How Does A Self-Directed IRA Work?

Let’s discuss how a self-directed IRA can work, and especially one for real estate

The first step in investing with a self-directed IRA for real estate is choosing a provider. For the purposes of this discussion, a provider is an entity or group of entities that includes custodial and possibly administrative services.

Internal Revenue Service regulations require that a qualified trustee, or custodian, hold IRA assets on behalf of the IRA owner. The trustee/custodian provides custody of the assets, processes all transactions, maintains other records pertaining to them, files required IRS reports, issues client statements, helps clients understand the rules and regulations pertaining to certain prohibited transactions, and performs other administrative duties on behalf of the self-directed IRA owner.

Choosing right provider is key to how a self-directed IRA works

The choice of provider is probably the most important decision in the process because you want this to be a long-term relationship.

You want to be able to rely on your provider to complete your transactions efficiently and as seamlessly as possible. After all, real estate is complicated enough without having another hurdle to jump over.

You want the provider to ensure that you’re in compliance with all of the relevant IRA rules and regulations (especially since this is their primary function) and to report required data to the Internal Revenue Service regarding your account.

In choosing your provider, you’ll need to determine the level of services required, gain an understanding of what the provider’s transaction process is and inquire about the provider’s customer service as well as understand the fee structure.

Your real estate investment should be the driver to determine the level of service you’ll need. You want to keep in mind your real estate strategy, including purchase, holding period, any asset maintenance and exit strategy.

How does a self-directed IRA work?

Here are some important checklist items for you to consider:

• Who are you working with, and do you know the difference?
• Be sure you know how the fees work.
• Know how the timing works.
• Evaluate safety carefully.
• Understand what service you are getting.

How self-direction works

A self-directed retirement plan may be used to invest in a broad array of traditional and nontraditional assets.

The account holder is responsible for conducting all due diligence and research about the investment and provides all instructions to the account administrator to execute.

All income and expenses related to the investment flow in and out of the IRA. Because the IRS has very specific rules on self-dealing, always speak with your administrator/custodian about your investment plans.

In the case of purchasing real estate through a self-directed IRA, the purchase contract is negotiated in the name of the IRA. The contract is submitted to the administrator with instructions on where to send the executed contract and deposit funds. The administrator executes the contract and financial disbursements or deposits according to the investor’s instructions.

Here are some more tips:

• Account holders — not the custodians — make all their own investment decisions.
• Self-direction allows for a broad array of investments, both traditional and nontraditional, with a few restrictions.
• All types of retirement plans may be self-directed.
• The most popular type of alternative asset in these plans is real estate of all kinds.
• Self-directed plans enjoy the same tax advantages as regular plans.
• The administrator expedites transactions, holds the assets and manages all the paperwork.
• When researching account administrators, choose a firm that not only will manage your account professionally but will also answer your questions and provide guidance when needed to ensure you are in compliance with federal regulations.

Once you determine that rolling over your retirement account to a self-directed IRA is in your best interests, we can help. Investment Resource of AZ, LLC is your Arizona rollover specialist. Our team has successfully rolled over more than $40 million in IRA funds for clients, educating them, streamlining the process and supervising each step of the way for them. Call us at 602-885-6122 or email evelyn@azirarealestate.com.