A self-directed IRA, first let’s backup and talk about traditional retirement plans. What a traditional retirement plan looks like is typically your 401(k) that you have with your employer, a lot of times held with Fidelity Investments. I think they’re probably the biggest sponsor of 401(k) plans in the country. Your employer encourages you to contribute money to your retirement plan, 5, 10%. That money goes into your 401(k) retirement plan held with a sponsor like Fidelity Investments. Fidelity Investments then gives you a couple investment options. They basically tell you you’re going to choose between the Fidelity Freedom Fund or the Fidelity Income Fund or the Fidelity Stock Fund, and a fund manager manages those mutual funds. The success of your 401(k) or your retirement plan is dependent on the fund manager’s ability to pick and choose the investments with inside that mutual fund, which is also inside the 401(k) that you have chosen.
Your investments are very limited. You usually don’t even have the option of choosing stocks. It’s usually between several mutual funds, which then chooses the stocks for you. In essence, your retirement is dependent on Fidelity and their ability to pick mutual fund managers, and the mutual fund manager’s ability to pick the investments. You are completely dependent on them for the day that you retire, and hopefully that there’s enough money in that 401(k) or that retirement plan to supplement your retirement.
What a self directed IRA does is give you a lot more control over your retirement planning. What you can do with a self directed IRA is invest in not only stocks, mutual funds, bonds, but also real estate, gold, antiques, anything that you feel is a good investment, it’s basically self directed, it gives you complete control over your retirement planning. Let’s go down the list. Number one, the self directed IRA needs to be held with a qualified custodian. There’s two ways that you can establish a self directed IRA. I have a self directed plan with the Entrust Group, E-N-trust Group is the platform, the custodian where my self directed IRA is being held.
There’s two ways that you can fund that. You could do a qualified transfer. A lot of times individuals will say, “I want to have more control over my retirement plan. I’m going to take my 401(k), cash it out and move it, t’s a qualified movement, it’s going from one qualified plan to the next, over to my self directed IRA.” The other one is basically a direct funding where you open up the self directed IRA and you start contributing on an annual basis that way.
Investments outside typical investments, you can invest, like I mentioned, in mutual funds, stocks, bonds, real estate, gold, antiques, other paper assets, anything that you think worthy, as long as the investment, and this is a real estate video so we are talking about real estate here, as long as the investment is non owner occupied, so you can’t use your 401(k) money and put it in a self directed IRA to fund your owner occupied single family home, that’s just not going to be the way it works. It needs to be in investment property.
The next line, as you can see, all of the assets, all of the cash flow, anything that the investment property generates, needs to go back inside that self directed IRA. You cash flow, you have expenses of 3,000, you are collecting $4,500 in rents, you cash flow $1,500 a month. That $1,500 needs to go back into your self directed IRA because it is, again, a qualified retirement plan and none of that money should be removed until you are of retirement age and you can make a qualified distribution to yourself. You can buy the property directly or make loans to other investors. One of the things that you can do with your self directed IRA is you can buy the property directly, you are the sole owner, or you can partner with other individuals or you can loan money to other individuals, other real estate investors, and charge them an interest rate and charge them points or whatever you and that investor agree upon.
You must stay within the guidelines of the custodian to stay in compliance, and again, it is a qualified plan, you want to make sure that you are not taking in your distributions, you are not using the investment or the assets for your benefit today. It is for the reason that this is a tax deferred and you are not paying any taxes on it, it is to benefit tomorrow, during your retirement, or excuse me, some time in the future. That is what a self directed IRA is. In summary, it gives you a lot more control over your retirement planning, your future. It takes the responsibility of your retirement out of somebody else’s hands, i.e. Fidelity, and their fund manager, and puts you in the driver’s seat and gives you a lot more control over your future outcome.
Hopefully that was helpful. If you’d like more information about self directed IRAs, some of the custodians that we use, and to be connected with their plan providers, please click on the link below in the video description. Tell us a little bit more about yourself, what you’re looking to do, how we can help, and we will certainly make that connection for you. All right, thank you.
What a 1031 exchange is, it basically is a tax vehicle that allows you to trade up to larger properties. Let’s say for instance you have a three family and you have some equity and you’re thinking about selling. If you sold that three family you are going to get hit with a capital gains tax, or you’re going to hit for capital gains taxes on the sale of that property.
If the value of the property went up, if you’ve obviously been taking a depreciation allowance every years so your basis is down, the federal and state government are going to say, “You received capital gains from this investment and you are going to get taxed on the sale. To avoid capital gains taxes and to use that money or the portion of tax that the federal government would have taken, to enhance your portfolio it makes a lot more sense to avoid those taxes and use that extra cash to grow your wealth and put it into the next property.
What a 1031 allows you to do is to avoid capital gains taxes, long as you’re following the IRS rules and you are trading up or using the proceeds of that sale to fund your next property. It’s typically used to trade up for a larger property. Let’s give you an example, I sold a $600,000 property and I bought it initially at, let’s say $400,000, I paid the debt down to three, and I was probably going to have a capital gain of let’s say around $200,000 on that property, if not a little bit more.
If I get hit with a capital gains tax and then use the proceeds to invest, I have less money to invest. A smarter, easier way would be to, not easier way but a more intelligent way, would be to use a 1031. Be within the law use a 1031 exchange to trade up to a larger property. Basically what you have to do is you have to use a 1031 exchange company and you have to follow certain guidelines to avoid that capital gains taxes. You have, I believe, identify a property within 60 days and close on that property within 90 days.
Those laws are changing depending on what administration is in, and where we are in housing and how the housing market is doing. Those are the type of things that you want to make sure, using a qualified company, because as those laws move and the rules change, you want to make sure that you are within compliance so you do not get audited or get hit with tax after the exchange
Make sure you’re following the time tables and identifying your property and purchasing and securing the property within a solid period of time. That’s what a 1031 exchange is. That’s how you can use it. Some of the best and the brightest real estate investors in the business are using 1031 exchanges over and over and over again to trade up to larger and larger properties and keep their money moving. They’re constantly keeping their money moving.
For more information about 1031 exchanges or to be connected with a 1031 exchange company, please click the link below in the description, tell us a little bit more about yourself and what you’re looking for. We can certainly connect you with some of the companies that we use on a regular basis. Thanks, hopefully this was helpful.