Several years ago, I received a call from an attorney friend. Lynda asked if I would like to invest with her and buy a fractional interest in an apartment building in Texas. I explained that I didn’t have the available cash to invest at that time. Then she asked if I had a self-directed IRA. When I said “yes,” she went on to explain that with my self-directed IRA, there was a way to make the investment after all.

Using my IRA? To buy real estate? Imagine That™!

What is an IRA?

IRAs offer tax-favored personal savings arrangements that allow people to set aside money for their retirement. Most people encounter the individual retirement account (IRA) basics early in their financial education.

The government sets contribution rules, minimum distribution withdrawal rules, prohibited investment rules, transaction rules, etc. It provides several choices in specific types of IRAs such as traditional, Roth, simplified employee pension (SEP), and savings incentive match plan for employees (SIMPLE).

Financial advisors most often focus IRA discussions simply around contribution limitations, rules for withdrawals, and tax-favored aspects. Once the basics are covered, however, most investors set up their IRA in a brokerage account and then select a “set-and-forget” strategy.

Not All IRA Accounts are the Same

What’s missing for investors – either because their advisors don’t have the option available, or worse . . . because their advisors are not aware of it – is counsel regarding a self-directed IRA option.  

In our experience (especially when speaking with younger investors), we often hear the phrase, “I made my contribution to my IRA this year!” Our response is usually something like . . .  “Terrific! That’s a great start! Is it an ‘other person directed’ IRA or a ‘self-directed’ IRA?” To which we usually get a glassy-eyed stare and a “What’s the difference?”

The reality is . . . most people overlook or are simply aware of the “self-directed” option for their IRA. And, in case that might be you, too . . . let’s “unpack” this special option from the government to ensure your hard-earned money works just as hard for you as you did for it!

Accessing this broader universe of investing options to help maximize the growth of your retirement assets is why we say, “there is more than meets the IRA!”

Does Someone Really Have a Multi-Billion Dollar IRA Account?

Last year, there was a big buzz about famed investor and entrepreneur Peter Thiel after news of his $5 billion Roth IRA went viral after a ProPublica article. Clearly, Mr. Thiel did not achieve this through only using traditional investment vehicles or methods!  

How did he do this?

For the most part, he used something called “alternative investments” within his IRA, including private stock in the company he co-founded, PayPal, and real estate. Unfortunately, most IRA custodians do not provide access to the universe of investment options such as Mr. Thiel took advantage of.  

Self-directed IRA custodians, however, DO allow for “non-traditional” investments such as real estate to be purchased and held within an IRA.

What is the Difference Between a Custodian and an Investor?

It’s at this point that the distinction starts to get fuzzy between a custodian – self-directed or otherwise – and the investor . . . so let’s make sure the distinction is clear.

An IRA is always self-directed by the investor. You, the investor, are responsible for choosing which investments to purchase within the IRA account. The custodian does not choose them, but instead oversees and does the reporting to you and the IRS.

Where paths deviate, is that most custodians only provide a “menu” of stocks, bonds, mutual funds, exchange-traded funds (ETFs) and so forth. A self-directed IRA custodian permits the same menu of traditional investments plus “alternative investments” like gold – private company stock – and as I did, real estate.

In general, custodians charge a service fee for the administrative work they provide, but again, they do not manage the IRA assets. Further, the IRA owns any assets within the IRA, including real estate . . . not you.

This is important, so it bears repeating. These are not your personal assets.

A Self-Directed IRA Isn’t You

To this point, it may be helpful to think of an IRA as a business owner thinks of their business. The business entity is a separate and distinct entity from the owners and operators.

Likewise, an IRA is separate from you. You establish your IRA for your FUTURE benefit. It’s not a vehicle to fund next year’s summer vacation.

You wouldn’t (or shouldn’t!) use a business credit card to go on a personal shopping spree, and the same idea holds true for investments in your IRA.

Investing in real estate takes advantage of the potential for higher income for the investor, as well as capital appreciation of the underlying asset(s). It works the same in your IRA. However, the hopefully higher income and future growth is not yours. It belongs to the IRA.

I’m sure you’ve guessed where this is going. The real property held inside the IRA isn’t yours either. That also belongs to the IRA!

All this creates additional considerations for you, the owner, in terms of potential liquidity limitations when allocating funds across the various investments inside your IRA. How do you invest without having all your retirement funds tied up in one single asset and asset class (real estate, for example)?

And the fun doesn’t just stop there! The “separate entity” structure of the IRA also has several limitations compared to standard real estate investing. In fact, there are SO many limitations that it’s wise to work with an experienced professional to avoid penalties for “self-dealing” or what is also called “prohibited transactions.”

Understanding the Self-Dealing/Prohibited Transaction Rules

There are certain rules and regulations that must be taken into consideration to avoid having your IRA disqualified under the law. One wrong move and 100% of the assets in your IRA can end up being taxed in a single year! Ouch!

A summarized explanation of the basics of what not to do can be found on the IRS’s own website in Publication 590. For purposes of this article, these limitations on “self-dealing” can be generally explained by saying that there are:

  • Three asset types you simply cannot invest in, and
  • Neither you nor any other “disqualified person” may engage in self-dealing with your IRA

So, how DO I Purchase Real Estate in my IRA?

The outright purchase of a property with IRA funds is not an option for many investors –especially at today’s prices.

Debt financing also has limited use in this situation because, as said above, you are not your IRA, so banks and other lenders are not willing to loan money to an IRA unless you are as well off as Peter Thiel!

But here’s the good news. There are a number of reputable real estate syndicators who allow you to invest with smaller capital commitments. Not only can you introduce diversification by purchasing real estate along with stocks, bonds, mutual funds, and ETFs, but you can also invest into different types of real estate . . . such as apartments, office buildings, storage facilities, and so forth . . . all in “fractional shares” that are more affordable. (I have seen some asking as little as $25,000 for a fractional interest in a project.)

And, as an added bonus, using these real estate syndications for investing makes it easier to enjoy the benefits of real estate investing without actively managing any of the properties or risking a “self-dealing” penalty as mentioned above.  

So . . . What’s the First Step?

First, speak with the custodian/brokerage where you currently have your IRA account. What are all the available investment options they provide – and what is the cost of their services to provide the various investment options? If they’re limited to individual stocks, bonds, mutual funds, ETFs, then you know you’ll have to start shopping for a new custodian.

Next, how much do you have to work with? You should keep your retirement investments in “many baskets” – stay balanced. Utilize a certain amount of “traditional investments” – especially starting out – and add alternative investments on top of your existing asset base.

One point to remember – start slowly. Most forms of investments (i.e., stocks, mutual funds, bonds, ETFs) are liquid and the “piggy bank” can be accessed in an emergency or for the exceptions IRS allows. Real estate investments, however, are usually at least five years in term, or longer. One highly regarded real estate investment platform has NO liquidity options for at least ten years . . . and tells investors it could be longer – and even MUCH longer before a sale of the property, building, etc. occurs.  

Many of the private offerings start at $100,000 but some can be half that amount. And, if you did what I did, we formed an LLC in Wyoming and contributed jointly using our respective IRA accounts or outside funds to add up to the $100,000 minimum investment. 

Conclusion: You May Have More IRA Investment Options Than You Think

It’s easy to get excited about new investment strategies but don’t forget to consider how you are allocating assets across your entire investment portfolio. Your financial and liquidity outlook is just as important as the merits of a specific investment when considering alternative investment decisions.

Current market conditions are highly volatile and provide much lower yields than historically. Taking full advantage of additional investment options, like real estate, in your self-directed IRA can enhance the rate of growth of your assets and help you reach your retirement goals faster.

If you’d like to have a conversation about alternative investments and the use of self-directed IRAs, let’s schedule a complimentary 20-minute conversation. We can help you determine if diversifying your retirement portfolio is right for you – your progress thus far – your time horizon – risk tolerance levels and the importance of investment liquidity for at least a portion of your IRA account.  

Investing in real estate using a self-directed IRA . . . “Imagine That™”!

Imagine That™! is a complimentary monthly newsletter provided by Wealth Legacy Group®, Inc. that addresses various topics of interest for high-net-worth and high-income business owners, professionals, executives and their families. Sign up to receive our monthly newsletter here.

R. J. Kelly, Wealth Legacy Group®, Inc. – May 2022

COURTESY OF

R.J. Kelly  ChFC, CLU, IAR, RICP. CAP, MSFS, AEP, CEPA Wealth Legacy Group

R. J. Kelly

Founder & Chief Visionary Officer

R. J. Kelly is Founder and Chief Visionary Officer of Wealth Legacy Group®, Inc. in San Diego, California, a company specializing in the diverse needs of closely-held business and professional families. Creator of the Wealth Legacy Assessment™ and the Critical Actions Roadmap™, R. J. and the WLG “tribe” develop comprehensive plans that maximize investment and asset growth, mitigate risk, create clarity in family legacy & issues of philanthropy, and facilitate business succession and exit strategies. He also Co-Founded and was Program Manager for twelve years of the non-profit, The Center for Wealth & Legacy™, an organization which presented over fifty community events, including the annual “Lasting Legacy & Inspiration Awards™” and the tri-annual “Leadership Insights Forum™”.

R. J. has been in the financial services industry since 1977. He is a Chartered Life Underwriter®, Chartered Financial Consultant®, Retirement Income Certified Professional®, a Chartered Advisor in Philanthropy®, has a master’s in Financial Services with an emphasis in taxation, and is an Investment Advisor Representative of Wealth Legacy Group®, Inc., an independent Registered Investment Advisor. Additionally, he has earned the Accredited Estate Planner (AEP®) designation recognizing a graduate level specialization in estate planning, and the Certified Exit Planning Advisor designation, an executive MBA-style program that trains and certifies qualified professional advisors in the field of exit planning for business owners. R. J.’s latest education is the Wealth Management Certified Professional designation, which provides training in the intersection of retirement planning and wealth management skills to address the complex needs of financially successful clients.

He is nationally recognized for his technical skills in:

  • tax
  • estate planning
  • business succession
  • national and international risk management
  • wealth/asset appreciation
  • executive benefits
  • charitable strategies

As well, R. J. has been regularly called upon as an expert witness in various litigation matters. Further, as a Life Coach™ and accredited Interplay™ facilitator, he is skilled in handling delicate interpersonal matters and facilitating family communication.

R. J. is a frequent speaker and author. Various publications such as the San Diego Union Tribune, LA Times, Yahoo Finance, Round the Table Magazine, San Diego Magazine, San Diego County Physician’s Magazine, Life/Health Pro, Insurance Forum, have run feature articles on R. J. or published articles by him, to name just a few.

Speaking audiences have included the: Vistage International Conference and various Vistage CE groups; the Strazzeri/Mancini Gathering; Advisors in Philanthropy National Conference; Nothing Bundt Cakes National Conference; The Dwyer Group Annual Conference; Main Platform – Million Dollar Round Table Annual Meeting; numerous NAIFA (National Association of Insurance & Financial Advisors) State conferences; and many more. He was featured on the PBS series “The Financial Advisors”, for three years was co-host of the San Diego radio program, “The Wealth Building Hour” and was a guest speaker on the American College’s Wealth Channel program.

R. J.’s interests include a commitment to being a wise and fun husband, dad, grandfather, performing periodically in a contemporary Christian band, and being active in community, church and international volunteer work. He has traveled to Guatemala, Mexico, Myanmar, Cambodia, Vietnam and Russia on various volunteer and humanitarian projects. He has raised over $30,000 to help Cambodian landmine victims and the Cambodian Children’s Fund. An eight-time marathoner, R. J. has raised thousands of dollars for Leukemia-Lymphoma research through his running. His life goals include facilitating $1 billion for charity (crossing the $100M mark in August 2012 and well underway to reaching the second $100 million), volunteering internationally 2-4 weeks/year, and travels to Bhutan, Iguaçu Falls, Machu Picchu, Tibet, India and the Amazon among many other places!

Most memorable life events thus far include a tail-hook landing and catapult take-off from the aircraft carrier, USS Abraham Lincoln, trekking in Nepal to an altitude of over 18,000 feet, performing solo to an audience of 7,500+, speaking for an audience of 13,000+, the individuals met through and running of various marathons, the lasting impact of a wise, loving and godly mother, and being married to my extraordinary wife, Vymean, a survivor of the killing fields of Cambodia, and one equally committed to making the world a better place.

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