers of self-directed real estate IRAs now can set up a limited liability company (LLC) that allows consumers to write their own checks for property investments — including foreclosures and recreational properties — without waiting for a custodian to process paperwork or courier documents.
“The costs for setting up an IRA with checkbook control can be considerably more than a standard IRA, but the IRA holder doesn’t pay additional transactional, special asset-based or holding fees,” said David Nilssen, president and CEO of Bellevue, Wash.-based Guidant Financial Group.
For example, a real estate IRA worth $100,000 would cost the holder about 1 percent a year — or $1,000 — in maintenance fees. These fees are usually billed in quarterly payments of $250. The transaction costs of acquiring other assets are additional.
A checkbook control plan would cost approximately $3,500 in setup fees, mostly due to the time and effort involved in drawing up the LLC. However, once the documents are in place, the IRA holder typically faces yearly expenses of less than $150. There are no costs for acquiring new assets because the IRA holder essentially acts as his or her own custodian.
“If you hold a $100,000 asset for 10 or 15 years, the annual maintenance fees can really begin to mount,” Nilssen said. “And, the asset is probably going to appreciate, meaning the IRA holder would have to pay more because the annual fee is calculated on the value of the asset.”
In addition, the ability to purchase real estate immediately — for example, at a trustee’s sale or at a recreational property auction — allows IRA holders with checkbook control to compete with other investors who have liquid cash on hand.
Consumers can invest self-directed IRA money in a wide range of investments, including stocks, bonds, mutual funds, money market funds, saving certificates, U.S. Treasury securities, promissory notes secured by mortgages or deeds of trust, limited partnerships and real estate. This includes single-family homes, timber parcels, gorgeous getaway condos and office properties. And, IRA funds can be the answer for an investor who sees a bargain property and is confident it will appreciate yet has no other available cash to purchase it.
Self-directed IRAs are not only relatively easy to establish but they are also not subject to some of the rules that apply to employee-sponsored qualified plans that are enforced by the Department of Labor. The bank, as account holder, has an obligation of investigating each investment to be considered. This personal due diligence is a substitute for the rules that govern some employee-sponsored qualified plans.
You cannot have your IRA “enable” an investment for yourself or another disqualified person (family member). In other words, if the IRA’s investment is deemed essential to accomplishing a transaction in which both you and your IRA invest, then the transaction would be considered a prohibited transaction. For example, you cannot use IRA money to buy your own residence or any other property in which you live. The purchase must be investment property.
Your IRA cannot purchase a real estate asset and then have a disqualified person use it while it is in the IRA. For example, you cannot buy a vacation home and use it partly for personal use, even though you might rent it to unrelated persons the rest of the year.
To prepare for your real estate IRA, designate the amount of your retirement funds that you wish to use in the property deal and open a new IRA account with an independent administrator. The best place to start is an independent community bank. However, many banks will not service real estate IRAs (some will say “never heard of it”) because it must act as owner — i.e., pay the taxes and collect servicing fees, which is paperwork that many lenders don’t want or need.
For companies specializing in real estate IRAs, visit Lincoln Trust; CNA Trust; American Church Trust; PENSCO Trust; Sterling Trust; Entrust Administration; Mid Ohio Securities; Quantum Advisors; or Oarlock Investment Services.
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