An IRA is one of the most beneficial accounts to utilize when one is building a retirement future. Although this account is analogous to a 401(k) it is much more beneficial that the 401(k) has ever been and will probably ever be. As the 401(k) is designed to benefit the employee as he or she worked for a company it is also very limited is the things that it can invest in. Additionally, the 401(k) is an account that does not allow the owner of the account to draw from its resources until that individual is much older.
Although the self directed IRA is a beneficial account it to has is limitations. It is important for investors to realize what those limitations are and how they can work around them to ensure they stay within the regulations the IRS has set. One day, whether you break the laws or not you may end up with an audit from the IRS on your hands. If you have been participating in prohibited transactions you will more than likely be caught and you will have to pay up for that. When I was growing up my brother used to always say, “It is better to ask for forgiveness than permission.” This may have been true when snitching cookies from the cookie jar, but this is not the case with the IRS. It is better to do it right and never have to ask for permission.
We encourage you to review the website link above as well as this link that discussed Prohibited Transactions. These two links will describe in much more detail the various laws you will be faced with as you invest with a self-directed IRA. For the purpose of this article we will discuss a one point that is prohibited when investing in real estate with your IRA but is also a challenging situation for those that are just getting started with real estate in an IRA.
There are only a few banks that will offer a loan to an IRA. This is because if the loans are due and the IRA cannot make the payments the account holder cannot use his or her personal funds to make the payment; in fact, the IRA holder cannot even write his name on the loan because this becomes a personal guaranty and thus results in prohibited transition.
The few banks that will guaranty a loan for an IRA also require 30% down on the payment for a property. This gives the banks enough equity that it could be worth it to them even if the IRA has to foreclosure on the property later on down the road; however, it is extremely difficult for an individual that has just started an IRA with the annual contribution limit to come up with the funds for a down payment without some sort of a rollover from a 401(k) or some other retirement account. For these individuals we suggest starting with real estate by wholesaling real estate in an IRA to get more funds. Then you can go from there once you have a stronger base of funds available.