Utilizing self-directed IRA’s to fund real estate investment deals is a great way to leverage other people’s money (OPM) to execute deals. Your private lender receives an above average rate of return and you can fund more investment property acquisitions; a great win-win all the way top Boca Raton architects.
I am not here to bash self-directed IRAs. They are a fantastic tool when used correctly. I utilize private lender self-directed IRAs routinely plus execute deals of my own in a self-directed IRA. However,Use Self-Directed IRA’s with Caution Articles I am here to voice a resounding word of caution. There are a lot of people out in the real estate world talking about the benefits of utilizing self-directed IRAs for private funding; that is great, but make sure you are receiving your information from reputable sources. Too many people are not providing the full story either because they don’t know or they are just being reckless. I am not sure which. This is not child’s play people!
The penalties for self-dealing or executing a prohibited transaction can be quite severe, including disqualification of the IRA status, early distribution penalties and punitive damages up to 100% taxation. Ouch! If you don’t know what the rules are concerning “self-dealing”, what a “prohibited transaction” is, or who is a “disqualified person”, you need to educate yourself. A great place to start understanding prohibited transactions is IRS publication 590. Here is an example. The IRS defines a prohibited transaction as follows:
“Generally a prohibited transaction is any improper use of your IRA account or annuity by you, your beneficiary or any disqualified person. Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of lineal descendant).”–Source IRS Publication 590.
Another great place to start learning about what is legal and what is not, is reading in the education sections of some of the major custodians for self-directed IRAs. Here is a short list of some of the major names that come to mind: Equity Trust Company – www.trustetc.com
Guidant Financial – www.guidantfinancial.com
Pensco Trust Company – www.penscotrust.com
The Entrust Group – www.theentrustgroup.com
My personal experience has been with The Equity Trust Company. However, there are multiple companies available that provide custodial services. The key factor I want to get across is that you need to educate yourself from reputable sources. Just because you hear someone talking about self-directed IRAs or read a blog post about self-directed IRAs (including this one) take the time to verify what is being said and the source it is coming from. You will be happy you did in the long run.
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