Comparing a Self-Directed IRA to a Self-Directed 401k

My phone rings many times throughout the week with very excited individuals on the line asking about Self Directed Retirement Accounts. This usually comes right after they learn the benefits of taking their Traditional Retirement Accounts and rolling them into something that allows for unconventional investing. More specifically, they want to invest in Real Estate.

Can I invest in Real Estate?

Can I really make higher returns than my broker?

Can my SD Retirement Account really own property?

Can I write a check from my account any time I want to make an investment?

The answer to questions like these is YES. The next question is, which is better for me? A SD IRA or a SD 401K? Here are a few of the differences that should be top of mind when deciding which way to go.

Using one of these accounts to invest in Real Estate is a great opportunity to use tax-deferred monies to purchase properties. Real estate offers several ways to generate wealth directly or indirectly, including:

• Cash flow: Generated from renting a property out at a profit.
• Asset Appreciation: Most land and property tend to rise in value over time.
• Inflation Hedge: Real estate tends to hold its value and rise with inflation.
• Tax Savings: Mortgage interest rates, property taxes, and home improvements can all be deducted on yearly tax filings.

Veterans have special benefits they can leverage, such as VA loans, tuition assistance, and disability, that give them financial advantages over investors.

Purchasing Real Estate is not the only way you can use these funds. Instead of purchasing entire properties, you can generate substantial gains by investing in a piece of property. Assets like Syndications offer investors shares of investment property that can be purchased like a stock on most regulated exchanges. Tax liens offer another avenue of cash flow, enabling investors to purchase existing tax liens and collect the repayment. If repayment is not made, they receive the home as collateral. Finally, wholesaling (Must be mindful of U.B.I.T) involves purchasing contracts and selling them to interested buyers at a fee. These strategies should be incorporated with your overall strategy for greater diversity.

These are some great ways to leverage an SD Retirement account. Keep in mind that there are also things that we must know to keep ourselves safe.  Things like prohibited transactions. These are things that will get us in trouble with the IRS and may create a taxable event. An example of a prohibited transaction would be purchasing or investing in a rental with retirement funds and allowing your children to live in it or even yourself. 

If you have questions about how these accounts can help you with your investing, or you want to know more about keeping yourself safe.  Feel free to reach out to us for an explanation.

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DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.