Using Your Self-Directed SEP IRA to Invest in Real Estate

Posted by Grant Cardone


It is common knowledge that when you contribute to an IRA for retirement, there is limited control over how the money is invested. As your IRA grows, you may find that you want to make some investment decisions yourself.

If your retirement funds are in a self-directed IRA, you can make your own investment decisions and choose the types of assets you put your money into. Luckily, there are options to roll retirement savings from your SEP IRA into a self-directed SEP IRA.

What is a SEP IRA?

SEP stands for Simplified Employee Pension. SEP IRAs are popular for self-employed individuals, such as independent contractors with 1099 wages. It's also a common retirement savings plan for small business owners with only a few employees.

SEP IRAs have higher contribution limits than many other retirement plans. SEP IRAs allow you to contribute 25% of your annual income, up to a maximum of $57,000 per year.

Traditional IRAs have an annual limit of only $6,000 — or $7,000 if you're 50 or older.

The Internal Revenue Service (IRS) has rules and guidelines for SEP IRAs you should review.

Converting your SEP to a self-directed IRA

It’s fairly simple to move funds from your current IRA into a self-directed plan. You can choose to convert your entire IRA, or just a portion of it.

If your current custodian offers options for self-directed IRAs, you can simply have them transfer the funds in-house. Your current adviser likely already knows your investment goals and can help you make the right decisions when transferring funds.

The process is almost just as simple if you choose to move to a new custodian for your self-directed SEP, as long as you’re doing a direct rollover. They will handle the transfer once you go through the process of setting up your new retirement plan. This process can ensure that your transfer is tax free, but you should always discuss this first with a tax professional to make sure.

There is a 60-day rule for deposits into the new self-directed SEP IRA if you receive the funds yourself. This rule says you have 60 days to deposit the funds into a qualified account in order to avoid paying taxes or fees on the funds you receive.

If at all possible, it’s usually best to set up a direct transfer to avoid the risk of being taxed and penalized on the money you’re removing from your current SEP IRA.

The rules for moving investment funds from one IRA to another are the same for a self-directed plan as they are for any other IRA rollover. For example, you can’t roll over funds from a Roth SEP into a traditional SEP.

Traditional IRAs and Roth IRAs are both able to be moved into a self-directed IRA. Just be aware that any funds you convert from a traditional IRA to a Roth IRA will be taxed since it is no longer tax deferred.

How you can invest with a self-directed SEP IRA

A self-directed SEP IRA gives you more options on how to invest your IRA contributions. You can choose to stick with the traditional investments such as ETFs, mutual funds, and stocks. You can also decide to invest in assets such as real estate, notes, and private equity.. Remember, there are downsides too, and there could be tax consequences so before you make any moves, you need to make sure you get advice from your financial advisor and tax professional built around your financial situation.

Investments you can make with a self-directed IRA

  • Real estate
  • Private equity
  • Buying a business
  • Private lending
  • Precious metals
  • Notes
  • Tax liens/deeds
  • Mineral rights
  • Cryptocurrency
  • Forex
  • Livestock

Prohibited investments from a self-directed IRA

  • Real estate for personal use
  • Gems
  • Artwork
  • Antiques
  • Coins
  • Rugs
  • Stamps
  • Metals
  • Alcoholic beverages
  • Certain other pieces of personal property

Why you should use your IRA to invest in real estate

In my opinion, real estate is arguably the best long-term investment. Real estate investments generate consistent cash flow, build equity, and appreciate over time. When taking equity and appreciation into account, real estate typically has higher returns than any other form of traditional investment.

Real estate is still the number-one wealth builder, so it’s a logical investment to fund your retirement. When using leverage to purchase investment properties and continuing to roll over equity into new investments, your retirement account can grow exponentially.

One of the most important considerations when investing in real estate with your self-directed SEP IRA is that you can’t be involved with the management of your investment properties. They also can’t be managed by a disqualified person, which includes a beneficiary, spouse, or any member of your family. For more information, review IRS Publication 590A.

Choosing investments for your self-directed SEP IRA

You need to be extra careful when you choose investments for your IRA, so you should always seek the advice of a finance or tax professional. While a managed SEP IRA has a whole team of analysts choosing investments for the investors, once a SEP IRA is converted into a self-directed plan, the investor alone is responsible for all of the investment decisions.

That’s why not only should you do your homework on any asset managers for real estate or private equity private placements you invest in, you should always get professional advice too. Make sure you’re investing your money with an asset manager that has a proven track record of successful investments and a large enough portfolio to attract competitive lending terms to increase the overall cash flow on the investments.

Investments like cryptocurrency and Forex may look exciting, especially when you see the few instances where investors have had huge wins. But, it is my opinion that these types of investments are too risky to put your retirement savings into.

How the IRA investments are made: The IRA-LLC

There are two ways IRA investors can direct their funds into their chosen investments: Investments can be made by the self-directed IRA custodian, or by opting to use a self-directed IRA called an IRA LLC to have checkbook control. An IRA-LLC what is an IRA-LLC, which are sometimes called a Checkbook IRA.

If you choose to invest through your custodian, they will have to consent to each investment. This will add extra fees and potentially cause delays. However, it does ensure that you are avoiding prohibited investments.

That’s why some people opt to set up a self-directed IRA LLC. This is an LLC that the IRA owns, but you manage. Basically, you get a “checkbook” tied to the LLC, which is why it has the catchy name.

The custodian of your self-directed IRA will transfer the funds into the LLC’s bank account. Since you manage the LLC, you are authorized to sign checks from the account. This is referred to as checkbook control.

Since you have checkbook control, you make the investments directly, without the consent of the custodian.

Solo 401(k)

A solo 401(k) is another option for investing your retirement savings account into real estate. A solo 401(k) is similar to a self-directed SEP IRA in that you can choose your own investments, but it’s limited to small-business owners that don’t have any full-time employees.

A solo 401(k) also provides checkbook control, but the retirement funds are held by a trust company instead of an LLC. The solo 401(k) also has higher annual contribution limits.

The solo 401(k) also provides a couple more options that aren’t available with a self-directed SEP IRA.

  • A solo 401(k) is allowed to invest in life insurance
  • You can take a loan against a solo 401(k) of up to 50% of the value up to $50,000
  • Can invest in an S Corp
  • Roth component is non-income restricted

However, a 401(k) has required contributions, so you’ll still have to continue investing even if you lose your income.

You’re in control. The purpose of a self-directed SEP IRA is that it puts you in control of your retirement savings. While this opens up new opportunities, it also comes with more responsibilities. Since your SEP IRA is meant to fund your retirement, you don’t want to take unnecessary risks.

Partnering with an investor like Cardone Capital to buy real estate with your IRA is one of the safest and most profitable options for growing your retirement savings. Cardone Capital has a proven track record of successful investments and has the most qualified team of real estate investment professionals.

Request more information, or schedule a call to discuss using your self-directed SEP IRA to partner with Cardone Capital.

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