Saving for retirement is more than just accumulating wealth. You have to understand how to generate regular monthly income and, more importantly, how to minimize the scythe of the taxman. For years, investors have used individual retirement accounts (IRAs) to build wealth in tax-advantaged accounts. More recently, investors have discovered self-directed IRAs (SDIRAs) as a way to use IRAs to invest in assets other than traditional stocks and bonds.
With an SDIRA, investors can put their retirement funds to work with assets they know and understand. For example, you can buy real estate in your IRA and enjoy the tax protection of such accounts as you build your retirement nest egg. While opening and managing an SDIRA is more complicated than your standard IRA accounts (tradition or Roth), there are many advantages for the right investor.
All SDIRAs are opened under a plan administrator that will allow you to use your IRA funds to buy real estate. Some administrators may encourage you to buy their own investments, but you will want to select an administrator who has a track record of simply managing the paperwork for your own.
Your new account will be funded with money from your existing IRA accounts. You roll this money into the new SDIRA and then you can start making your purchases. If you do not have enough existing funds, you can consider setting up a self-employed retirement account as a Roth-type account. It will take time to build up funds for property investment, but once you start buying real estate in a Roth account, all the assets in the account will be totally tax-free when you retire.
There are some restrictions on the type of real estate investments you can make. You cannot buy or rent property to or for yourself, your business, family members, and other extended restrictions. Failure to abide the rules results in tax liability and penalties on your investments. The best approach is to find property with a reliable long-term tenant.
Like most financial vehicles, there are other nuances that affect the appropriateness of the investment for a specific person. The first step is to develop an understanding of how the SDIRA works and then deciding how it can work to improve your own financial situation. If handled correctly, the SDIRA offers a great way for individuals to diversity their assets and enjoy all the tax advantages they deserve in retirement.