Most people believe that their IRA can only be used to invest in the stock market. That’s certainly what mutual fund companies would like you to believe. However, the truth is you can roll over any IRA (401k, simple, traditional, Roth) into what’s known as a Self-Directed IRA (SDIRA) and invest in a whole range of investments, including real estate. If you want to avoid stock market volatility or simply diversify your investment dollars in a tax-sheltered environment, an SDIRA is a great option worth considering.
In order to set up an SDIRA, or roll an existing IRA you have into an SDIRA, you’ll need to hire a custodian who manages your assets, handles your transactions, and keeps records for the IRS. Real estate investing website Bigger Pockets keeps a running list of companies that can set up an SDIRA for you and provide custodial services.
There are strict rules surrounding SDIRAs along with steep penalties for violating these rules, so your custodian will help keep you out of trouble. Generally, you want to make sure income related to the SDIRA’s assets such as rental income from an investment property along with expenses from that property stay inside the SDIRA. Your SDIRA should not benefit family and relatives. You also want to make sure you’re only investing in assets that are allowed by the IRS. Fortunately, the IRS currently only prohibits SDIRAs from investing in insurance and collectibles. If you’re ever unsure about something related to your SDIRA, always check with your custodian.
SDIRAs are great options for real estate investors. You can buy properties with your IRA and earn income tax free! If you don’t want the hassle of trying to find and buy properties and manage tenants, you can lend funds to other investors and earn more passive income (also tax free!) Real estate investors can also use their SDIRA to invest in paper such as notes and tax lien certificates. There are numerous possibilities.