Learn How Partnering With Your Retirement Account Can Boost Your Real Estate Investments
Checking on the performance of your retirement account can be an agonizing affair nowadays - especially if you’re primarily invested in the stock market. Investing in a fluctuating asset class or correlated asset classes can be a risky strategy when it comes to securing long-term wealth.
Your retirement is too important to be tied to something as volatile as the stock market. A well-diversified portfolio should include income-producing assets. This can bring you peace of mind, both now and during your golden years.
By using the power of a self-directed IRA (SD-IRA), you can get creative with your investments, diversify, fight inflation, outpace wage stagnation, and set yourself up for a wealthy retirement.
Utilizing A Self-Directed IRA To Invest In Real Estate
Traditional financial advice typically includes an investment strategy focused on stocks, bonds, mutual funds, ETFs, CDs, etc. While these assets can certainly have a place in your overall retirement strategy, there is an exciting opportunity for more diversification through an SD-IRA.
These accounts can provide you with the opportunity to invest in a broader range of assets such as real estate, private equity, capital ventures, or other alternative assets - all while using pre-tax dollars. The tax advantages of this are significant.
Moving away from the traditional investments you’re likely familiar with can open up a new world of investing where you’re in the driver’s seat. You can choose your investments and ensure you’re invested in assets that aren’t affected by one another - making your portfolio more resilient against economic fluctuations.
Not everything is up for grabs in your SD-IRA. There are certain rules that need to be followed to avoid making prohibited transactions. Forbidden assets include S-Corporations, life insurance, certain collectibles, etc. You also cannot engage with any disqualified persons such as yourself (self-dealing), your spouse, descendants, fiduciaries of the IRA, etc. And in the case of real estate investing, you cannot perform physical labor on the property known as sweat equity.
Overall, investing in real estate is a fantastic option for your SD-IRA. You can choose to invest with the intention of flipping the property to earn a quick profit, buy and hold for rental income, crowdfund, etc. Real estate investing includes both passive and active opportunities - it’s entirely possible to invest in real estate without ever dealing with a burst pipe.
If you want to explore the opportunities of real estate investing within an SD-IRA, but don’t want to start from scratch to raise the capital, partnering could be a great solution for you.
What Is IRA Partnering?
You’re likely aware that you cannot use the money sitting in your 401(k) or IRA right now without paying significant penalties and fees. But what if you used the money in a different way - say using it for a down payment on a real estate investment?
Partnering refers to pooling money to fund an SD-IRA. You can pool from your own accounts including Traditional and Roth IRAs, Traditional and Roth 401(k)s, SEP-IRAs, Simple IRAs, Defined Benefit Plans, Defined Contribution Plans, personal funds, and more!
You can also partner with other people’s accounts - such as your spouse or business partner.
Using retirement dollars to pool the necessary capital can significantly boost your real estate investment. You could potentially pool enough capital to buy a property outright or leverage debt with a non-recourse loan and put down the minimum amount on multiple properties.
Considerations for IRA Partnering
There are certain regulations that need to be adhered to in order for IRA partnering to be successful.
Individually-Owned Accounts
While the term “money pooling” makes it seem like all the cash is being put into one account - that’s not exactly how it works. SD-IRAs are individually owned and the capital within them is segregated - whether you’re partnering with your own accounts or other people’s.
This also means that any returns (whether income or sale proceeds) are divided proportionally back into separate accounts based on how much capital was originally invested. It’s also important to note that any non-IRA funding will be subject to taxes.
New Transactions
As we mentioned earlier, you cannot do business with yourself within your SD-IRA, nor engage with disqualified persons. However, there is a special exception when purchasing a real estate investment property for the first time. This is considered a new transaction and the IRS allows you to partner with whomever you’d like.
You cannot bring on a new partner down the road on the same property - neither a person nor your own IRA/401(k) because the property is no longer considered a new transaction.
But if you acquire a new property, this would be considered a different new transaction with partnering privileges.
Keep A Distance
The purpose of an SD-IRA is to benefit your future self in retirement. You cannot gain any benefit to the purchased property right now (except the satisfaction of knowing you’ve invested well).
You (and any disqualified persons) cannot live on the property or physically manage the property. The property is not held in your name, but instead in the name of your custodian on behalf of your SD-IRA. Any proceeds or income produced by the property flows back into the IRA, not your personal account.
5 Steps to Partner With Your IRA or 401(k)
Getting started with an SD-IRA and securing a real estate investment is quite simple. These steps will walk you through the process.
Choose a custodian and open an SD-IRA account. At Chicago Trust Administrative Services, we partner with you to make your investment deals simple, fast, and compliant.
We also help you avoid prohibited transactions, determine disqualified persons, and offer any guidance and support you need to be above board and compliant with the IRS.
Determine the partnership. Decide which accounts you want to partner with - either your own accounts or someone else's and how much each account will contribute to the property purchase.
Fund your SD-IRA. This step can sometimes be a bit time-consuming. The time it takes to transfer IRA/401k assets from your current administrator can take about two weeks, but in some circumstances, it can take up to 30 days.
At CTAS, we only transfer cash, so the timeline ultimately depends on the liquidity of the transferred funds. Once we receive the funds, we’ll be ready to make the investment on behalf of your SD-IRA by the next business day.
Find A Property and Make an Offer. This process is quite similar to any other property purchase.
Help Secure Your Future: While this method will not produce a cash flow for you now because the proceeds have to flow back into the IRA, you will get to enjoy the benefits of your real estate investment in retirement.
Get Started With Chicago Trust Administration Services
As a whole, our nation is living longer lives thanks to incredible technology and medicine. And while we can be grateful for the opportunity to live for many years, we need to start rethinking our retirement strategies.
While our traditional go-to methods may not be adequate enough, alternative assets can help us overcome the financial gaps that are being created. Investing in real estate can be a game changer when it comes to living a life of wealth and security.
We’re excited to show you the different ways you can get started with money you already have sitting in your various accounts. To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.