Buying Notes with your Self-Directed IRA

Now that you know the basics of a Self-Directed IRA, let’s dive into some of the leading trends in Self-Directed Investing. With all of the stock market uncertainty, investing in notes has become increasingly attractive using tax-deferred funds in your IRA or retirement plan. Notes can be a great option because the payment streams come into your IRA and in the final analysis, on a first trust deed, the worst case is that you own the property. Best of all, discounted notes can be purchased for pennies on the dollar.

Investing in real estate and notes is just like any other transaction that uses a third-party entity as the owner. Here are some rules to keep in mind when considering note-buying with your Self-Directed IRA:

The IRA owner cannot receive any benefit from the IRA or its assets. Specifically:
- No living on the property.
- No direct receipt of income related to the property. Income is only permissible when it is proportionate to the investment.
- The IRA cannot deal with you or any disqualified persons. This includes parents, spouses, children, and some business associates.
Qualified plans assets, such as an office building invested in or by a plan, can have a certain part allocated to having you rent space for the purposes of the plan (we suggest consulting an attorney for more information).

How to get started buying notes with your self-directed IRA:

Once you’re ready to start investing, a direction of investment form must be completed when purchasing a real estate note. By utilizing an IRA administrator, you can guarantee your directions will be executed in a detailed and timely manner, assuring efficient transactions.

When a title or escrow company is involved, make sure that all instructions are provided for all documents in your account. Title or escrow companies may have additional requirements for your transactions than ours, so please be aware.

Your administrator must receive all loan documentation before funding can take place. Funding may not be initiated without a full loan package; this includes a trust deed and note, title insurance (if applicable), and appropriate vesting.

As your record keeper, your IRA administrator may receive payments directly from your payer as well as process loan payments. They also keep all original documentation for your convenience.

By investing in notes, you are investing in a tangible asset. By investing with your Self-Directed IRA, you are guaranteeing tax-free returns on those investments, making it a great alternative to the stock market. For more information on buying notes in your Self-Directed IRA, or any of the options available to you by Self-Directed investing, call us toll-free at 888-938-5872.

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Self-Directed Investing 101

The Self-Directed IRA industry is growing at a staggering pace and is expected to see over $2 trillion enter the market over the next few years. With over 45 million retirement account holders and less than 4% of those being held in nontraditional assets, the time to consider Self-Directed investing is now. The Investment Company Institute- the national association of U.S. investment companies, estimates that nearly $4.7 trillion in IRAs were held in the U.S. last year. Of this, an estimated $94 billion or a mere 2 percent are Self-Directed IRAs.

So, what is Self-Directed IRA Investing?

A Self-Directed IRA allows you to decide how to invest your retirement funds. Many people assume “Self-Directed” is a unique type of IRA. However, “Self-Directed” is not a type. Any IRA, whether it’s a Traditional, ROTH, SEP, or SIMPLE IRA can be self-directed.

Using your IRA to invest in non-traditional assets like real estate has been available to investors since 1974. You may be learning about this for the first time because large banks and brokerage firms don’t typically offer these investment options. You may ask – “Is this really legal?” The answer is yes. With the exception of life insurance contracts, collectibles, and stock in an S corporation, IRS rules allow all other investment types as long as they comply with the rules governing retirement plans.

Why Self-Direct?

Stock market volatility and the economy have many investors considering alternative assets for their retirement accounts. A Self-Directed IRA gives you control over your retirement funds by making tax-free investments in assets that you’re familiar with.

What Can I Invest in?

Below are some examples of investment opportunities available to you through your Self-Directed IRA:

Types of Self-Directed IRA Investments Allowable by IRS:
Residential real estate	Tax Lien Certificates	Precious Metals
Commercial real estate	Equipment leasing	Factoring
Undeveloped or raw land	Livestock	Accounts Receivable
Real estate notes	Foreign currency	Oil and Gas
Promissory notes	Stocks ,bonds, mutual funds	Structured Settlements
Limited partnerships	Private placements
LLC and C-Corp	Structured Settlements	LLCs, LPs and C-Corporations

What are the Rules?

Prohibited Transactions. IRS rules forbid certain types of transactions in IRA accounts. Some examples are listed below:

Collecting management fees for your properties is also prohibited as it is a direct benefit for you, the account owner.
Collecting commissions on properties purchased through your IRA.
You may not buy, sell, or lease your real estate from disqualified persons.
All profits generated from an IRA owned asset must be paid back into the IRA and all expenses incurred by the asset must be paid by the IRA (they may not be paid with personal funds and reimbursed by the IRA).
Any debt used to acquire an asset in an IRA must be non-recourse. In other words, the IRA owner is prohibited from guaranteeing the note personally.

Disqualified Persons. IRS rules define certain individuals that are unable to participate in any transaction with your IRA:

Yourself
Your Spouse
Your Children
Your Children’s Spouses
Your Parents
Certain Business Partners

Additional Regulations. Here are a few examples of prohibited transactions using your IRA that you should become familiar with:

The property must remain in the IRA until distributed or sold to a third party.
Property owned within an IRA will not be able to take advantage of write-offs, such as depreciation or other expenses relating to the property.
All rental profits must be returned to the IRA.
When purchased, the property becomes an asset of the IRA.
If you are an owner, you may not lease to a disqualified person, or in any way have a disqualified person occupy the property while it’s owned by your IRA.
While an IRA owner cannot manage the property, they can hire a property manager or real estate broker to collect rent and maintain the property.
Neither the IRA owner nor his/her family members (siblings excluded) may have access to or utilize the property while it’s in the IRA.
Borrowing money from an IRA. IRA’s are prohibited from making loans to IRA owners as well as any other disqualified persons.
IRA owners are prohibited from using their IRA as collateral for any loan, as the amount they pledge as security will be deemed a distribution by the IRS.
Selling assets you already own to your IRA or to a disqualified person’s IRA.
Purchasing a property for personal use, either by the IRA owner and/or a family member.
Purchasing a property owned by a family member who is a disqualified person.
Lending money to a disqualified person.

So should I open a Self-Directed IRA account?

Self-Directed investing isn’t for everyone. For some, the idea of having total control of their investments is a daunting one. We recommend reviewing your investment strategies with your tax advisor prior to investing. For more information about what a Self-Directed IRA can do for you call us toll-free at (888) 938-5872.

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