What Is a Self-Directed IRA?
The term “self-directed” means that alternative investments are accepted or offered by the IRA custodian. An IRA custodian is the financial institution responsible for record keeping and IRS reporting requirements. The “self” directed aspect kicks in each year since you must accurately value your investment annually and report the value to your IRA custodian.
How They May Be Used to Buy Real Estate
The first steps when using an IRA is to set up a Self-Directed IRA. Several reputable companies provide individual investors with the ability to set up self-directed retirement accounts. Due to the complex nature of Self-Directed IRAs, it is helpful to have a custodian that will help provide some much-needed guidance as you travel through the murky and confusing waters of the IRS tax code.
Some IRA custodians have more complicated fee structures than others. Therefore, it is important to do your homework and examine all of the potential fees and expenses that will impact the overall return on your investment. In many cases, it is advisable also to establish a limited liability company (LLC) or other entity to hold the investment assets.
With Self-Directed IRAs, you must generate sufficient cash flow that will cover all maintenance and repair costs without the need for you to add cash each year.