Florida Realtor August 2015 : Page 24

BUILD YOUR WEALTH Use a self-directed IRA to invest in properties. BY JOHN JAMIESON Self-Directed IRAs W hen it comes to retirement planning, most real estate professionals turn to the trusted 401(k)s and individual retirement arrange-ments (IRAs). Another option is a self-directed IRA (SDIRA). Once you understand this very specific type of account, with the help of a financial advisor and accoun-tant, you can create wealth for your own investment portfolio. What is a self-directed IRA? This type of investment is a qualified account that is ap-proved by the IRS to make nontraditional investments, such as those in real estate. The investment (in this ex-ample, real estate) is owned by the IRA for the benefit of the account owner, and it has all the tax benefits of a standard IRA. The taxation of your investments will depend on the type of IRA account you choose. You may choose to roll over a current traditional, Roth and Simple IRA to a self-directed IRA, or you may use new funds to set up this type of account without taxes or penalties. If you set up the SDIRA as a traditional IRA, the mon-ey you invest will grow tax deferred until you start with-drawing funds. If you set up the SDIRA as a Roth IRA, you’ll pay taxes on the money you invest, but the Roth money will be tax free upon withdrawal. (continued on pg. 26) 24 FLORIDA REALTOR August 2015

Build Your Wealth

John Jamieson

Use a self-directed IRA to invest in properties.

When it comes to retirement planning, most real estate professionals turn to the trusted 401(k)s and individual retirement arrangements (IRAs). Another option is a self-directed IRA (SDIRA). Once you understand this very specific type of account, with the help of a financial advisor and accountant, you can create wealth for your own investment portfolio.

What is a self-directed IRA?

This type of investment is a qualified account that is approved by the IRS to make nontraditional investments, such as those in real estate. The investment (in this example, real estate) is owned by the IRA for the benefit of the account owner, and it has all the tax benefits of a standard IRA. The taxation of your investments will depend on the type of IRA account you choose.

You may choose to roll over a current traditional, Roth and Simple IRA to a self-directed IRA, or you may use new funds to set up this type of account without taxes or penalties.

If you set up the SDIRA as a traditional IRA, the money you invest will grow tax deferred until you start withdrawing funds. If you set up the SDIRA as a Roth IRA, you’ll pay taxes on the money you invest, but the Roth money will be tax free upon withdrawal.

A sample IRA transaction

Let’s say you run across a $100,000 fairmarket- value home that you can buy for $70,000 because it needs about $10,000 in repairs. The home will lease for $900 a month and should net $600 after taxes, insurance, management and deferred maintenance. You buy the property using your self-directed Roth IRA account. The Roth invests the $70,000 and normal closing costs on your behalf and also invests the $10,000 in repairs. When the property begins to lease, the payments will be sent directly to your Roth account. Any expenses will be paid out of your Roth, and net rental income will not be taxable.

In this example, let’s assume that you hold the property for five years and net $32,000 in rental income, taking into account some vacancies and extra repairs. You then sell the property for $125,000, netting $120,000 after expenses. If your cost basis (the purchase price plus closing costs and repairs) is $85,000, you would realize a $35,000 capital gain from the sale, plus the $32,000 in net rental income for a total profit of $67,000 in five years. That flows back to your Roth IRA, meaning that all profits are tax free!

Here are some examples of other investments that your self-directed IRA is allowed to make on your behalf:



Property flips



Private loans to other investors with above-market interest rates



Real estate options (not stock options)



Oil well leases and other energy investments



Mobile home parks and mobile homes



New construction


Lease options

Due diligence

While self-directed IRAs can be useful, you would be wise to do your due diligence and enlist the help of a tax professional before making an investment or opening an account.

According to Warren L. Baker, a tax and estate attorney with Fairview Law Group, PS, in Seattle, “Without a doubt, there are significant tax-compliance problems within this marketplace. Unfortunately, these pitfalls can result in the complete invalidation of the SDIRA due to a prohibited transaction and/or current tax consequences within the SDIRA itself.”

Last year, the North American Securities Administrators Association (NASAA), an international organization devoted to investor protection, issued an advisory that warns investors to choose a third-party custodian carefully. “While self-directed IRAs can be a safe way to invest retirement funds, investors should understand that third-party custodians have limited duties to investors,” said William Beatty, president of the association.

“Fraud promoters can misrepresent the responsibilities of self-directed IRA custodians to deceive investors into believing that their investments are legitimate or protected against losses,” he said. “The third-party custodian’s sole responsibility is to report information to the IRS and from the issuer to the investor.”

When properly used, a SIDRA can help real estate professionals invest in solid property deals. This account frees up cash that many people mistakenly believe can be invested only in the stock market. With proper planning and advice from tax and financial professionals, you can invest in a product you’re confident about for a successful retirement.

John Jamieson is the owner of Real Estate Agents Build Wealth and Perpetual Wealth Systems (realestateagentsbuildwealth.com), showing real estate professionals how to grow and protect wealth. He is also the author of the book “The Perpetual Wealth System.”

Ways to Avoid Fraud with Self-Directed IRAs

The U.S. Securities and Exchange Commission (SEC), Office of Investor Education and Advocacy (OIEA) and the North American Securities Administrators Association (NASAA) recently issued an investor alert (sec.gov/investor/ alerts/sdira.pdf) to warn investors of the potential risks associated with investing through self-directed Individual Retirement Arrangements (selfdirected IRAs, or SDIRAs). NASAA has noted a recent increase in reports of or complaints about fraudulent investment schemes that use a self-directed IRA as a key feature.

Here are some tips for avoiding fraud:



Verify information in self-directed IRA account statements. Alternative investments may be illiquid and difficult to value. As a result, SDIRA custodians often list the value of the investment as the original purchase price, the original purchase price plus returns reported by the promoter or a price provided by the promoter. Investors should be aware that none of these valuations necessarily reflects the price at which the investment could be sold, if at all.



Avoid unsolicited investment offers. Investors should be wary of an unsolicited investment offer that promotes the use of a self-directed IRA. Fraud promoters may attempt to lure investors into transferring money from traditional IRAs and other retirement accounts into new self-directed IRAs in order to participate in the fraud promoter’s scheme.



Ask questions. Always ask if the person offering the investment is licensed and if the investment is registered, and then check out the answers with an unbiased source, such as the SEC (sec.gov) or your state securities regulator (nasaa.org).



Be mindful of guaranteed returns. Every investment carries some degree of risk, and the level of risk typically correlates with the return an investor can expect to receive. Low risk generally means low yields, and high yields typically involve higher risk. Fraud promoters often try to persuade investors that extremely high returns are guaranteed. Don’t believe it. High returns represent potential rewards for investors who are willing and financially able to take big risks.


Ask a professional. For complex investment opportunities, particularly those that involve the opening or creation of a new account outside a traditional financial institution or well-recognized broker, investors should consider getting a second opinion from a licensed, unbiased investment professional or an attorney.

For more information, call the SEC’s investor assistance number at (800) 732-0330 or visit its website at investor.gov.

How to Set Up a Self-Directed IRA

• Locate an Internal Revenue Service–approved company to act as the account’s custodian. Two such companies are Equity Trust Co. And The Entrust Group. While no official list of these approved companies is available, you can get other information at irs.gov/Retirement-Plans and at investor.gov.

• Open and deposit funds into the account.

• Choose investment opportunities, making sure they fit the IRS’s definition of eligible properties.

• Submit required documents (purchase agreements, addendums and direction of investment forms provided by the custodian) to the custodian with closing instructions, and then work with the custodian to get the property closed and funded.

Plan Today for an Easier Tomorrow

According to a recently released household survey conducted by the Board of Governors of the Federal Reserve System, as of 2013, approximately 31 percent of Americans reported having zero retirement savings and lacking a defined-benefit pension. While that number includes all Americans, not just real estate professionals, it’s still troubling.

Here are some steps you should take immediately if you want to be one of the few truly wealthy agents or brokers and not just get a nice sales plaque every year:



Write down every expense in your life, with one category for personal expenses and one for business expenses. The easiest, most accurate way to do this is to print out, for the last two months, your bank statements from every account and any credit card statements. Categorize each expense as personal or business, and move it to the appropriate category. Doing this helps you determine what can be deducted for business expenses and gives you a clear picture of your cash flow. Check a minimum of two months’ expenses (four would be better) to overcome the odd months when you spend more or less than normal.



Total these two main categories; this figure becomes your monthly breakeven point if you just want to pay your bills. Analyze where your money is going, and ask yourself whether you could reduce the nonessential expenses and shop for better deals on the essential bills.



Determine whether you are paying your bills with your cash or with money borrowed from credit cards to keep afloat. If it’s the latter, get your budget balanced and stop using your credit cards to make yourself seem successful.


Immediately invest the amount you end up saving in a retirement account.

Read the full article at http://browndigital.bpc.com/article/Build+Your+Wealth/2223813/266297/article.html.

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