If you are looking for ways to build wealth for your retirement, investing using SD-IRA or 401(k) is one of the best decisions you can ever make. The Self-Directed Individual Retirement Account (SDIRA) differs from the conventional IRA in the sense that it’s for investors who are willing and ready to go beyond the usual investments that are common with retirement accounts such as stocks, bonds, and mutual funds.
However, Self-Directed IRAs or 401(k) just like the traditional IRAs offer tax advantages to investors who are investing in their retirement. The main difference is that a 401(k) retirement is provided by the employer and employees’ contributions are automatically from their paychecks.
What are these alternative investment options?
Since Self-Directed IRA or 401(k) benefits from tax incentives, they are highly regulated by the Internal Resource Service (IRS). Some of the alternative assets that are offered under the Self-Directed IRA or 401(k) retirement plan include;
- Real estate
- Development land
- Promissory notes
- Cryptocurrency
- Precious metals
- Tax lien certificates
- Water and mineral rights
- LLC membership interest
- Oil and Gas
How to invest in real estate using Self-Directed IRAs or 401(k)
Investing in real estate using Self-Directed IRAs or 401(k) retirement plans is not a complicated process. The first thing you need to do is to identify a good custodian company (a brokerage or an investment firm) that will help you create a Self-Directed IRA or 401(k) account.
A custodian will come in very handy as they will advise on the best Self-Directed IRA account that will work for you. You will also be facilitated on how to do the required paperwork so that you can do the rollover. If the Self-Directed 401(k) is offered by your employer, the plan administrator will act as the custodian.
The role of the custodian will be to hold the IRA assets and have the power to make purchases or sale of investments on behalf of the investor. In 2022, the annual contribution limit for Self-Directed IRA or 401(k) is $20,500, plus another $6,500 catch-up contribution for every year for investors aged 50 years and beyond.
Benefits of investing in real estate using a Self-Directed IRA or 401
You can leverage your returns or invest passively
When you invest in real estate with your retirement funds, you can leverage by taking a portion of your retirement account funds and using the fund as a down payment when purchasing a real estate property. Alternatively, an investor can also opt to invest passively mostly in real estate syndications or private equity funds.
Risks associated with holding Self-Directed Individual Retirement Accounts
By investing in real estate using a Self-Directed IRA, you will still experience some level of risks. The best decision to minimize risks is to create a balanced portfolio for your retirement funds. By going beyond the traditional retirement accounts that are usually based on stocks and mutual funds, an investor can create a balanced portfolio.
Rolling over some of the retirement funds from the traditional IRA to the Self-Directed IRA is a sure way of minimizing investment risks. However, although a Self-Directed Individual Retirement Account gives you bigger control of your retirement finances, investors should do due diligence before joining as there are many fraudulent schemes out there that may fail to deliver what they promise.