If you have not heard of a self-directed IRA, you are certainly not alone. Most people who are building wealth through IRAs, use the traditional means (i.e. Roth, Inherited, SEP or SIMPLE). However, most are unfamiliar with the concept of self-directed IRAs and the benefits of having them.
With that, this post will highlight the basics of self-directed IRAs and how they can be beneficial as an estate planning tool.
For the uninitiated, custodian of the account can unilaterally choose how the funds will be invested. This freedom allows for nearly any type of investment, including real estate, promissory notes and even precious metals. For instance, a self-directed IRA can be used to purchase investment properties, and the proceeds from the sale of such property can be protected through the IRA so that they may grow in a tax deferred manner.
When the custodian reaches retirement, the proceeds can be accessed in the same manner as other qualifying IRAs.
Indeed, a self-directed IRA seems like a no-brainer for some, but following the rules surrounding these vehicles is essential. Rule violations could but one’s investment at risk. As such, investors should be wary of illegal transactions. For instance, a self-directed IRA cannot be used to purchase real estate that is owned by a parent. Essentially, the federal government does not want tax advantaged accounts to be used to facilitate transactions where the parties are closely related so that taxes are unfairly minimized.
If you have questions about how a self-directed IRA can help in your estate plan, an experienced attorney can help.
