If you are now retired or close to it, you remember what happened in 2008 — the Great Recession — when the stock market crashed. The S&P 500 Index lost 56.4% by 2009, which translated into corresponding losses in people’s IRA and 401K retirement plans.
The horrible joke about the Great Recession was that it turned Americans’ 401Ks into 201Ks. I experienced this first hand when the value of my 401K decreased by more than $300,000 due to the crash.
At the time, it was not preventable because you were only allowed to invest in the stock market with your traditional 401K and IRA accounts. However, if you have retired or have a retirement account from a past employer, you can rollover money that is in your traditional 401K or IRA into a Self-Directed IRA (SDIRA) and gain checkbook control over your funds.
You may wonder why you have never heard of a SDIRA, even though they have been allowed starting back in 1975. The reason is because Wall Street and most financial professionals do not benefit from it so they don’t advertise it. They want your money locked in the stock market so they can collect fees and commissions.
But with money in an SDIRA, you can take money out of the stock market and invest in other qualified assets, including real estate!
What Exactly Is a Self-Directed IRA?
Self-directed IRAs (SDIRA) give owners complete control over their retirement funds and investing decisions.
These plans can use alternative investments, like real estate, to create diversity and build retirement wealth.
The power of SDIRAs compared to traditional IRAs or 401Ks:
- SDIRA investments are not limited to stocks, bonds, and mutual funds.
- SDIRA can invest in many alternative assets not available in traditional brokerage IRA accounts.
- Account owners—not advisors, brokers, or plan custodians—choose their own investments they personally know and understand.
- You have checkbook control over your retirement funds. Whenever you need to fund qualified investments, you write a check or initiate a wire transfer.
Why Should You Self-Direct Your IRA or 401K?
Additional investment capital: You won’t miss that next hot investment because you don’t have the personal funds to invest. Put your retirement plan funds to work to invest in real estate and earn tax advantaged income for your golden years.
Control of your retirement funds and decisions: When you invest in things you personally know and understand, you increase your odds of success. Self-direction allows you to call the shots instead of relying on someone else to make decisions for you.
Alternative investments create critical diversity: Self-direction presents the opportunity to step off Wall Street. You can invest in multifamily apartments to grow income and avoid the volatility of the stock market.
Tax-free or tax-deferred growth: Income generated by assets in your plan, including capital gains, flows into your SDIRA on a tax-sheltered or tax reduced basis. This allows you to build your wealth faster and provides you more funds to reinvest.
What is a Retirement Account Rollover?
Rollover your funds from a former employer’s IRA or 401K plan to a self-directed account with no tax liability or penalty. Then you’re ready to invest.
A rollover is when you move funds in a prior employer sponsored traditional IRA or 401K to a SDIRA.
With a rollover, you can preserve the tax-deferred status of your retirement assets without paying current taxes or early withdrawal penalties at the time of transfer.
Can You Combine Retirement Funds?
Yes. You can combine funds from traditional IRAs and 401Ks by rolling them all to a single SDIRA account. So if you have accumulated several IRA and 401K retirement accounts from past employers over the years, you can consolidate them into one SDIRA.
However if you have a Roth IRA it must be rolled to a SD Roth IRA. Since Roth IRA is tax-free you do not want to combine it with tax-deferred SDIRA funds.
What are the Tax Benefits?
SDIRAs typically offer the same tax-deferred benefits as traditional IRA or 401K. However, some income generated from investments could generate a limited amount of tax due to Unrelated Business Income Tax (UBIT).
Self-Directed Roth IRA accounts offer tax-free income and capital gains if withdrawals take place after retirement age.
Please consult your CPA or tax advisor.
How Do You Establish Your SDIRA?
Before making any kind of self-directed investment you must first open an account with a provider and fund it to get started. If you are rolling over funds from another custodian, it typically takes up to four weeks to complete, so plan accordingly.
We will refer you to knowledgeable self-directed providers as it’s critically important to work with an experienced and knowledgeable administrator. They will walk you through the process of setting up your SDIRA.
Many of these investments have complexities, and it’s essential to have an experienced self-directed administrator who understands all of the rules.
After you have your SDIRA created and moved money into it…the fun begins! We will provide you with exclusive apartment investment opportunities for you to invest in. Just join the Investor Circle to get started.
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