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Self-directed IRAs are tax-advantaged accounts for investing in assets in addition to traditional stocks and bonds. Many investors see the opportunity to invest in assets such as real estate, tax liens, purchasing notes, precious metals and more.
Self-directed IRAs allow you to build wealth for your future by investing in assets that you are familiar with.
But, what happens when you find an opportunity and you don’t have enough money in your IRA? Can you co-invest with your IRA?
Yes, partnering your self-directed IRA with another funding source is possible. Here are six possible ways you can partner your IRA funds to take advantage of that investment opportunity.
How to partner your self-directed IRA: Six options
1. Your non-IRA money
Although you are considered a disqualified person to your own IRA, it’s possible to partner with your personal funds to take advantage of an investment opportunity.
Your IRA would be responsible for expenses and receive income based on the percentage of the IRA investment.
Since an IRA is intended to benefit you upon retirement, this can be a slightly complicated option in terms of partnering your IRA. However, if you follow the self-directed IRA partnership rules and regulations regarding disqualified persons, it may be an option for taking advantage of an investment opportunity.
You can also partner your IRA with an investor’s funds outside of a retirement account. They can use personal funds to co-invest with your IRA.
2. Your other retirement accounts
Do you have an additional retirement account? If so, you have the option to co-invest that account with your IRA. If you choose to co-invest with a Traditional IRA and a Roth IRA, for example, the profits would be split between the tax-deferred accounts.
If you have a Health Savings Account (HSA) or a different small business account, such as a SEP IRA, SIMPLE IRA or Solo 401(k), you can also co-invest one or more of these accounts with your self-directed IRA to complete the investment transaction.
3. Your spouse’s IRA
Although your spouse is considered a disqualified person when it comes to transacting on your IRA assets, it is possible to co-invest with your spouse’s IRA to purchase an investment.
For example, if you’re interested in using your IRA to purchase raw land or a house, but lack the amount necessary to do so, you have the option to partner with your spouse’s IRA to capitalize on that opportunity.
Did you know?
Even if your spouse is not working, they may still be eligible to have an IRA.*
Just as you have the ability to partner with a spouse’s IRA, you can partner with other investors’ IRAs. An important aspect of this partnering option to remember is that you must maintain the percentage of ownership for both expenses and profits for all transactions associated with the investment.
For example: You want to invest in a residential property for $280,000 with your IRA, but your IRA only has $70,000 (25 percent). You could potentially partner your IRA with other interested investors who want to partner their IRAs with yours to purchase the property.
Investor A has $112,000 (40 percent) in an IRA
Investor B’s IRA has $84,000 (30 percent)
Investor C’s IRA has $14,000 (5 percent)
Your IRA will be responsible for 25 percent of the expenses incurred and will profit from 25 percent of the total sale price when the property is sold.
If the property sells for $400,000:
Your IRA will receive $100,000
Investor A’s IRA will receive $160,000
Investor B’s IRA will receive $120,000
Investor C’s IRA will receive $20,000
5. Your children or grandchildren’s CESAs
With a Coverdell Education Savings Account (CESA) you can save money for a child or grandchild’s qualified educational expenses. Because the annual contribution limit for a CESA is $2,000, investors who are looking to grow the account often look for co-investing opportunities. Option #5 is to partner your self-directed IRA with a self-directed CESA for your children or grandchildren.
6. Another investor’s non-IRA money
Similar to co-investing with another individual’s IRA, you can also partner your IRA with an investor’s funds outside of a retirement account. They can use personal funds to co-invest with your IRA.
As always, it is recommended that you consult with your tax or financial professional before initiating any IRA investment strategies.
* SPOUSAL IRA – If you are married and have compensation, you may contribute to an IRA established for the benefit of your spouse for any year prior to the year your spouse turns age 701⁄2, regardless of whether your spouse has compensation. You may make these spousal contributions even if you are age 70 1/2 or older. You must file a joint income tax return for the year for which the contribution is made.
SPOUSAL ROTH IRA – If you are married and have compensation, you may contribute to a Roth IRA established for the benefit of your spouse, regardless of whether your spouse has compensation. You must file a joint income tax return for the year for which the contribution is made. Your contribution may be further limited if your MAGI falls within the minimum and maximum thresholds.
Can I co-invest other funds with my IRA to make an investment?
Yes, partnering your self-directed IRA or other retirement account with another funding source is possible. You can partner your IRA with your non-IRA money, your other retirement accounts, your spouse’s IRA, other people’s IRAs, another investor’s non-IRA money and your children/grandchildren’s CESAs, to name a few options.
Can I transfer funds from a previously established retirement plan into an Equity Trust self-directed IRA?
It is possible to transfer funds from an IRA you hold at another custodian or a retirement plan from a prior employer, provided the tax environments are the same. A traditional IRA held by another custodian needs to have its funds transferred to a traditional IRA. A Roth IRA needs to have its funds moved to a Roth IRA. Our retirement account specialists can help you determine what type of account you need to open at Equity Trust to move your funds in an approved manner.
Equity Trust Company is a directed custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust Company is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional. Equity Institutional services institutional clients of Equity Trust Company. Brokerage Services Available Through ETC Brokerage Services, Member SIPC, and FINRA. *Founded in 1974 | Self-Directed IRA Custodian since 1983. The predecessor business to Equity Trust Company was established in 1974 and the IRS approved as a custodian in 1983. **Assets under custody as of 3/1/2020.
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