Many of our clients fund private mortgage notes through self-directed IRA’s (referred to often as SDRA’s). SDRA’s, if set up and used properly, can create true tax-free wealth for you and your family.
What is a SDRA?
An SDRA is technically no different than a traditional IRA. You would contribute to and set up a SDRA the same exact way you would a traditional IRA. SDRA’s come in many forms -- 401K’s, SEP’s, HSA’s, or even child education funds! They are easy to set up and establish once you find a SDRA custodian (we will gladly refer you to our favorites if you don’t already have one!). What makes the self-directed version of these retirement accounts so unique is the incredibly wide array of investment options. Most traditional IRA custodians only allow you to invest in approved stocks, bonds, mutual funds and CDs. A SDRA custodian will allow you to invest in many alternative investments such as real estate, businesses, tax certificates and private mortgage notes – just to name a few!.
What are the benefits of a SDRA?
In addition to the tremendous IRA benefits (tax-free profits, tax deductions, asset protection and estate planning), you are able to invest tax-free in investments that you know and understand which, through the power of compounding interest, can create incredible wealth for you and your family. For instance, if you had a particular expertise in purchasing tax liens, you could establish a SDRA and then begin investing in tax liens through your SDRA. Any profits made will return to your SDRA either tax-deferred or tax-free, depending on the type of account you set up.
Similarly, our clients open SDRA’s and leverage our deals and our expertise in private mortgage notes to create their own private lending empire, of which the profits are either tax-free or tax-deferred.
Why haven’t I heard of a SDRA before?
While SDRA investing has been around for more than 30 years, the concept hasn’t received large attention because most traditional IRA custodians (banks and brokerage firms) focus on the equities markets, as well as bonds, mutual funds and CDs which, in turn, gives people the misconception that a SDRA is either not legal or simply not available to them. This could be because traditional IRA custodians may not be able to legally refer clients to or invest in non-registered securities. Or it could be because they may not be able to make any money from you if you leave them for a SDRA. Or, much like many Americans, they may not even know SDRA’s exist. Whichever the case, given the incredible financial flexibility and control you have through a SDRA, it is a mystery as to why these types of legal accounts are not more popular.
My CPA/attorney/financial advisor hasn’t heard of a SDRA, what should I do?
A trusted advisor who has not heard of SDRA’s is not an uncommon experience, given their relatively unknown nature.
Both Hard Money Bankers, LLC and our SDRA partners have worked with thousands of professional advisors across the country to educate them regarding IRA and self directed IRA rules so they can best customize advice to meet your personal needs.
Can I be assured that SDRA’s are legally allowed under IRA rules?
As long as you follow relevant IRS regulations the answer is definitely “yes.”
There are specific rules regarding IRAs, including SDRA’s, and there are certain types of transactions that you can not perform through an IRA. Most importantly, the IRS prohibits “self dealing,” which means you are investing in investments in which you or your family members of lineal descent have prior ownership. Your SDRA custodian, along with your attorney or financial advisor, will be able to advise you as to which investments you can and can’t do, as there are clear IRS guidelines on this topic.
Are my SDRA investments guaranteed?
No investment (aside from FDIC-insured deposits) is guaranteed and self-directed investing is not for everyone. However, most successful investors feel that if they know and understand the assets they are investing in, the risk involved is much less than with traditional IRA assets they don’t understand.
Important Note: No employees or owners of Hard Money Bankers, LLC are IRA custodians, accountants or financial advisors and are not affiliated with any IRA custodians. We can, however, refer you to self-directed IRA custodians that our clients use, like and trust. No information given herein should be construed as tax or investment advice.
