- Self-Directed Accounts
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What if a real estate or other investment opportunity presents itself, but you don’t have enough money to take advantage of it?
The good news is that there’s a variety of funding sources you may be able to tap. When you discover the pool you may be able to draw from, you gain nearly unlimited investing potential – with $0 out of pocket.
There might be funding sources more accessible than you realize. People in your own network may have the capital you need for your investment. You can expand your network by finding investing clubs or Meetup groups in your area.
If you know someone who owns a business, you may be able to access funds from the business for your investment. Consider business owners you might know in fields related to your investment.
New investment avenues are opened to you once you realize your IRA can invest in rental properties, rehabs, private equity, tax liens, or loans in the form of promissory notes – to name a few alternative investment options available to self-directed IRA investors.
Your IRA or Roth IRA is not the only retirement account you can self-direct. Health Savings Accounts, SEPs, SIMPLEs, and Solo 401(k)s may also be used for an array of investments.
To take advantage of this funding source, you’ll need to open a new account, or roll over or transfer an account from your current IRA provider to a self-directed IRA custodian.
Video: What is a Self-Directed IRA?
Many investors do not realize a Spousal IRA may be opened for a non-working spouse, even without earned income, and the spouse with earned income can contribute to both IRAs up to the annual limit for each. As long as one individual meets the eligibility requirements and you file a joint tax return, you and your spouse may be eligible to open an IRA.
According to the Investment Company Institute, Americans hold approximately $30 trillion in total retirement assets, with $9.8 trillion of assets in IRAs.¹ That’s a lot of potential investment capital – some of it sitting in retirement accounts within your network.
Often the first step is to make others aware of the possibilities for their own retirement plans – including the ability to invest in alternative assets like real estate, notes, private loans, private equity, and more.
Like IRAs, CESAs can be used to invest in an array of assets. CESAs allow investors to save and invest tax-free for qualified educational expenses for a beneficiary under age 18, such as your child, grandchild, or nieces and nephews.
If you’re investing with a retirement account but still don’t have all the funding you need, it’s possible to use debt financing. Your IRA may receive a loan, but it must be non-recourse.
IRAs require non-recourse loans because your IRA (or you personally) cannot be the personal guarantor or serve as collateral for the loan. The only recourse is the investment asset that is being financed with the loan.
Note: Your IRA cannot receive a loan or other extension of credit from a disqualified person. Please reference IRC 4975 and consult with a financial professional.
Video: Non-Recourse Loans with Self-Directed IRAs
Non-recourse loans do not have to originate from a financial institution. Any loan made to an IRA must be non-recourse, but the lender can also be a private investor or another retirement account. You may be able to work out terms for a non-recourse loan with another investor or another retirement account holder for an agreed-upon interest rate or rate of return.
Similar to the non-recourse loans from financial institutions or individuals, it may be possible to work out a lending arrangement with another business in your network. If you have business owners in your network who are interested in your investment opportunity, your IRA may be able to receive non-recourse financing from their business.
Once again, be aware that your IRA cannot receive a loan or other extension of credit from a disqualified person. Please reference IRC 4975 and consult with a financial professional.
You have the ability to partner multiple funding sources on one investment, even when self-directed IRAs are involved.³ For example, you may choose to co-invest both your Traditional IRA and your Roth IRA so you can split the profits between the tax-free and tax-deferred accounts. You can also partner your IRA with your Health Savings Account (HSA) or small business account (SEP, SIMPLE, Solo 401(k), etc.)
It’s also possible to co-invest your IRA money with another investor’s IRA, or your IRA with non-IRA money.
Video: Partnering Multiple IRAs to Buy and Sell Real Estate
Considering all the funding combinations, the funding possibilities for your next investment are nearly limitless!
Can I co-invest other funds with my IRA to make an investment?
²When an IRA receives debt financing, investors must be aware of a potential tax implication called Unrelated Business Income Tax. Get more information on UBIT.
³Please review Internal Revenue Code 4975 to ensure your investment follows all IRS rules and regulations for self-directed IRAs. Check that your investment does not involve any disqualified persons or engage in any prohibited transactions. It is also important to ensure all expenses are paid for and income is returned in direct proportion to the percentage of ownership arrangement of your co-investment structure.
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