Most people's retirement plans today are typically invested in some form of securities or commodities plan that is managed by a third party plan administrator. The administrator decides how the retirement fund is invested, controls the make up and structure of the fund, and is responsible for the day to day decisions on how that retirement fund is managed. In other words, if you have a 401(K) your employer withholds money from your paycheck, and a third party decides how to invest it for your future retirement. While this might be an acceptable form of retirement planning for some, many people are realizing that declining stock values and increased inflation are leaving their retirement plans vulnerable and insufficiently diversified to counter economic fluctuations.
A Self Directed IRA allows you to take control of your IRA and manage it yourself, provided you follow the IRS rules for IRA's. Using a self directed IRA you can direct your IRA to buy real estate (or other investments) and the rental income along with the appreciation of the real estate will become part or your retirement plan. Income generated from the property will grow in your retirement account and receive the same tax treatment as your traditional IRA, consequently it is also subject to the same penalties for early withdrawal.
A Self Directed IRA is not for everyone and like any investment or tax decision, you should consult your CPA or Financial Adviser. However, do not be surprised if your CPA or Financial Planner is not familiar with the details and regulations of a Self Directed IRA. Self Directed IRA's have been in existence since the IRS first established the retirement planning code in the 1950's however many CPA's, financial planners and broker dealers, lack experience with this type of investment because the IRA assets must be held by a government appointed custodian and there is no compensation structured for them to benefit from setting up a self directed IRA. While this may be the case, it should not hinder you from pursuing this form of retirement planning. Remember, the business model for self directed IRA's does not lend itself for your CPA or Financial planner to profit from these types of transactions, therefore you may be required to pay a fee for their advisory services, however the up-side of a Self Directed IRA will give you greater control, diversity and growth from your IRA assets. Deciding whether this is the right choice for you or not, should be determined after reviewing the overall assets and strategies of your existing plan with a qualified advisor and comparing that to the investment benefits of the real estate you plan to buy through your retirement fund.
Your goal in establishing a self directed IRA should be to strike a balance with all of the investments held within your retirement plan and to spread your risk through diversification. Adding real estate to an existing portfolio of mutual funds, bonds and other securities can offset risks associated to volatility in the bond and stock markets.
As a real estate investment consultant I work together with CPA's, Attorney's and Financial Planners that can help you explore if a self directed IRA is the right thing for you. In my next publication, I will discuss the do's and don'ts of a self directed IRA and I will share examples of how a self directed IRA can help you grow your retirement.
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