Welcome back to our third and final blog in our Self-Directed IRA series! Now that you know what an IRA is, the benefits to having one, all the rules and regulations and about custodians, let’s talk about how a Self-Directed IRA actually works. We’ll also share with you how BMG Rentals Property Management serves Self-Directed IRA clients and discuss which IRA is best for you!
In seven simple steps, this is how a Self-Directed IRA works with real estate:
1. Establish and Fund an account with your custodian. Some banks and accountants offer this service, or there are companies that specialize in serving as the custodian for Self-Directed IRAs that can be found online, or feel free to ask your BMG property manager for others.
2. Identify the property you would like to purchase for your IRA Investment
3. Ensure Correct Title of Your IRA Investment. You and your IRA are two separate things, and as such, the investment needs to be titled in the name of your IRA and not you personally. The correct title for most real estate IRA investments is: “Name of Custodian” FBO (for benefit of) YOUR NAME IRA. A good custodian will help with this.
4. Request Funds to Purchase the property for your IRA Investment. Whenever funds are required to purchase an investment with your Self-Directed IRA, you must instruct your custodian to do so on behalf of your IRA with the correct investment form.
5. Custodian Remits Funds and Retains Records. Your custodian will process the form(s) and will send funds for the investment based on the specifications. Once the transaction is complete, all records pertaining to the investment should be sent to your custodian for safe keeping. BMG sets up your custodian as the payee and sends statements to you and your custodian.
6. Maintain Your IRA Investment (How Income and Expenses Flow). BMG knows that all payments/profits related to investment in your Self-Directed IRA must be made out to your IRA. The payments/profits must also return to your IRA account. In addition, all expenses related to your investment must be paid from your Self-Directed IRA. All of the property income and expenses are tracked by BMG and reported to you and your custodian. The income from your investment goes back to your IRA and grows Tax Free!
7. Sell Your IRA Investment. Fill out a “sell investment form” to instruct your custodian to sell the investment on behalf of your IRA. Funds from the sale are then returned to your Self-Directed IRA—tax-free!
While this process seems simple to do, remember that you need to stay arm’s length away when handling your Self-Directed IRA. With a good custodian and BMG Rentals Property Management, you still have control over your investments and can work with professionals to increase your tax free returns.
Some BMG clients are seeing great success in building their retirement accounts through a Self-Directed IRA.
We have clients who are moving their retirement funds into a Self-Directed IRA. The monthly rental income goes into their IRA account and their principal investment grows with the real estate they purchased. The income does not count against the maximum contribution limits. You are still able to contribute on top of the income it produces. Upon retirement they will have regular monthly income while their principal investment is growing in their real estate holdings.
There are multiple different kinds of IRAs to choose from. When choosing your IRA be sure to research the rules, regulations and contribution amounts carefully. The most common Self-Directed IRA types are Traditional IRAs and Roth IRAs and hopefully you’ll be able to clearly see which one is better for your circumstances. It is best to discuss this with your accountant.
|At A Glance||Traditional IRA||Roth IRA|
|A government savings plan that offers tax advantages for individuals to set aside money to retire. Contributions are made with pre-tax earnings.||A government savings plan that offers tax advantages for individuals to set aside money to retire. Contributions are made with after-tax earnings.|
|Account balances compound tax-deferred until funds are taken out.||Account balances compound tax-deferred but funds that are taken out are tax-free if account is five years old and account owner is over 59½.|
|100% of earned income, up to $5,000. Plus an additional $1,000, if age 50+. Total of $10,000 for married couples. (Contribution limits are reduced by any contributions made to a Roth IRA.)||100% of earned income, up to $5,000. Plus an additional $1,000, if age 50+. Total of $10,000 for married couples. (Contribution limits are reduced by any contributions to a Traditional IRA.)|
|Individuals must be under 70½ years old and have earned income.||Individuals must have earned income and adjusted gross income less than $125,000 for singles and $183,000 for married couples.|
|Tax Deductions on Contributions|
|Penalties For Early Withdrawal|
|There is a 10% penalty for withdrawals before age 59½.||There is a 10% penalty for withdrawals before 59½. (Note: Roth contributions can be taken out at any time without penalty.)|
|Exceptions for 10% Penalty|
|Maximum age to Begin Contributions|
|70 ½||No Limit|
|Yes. Minimum withdrawals begin after the age of 70½.||No|
Well, there you have it; everything you need to know about Self-Directed IRAs! Remember when choosing and IRA, a Custodian, an Investment type, or anything else, be sure to do your research. If you have questions or comments, leave a note below and we’ll do our best to respond quickly. Make sure you subscribe to our Newsletter too so you don’t miss out on valuable information.