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Do you have a dream retirement home? According to an article published on CNBC.com, renting is more common than homeownership for retirees. Your self-directed IRA could help you pay for that dream. When you buy real estate property through your IRA you can use the income from that property to pay off that dream home's mortgage. You should be able to do this fairly quickly and effectively with your IRA tax savings. Then when you're ready to bail out and retire you can move the property title from your IRA into your name. If you wait until you're at least 59 1/2 to take the property out of your IRA, you won't have to pay the 10% early withdrawal penalty. However, you cannot live on that property while your IRA still owns it as this can lead to tax problems. Of course, nothing is stopping you from driving by your dream home with a smile on your face knowing that it steadily being paid off with your rental income.
How to set up a self-directed IRA
Creating a self-directed IRA is not as simple as creating a traditional or Roth IRA. You need to create it as a business with your Secretary of State. It will be an LLC or Limited Liability Company. You should hire an attorney to prepare what’s called an operating agreement. Next, verify the agreement to make sure it meets the requirements for a self-directed IRA LLC as determined by your Secretary of State.
Find an IRA custodian
You'll need to open your self-directed IRA with what's called an IRA custodian. You will finance that IRA with funds or a transferred balance from an existing retirement account. Finally, you will need to work with your IRA custodian to begin the investment process. Your custodian will help you decide on the terms of your investment and then invest in the LLC. In most cases, you will need to establish what’s called a front end checkbook account to administer your self-directed IRA. This will be a special checking account to pay for all the expenses incurred by your real estate property as well as a place to deposit your rental income.