When you put “real estate” and “IRA” in a single topic, the self-directed IRA usually comes to view. An alternative to the venerable 401(k), a self-directed IRA entitles the holder to any investment tax-free until retirement. Although it’s unclear how many Americans use this special kind of IRA, the Securities and Exchange Commission last year estimated two percent of all IRAs. The fact that companies have reported growth over the years from these IRAs means the number is steadily rising.
While it may sound like a promising deal, it usually is if you take note of the restrictions behind it. Under the Employee Retirement Income Securities Act of 1974, a self-directed IRA cannot be applicable to certain situations such as paying for a relative’s down payment. More importantly, if you or your family benefits from the real estate you bought with a self-directed IRA financially, there’s a ten-percent tax penalty waiting for you. In addition, any repair job must be funded using the IRA.
Any deal isn’t without its ups and downs, but many have benefited from self-directed IRAs. Some who moved from other types of IRAs such as Roth IRA claimed that they’ve earned double digits since the switch. Nevertheless, being new to a self-directed IRA is like being new to work or school; without any awareness of the rules, it will be difficult to fit in. A self-directed IRA, when used properly, can be a great help in the long run.