Tips on Opening a Self-Directed IRA in 2022 from a CPA

There are a lot of investment vehicles that investors can utilize with proper guidance and education, unfortunately in today’s day and age there are a lot of financial “advisors” who are trying to make a quick commission of their clients and do not hold their best interest. If you have been in touch with a good CPA then they probably recommended a self-directed IRA. What exactly is a Self-Directed IRA? Simple, it’s a powerful wealth building strategy which allows you to invest in different type of assets such as rental property. People may argue this all day long but the fact remains that the real estate market over the past 20+ years has had higher ROI than the stock market. Most importantly a Self-Directed IRA offers you the freedom and control that a traditional Roth IRA/401(k) never will. Rather than having a third party investment manager decide your future, you control where your capital is invested.

  • Tax Sheltering for rental properties
  • Asset protection strategies
  • Easy rollover/transfers from Roth IRA/Solo 401(k) plans

Before we start, you need to make sure you have sufficient capital to start – you’re obviously not going to be able to invest in a property in a Self Directed IRA with just $5,500 dollars! Remember you are the fund manager now, you are the one administering the capital of your retirement, you should be jumping out of your seat right now and asking yourself “Where do I start?!?” Nevertheless, the IRS has some strict rules and guidance around Self Directed IRA’s, and if you end up violating any of these then you could go through an audit and face hefty penalties and interest. While the best practice is to get in touch with a real estate specialized expert CPA, here’s the rundown of what IRS wants to see:

  1. Avoid dealing with any disqualified parties (meaning no family members)
  2. Arm’s length transactions only
  3. Any income/cash flow is for the exclusive benefit of the plan

Personally I have seen real estate investors make major blunders when trying to set up rental properties (owned by an LLC) into a self-directed IRA. These blunders can be easily avoided if you set up a consultation with an expert CPA. Please do not set up the LLC under your name, instead set it up under the self-directed IRA. In essence when you set up the LLC under Joe Schmidt IRA account$091 at Forbes Advisors, you ensure that no IRS rules are being violated. You can then list yourself as a manager for the LLC and hire a registered agent (do not make the mistake of being your own registered agent). If your CPA is smart they will help craft some additional asset protection provisions in your operating agreement.

Another mistake I see investors making is doing various activities for the property such as plumbing, electrical work, etc. You need to hire somebody else to come in and take care of these small emergencies (remember Arms Length). Finally, you must ensure that you don’t make an S-Corp election for this LLC, because then the IRS will smell blood and the entire gig is up. We all know what S-Corps are for (they’re a flow through entity whose income and losses pass through to your tax returns). There are a lot more details involved with the self-directed IRA tax shelter strategy, but you must ensure that you don’t engage in any disqualifying transactions.

Overall self-directed IRA’s are a way more lucrative and incentive driven then investing in a mutual fund which your financial advisor recommends. Get in touch with an aggressive CPA firm which will help deliver value and not just provide year end compliance.

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