When saving for retirement, workers spend decades stashing their paychecks into Individual Retirement Accounts (IRAs). And while many people may be familiar with the traditional offerings of IRAs - investments in bonds, mutual funds, etc. - they likely aren't aware their IRAs can be used for other purposes as well.
Self-directed IRAs aren't much different than standard IRAs - they just provide more investment options, so workers have greater control over how their savings is being used. A growing number of IRA holders are looking to alternative forms of investments, such as real estate.
For those interested in investing their IRA into land, the benefits could be great. However, they need to ensure they are fully aware of how to self-direct their IRA toward the appropriate types of land.
Mossy Oak Properties has hundreds of certified land specialists around the country who can assist with any questions that may arise pertaining to self-directed IRAs. Additionally, Tyler Carter, director of business development at NuViewIRA stated prospective land investors should ask lots of questions to ensure they fully trust the decision they're making.
Understanding self-directed IRAs
As noted, self-directed IRAs may be less well-known, but they're not inherently different from what investors are used to.
"Self-directed IRAs aren't a separate type of IRA," said Carter. "Self-directed is merely a term we use in the industry to indicate that we give our clients the largest possible spectrum of investment options. Investing in timber is very straightforward. The land is titled in the name of the IRA instead of the individual (this is the case for any IRA-owned asset), and any income goes back to the IRA with all the tax advantages that an IRA affords. The IRA works in exactly the same way as any other IRA - the only difference is that timberland is the investment, instead of mutual funds, stocks, bonds, etc."
The main benefit of an IRA is that the savings invested in the account is tax-deferred, which means the money will not be taxed until it is withdrawn at a much later time. And during retirement, owners have less taxable income so IRA withdrawals will be taxed at a lower rate. The money earned during the land investment does not mean quick cash. Rather, the money is directed straight back into the IRA.
"There are many benefits to using a self-directed IRA to purchase investment real estate," said Carter. "Traditional IRAs allow for tax-deferred investment into land and Roth IRAs offer the benefit of truly tax-free growth. There's no need for a 1031 exchange."
Because a 1031 exchange is not required, the process is inherently easier because 1031s can be extremely complex. Likewise, for those who are confident in the investments they are making, using an IRA makes sense because retirement accounts are many times one of the largest assets people own. Carter noted IRAs can contain large sums of investable cash - cash that can be put to use however one chooses.
"If someone isn't interested in mutual funds of other stock market-based investments, self-directed IRAs give them options that they don't have with traditional brokerage houses."
What to keep in mind about self-directed IRAs
Above all, self-directed IRAs may be more heavily reliant upon having a deep understanding of the market one is investing in and then doing so at the right time.
"Timing is very important." Carter stated. "All too often I see a client miss out on an investment opportunity because they identify a property while their money is still tied up in traditional investments. It's important to fund a self-directed IRA with enough money for an initial deposit before you start shopping around. [Investors] should also familiarize themselves with the IRA rules covered in section 4975 of the IRS code."
While there are many things to keep in mind during the investment process, it's always best to leverage one's own knowledge base as a starting point, Carter suggested. If a person knows nothing about stocks, then playing the stock market may not be the best option for funding one's retirement. On the other hand, if someone is knowledgeable on a particular market, such as timberland, then investing in land can be a real boon if done correctly. The key is to never jump into something if not prepared. An important question to ask prior to deciding on how to use an IRA is, " How comfortable are you betting your retirement on something you may or may not understand?"
Interested investors should acquaint themselves with all associated tax laws and retirement options before making a final decision on how they wish to use their IRA. Carted stated fewer than 2 percent of the population is even aware that self-directed IRAs are an option, which means there may be a steep learning curve to start out. However, if one is looking to avoid excess market fluctuations and invest in something they truly believe in, then land could be worthwhile.
"As an increasing number of people are forced to choose between the risks and volatility of stocks versus the poor performance of bonds due to interest rates, self-directed retirement accounts are becoming very popular investment vehicles," said Carter.
Though retirement and investment knowledge may not be on the forefront of one's mind, there's never a better time to start thinking about your future than now. With the guidance of IRA experts and MOP land brokers, you can ensure you're making the best decision with your savings.
As Carter stated, "Most people are accustomed to clicking a button to purchase an IRA investment online. Completing a contract for real estate inside their IRA is often a new experience."
At the end of the day, investment decisions are yours to make, and if you're not familiar with the land investment process, then it's best to reach out to a professional who can help.
For additional information about the land market and how you can benefit from a partnership with Mossy Oak Properties, get in touch today.