Summer 2020 is officially here and, if you’re like me, you’re planning on taking a vacation very soon, but before you hit the road, or board a plane to your vacation destination, there are some updates that you need to know if you have a Self-Directed IRA, or if you’re thinking about starting one.
In this blog post, I will share with you the latest updates regarding self-directed IRAs, taxes, 401K’s and provide you with tips that you can use a self-directed IRA for purchasing multifamily real estate.
Self Directed IRA 2019 Contributions Are still Open
Yes, it’s true, even though July 2020 is right around the corner, 2019 contributions are still open but the deadline is July 15th for you to make those contributions to your IRA.
Even if you don’t have a self-directed IRA open, there’s still time for you to open one and make those 2019 contributions before the deadline so if you’ve been “sitting on the fence” waiting to open a SDIRA. or make your contributions, now is the right time to get it done before we reach the deadline.
The contribution limit for 2019 is now $6,000 per year for both Traditional and Roth IRAs, up from $5,500 for 2018. Catch up contributions will remain $1,000, so if you are over 50 you can contribute up to $7,000 a year.
Traditional IRAs allow for tax-deductions upfront with deferred taxes— meaning you don’t pay taxes until the money comes out of the account. But the IRS wants those taxes eventually, so you’ll need to start taking yearly Required Minimum Distributions (RMDs) once you turn 70 ½, where you’ll be required to pay taxes on that distribution as ordinary income.
Roth IRAs are post-tax, meaning you’ve already paid taxes on the money before you contributed to your IRA. Since you’ve already paid taxes on these funds, Roth IRAs don’t owe taxes when distributing funds, and aren’t required to take RMDs. Your investment gains are in a post-tax environment. ( Source )
There’s no denying that 2020 will be remembered as one of the toughest years on record for just about everyone, including investors. The good news though is that the tax deadline was extended from April 15th to July 15th, 2020, giving investors more time to get on track financially following Covid-19.
If you didn’t pay your 2019 personal taxes back in April, you have about two weeks left to get them filed or you can click here to apply for an extension which will give you until October 15th to file your taxes.
Benefits Of Having A Self-Directed IRA
The most obvious benefit of having a self-directed IRA is that you can use it to purchase multifamily properties, I outlined this in detail in one of my previous blog posts, you can read it by clicking here.
Some of the other benefits that you will enjoy from having a self-directed IRA include the following:
Increased Return On Investment Potential
With a self-directed IRA, you have a ton of Freedom including the fact that you can invest in what are classified as “alternative investments”. This means that besides real estate, you can invest in promissory notes and cryptocurrencies, allowing you to diversify your investment portfolio.
You Can Take Control Over Your Financial Future
By investing in a self-directed IRA, you can take control over your financial future since the name “self-directed” means that you can specify where you want to be invested.
Before choosing the investments that you want to make with your self-directed IRA, it’s best to consult with a trusted accountant or real estate IRA profession just so you can have confidence that you’re choosing the very best investments.
Protects Your Economic Portfolio Against Fluctuation
There’s no denying that the stock market has been volatile in the last six months and this isn’t expected to end any time soon. Thankfully, with a self-directed IRA, you can protect your net worth from economic fluctuation by diversifying into multifamily real estate and other alternative assets.
Diversification is the key to success as a multifamily real estate investor and by having “healthy diversification”, you can capitalize on the best investment opportunities today while protecting your net worth from fluctuation in any investment market.
Besides having the opportunity to diversify your investments, you also have the ability with an SDIRA to enjoy the tax-deferred income.
Example: Let’s say that you earn an annual income of $40,000 from one or more of your multifamily investment properties since these properties are owned by the self-directed IRA, that income will go back into the IRA and enjoy tax-deferred status.
Yes, you’re going to have to eventually pay taxes on the money that you’ve deferred but the reality is that some investors can defer the taxes that they have to pay for years.
What Are The Risks That Come From Investing In Multifamily With A Self-Directed IRA?
No doubt having a self-directed IRA is potentially one of the best investment vehicles for building wealth but it can also come with some risks including the following.
As with any investment that you may make over time, there’s always going to be potential as an investor for you to be scammed by a fraudulent investment, or Ponzi style scheme because self-directed IRA’s are ideal to some scammers because of the amount of money that they can hold.
Some of the tips that you should follow before investing in anything with your self-directed IRA include the following:
- Never take an unsolicited investment offer.
- Always ask plenty of questions and be wary of people who are hesitant about answering the questions that you have.
- Avoid investment opportunities that promise guaranteed returns because if an investment sounds too good to be true, it most likely is.
- If you’re ever in doubt about a potential investment, don’t hesitate to ask for professional help.
Not Diversifying Your Real Estate Investments
As you know, diversification is one of the keys to success as an investor, the same is true when you’re investing in multifamily real estate using your self-directed IRA.
You want to make sure that you’re diversifying in different types of multifamily properties nationwide instead of investing in one type of multifamily property in one city or state because you’ve identified that area as the next “big” hot spot for upside potential in the United States.
Lack Of Due Diligence
Another risk that you want to avoid as a multifamily real estate investor is not doing your due diligence before using your SDIRA to invest.
Due diligence is an essential part of being an investor and when you use the money in your SDIRA to invest in multifamily, you must have the property thoroughly inspected, review the rent rolls, research market trends and review the potential for future growth in the area before you use for your self-directed IRA to invest.
Rules For Investing In Real Estate With A Self-Directed IRA
If you’re planning on getting started with purchasing multifamily properties with your self-directed IRA, there are a variety of rules that you must follow so that you can avoid penalties with the IRS.
Rule #1 – You Can’t Purchase A Property From Yourself Using Your SDIRA
The first rule that you must follow when you have a self-directed IRA is that you cannot use the SDIRA to purchase the property from yourself since you are classified as a “disqualified person”.
Rule #2 – No Indirect Benefits
Another rule that you must follow is that you cannot enjoy indirect benefits when you have a self-directed IRA.
Example: You can’t use one of the units of your multifamily property as a vacation home for two weeks every year.
Rule #3 – The Property Must Have A Unique Title
Since your SDIRA, and you, are separate entities, the title of the multifamily property that you purchase with your self-directed IRA must be in the name of your SDIRA account instead of being in your name.
Rule #3 – You Must Pay Expenses From The SDIRA
If you plan on updating the multifamily property that you purchase with your SDIRA, or taking care of routine maintenance, all expenses must be paid directly from the IRA.
Besides maintenance, these expenses can also include utility bills, property taxes, and renovations as well.
Rule #4 – Income That’s Generated From The Multifamily Property Must Be Returned To The SDIRA
Last of all, another important rule to follow is any income that’s generated from the multifamily property which is owned by the self-directed IRA must be returned, or paid directly to your self-directed IRA.
Contact Trier Capital
Are you ready to invest in multifamily properties but you don’t want to do everything yourself? The solution to this problem is to partner with Trier Financial.
At Trier Capital, we are a private equity firm that makes it easy for you to passively invest in lucrative apartment building syndications.
Finally, you can invest in tax-advantaged real estate without having to deal with the nuance or complication of purchasing and managing a property yourself.
With our simple step-by-step process allows you to accelerate your wealth creation so you can live a magnificent life on your terms, whether that means traveling the world, spending more time with family and friends, or making an impact.
Let us help you get started with owning multifamily properties! To learn more about working with Trier Capital, contact us today by calling (630) 229-2383 or click here to connect with us online.