Crowdfund | Investing in Real Estate Crowdfunding with Self-Directed IRA
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Investing in Real Estate Crowdfunding with Self-Directed IRA

Real estate has historically been a popular investment vehicle for investors interested in diversifying their portfolios, promoting growth, and expanding wealth options to maximize retirement savings. This is because real estate has provided investors with a higher return on investment than other investment options, including government bonds and interest rates on savings accounts. There are also a number of tax advantages making real estate a smart investment strategy.

With improvements and advancements in technology, millions of American investors have access to wealth-building tools and information to aid them in choosing various property types or other equity deals as investments while also enjoying the flexibility and freedom to seek the expertise of professionals who handle day-to-day operations.

In April of 2012, President Obama signed the JOBS (Jumpstart Our Business Startups), which has given investors the freedom to invest in new real estate crowdfunding offerings and the opportunity to co-invest alongside hundreds of other stakeholders. These crowdfunding offerings have proven to boost rates of return by using tax efficient strategies with individual retirement accounts (IRA). As a result, there are now more than 50 million IRAs in the United States worth over $7.3 trillion.

The four most common types of IRAs include the following:

  • Traditional IRA – a tax-deferred retirement savings account, allowing investors the flexibility to reinvest throughout the life of the account until retirement age; taxes are paid on withdrawals at retirement age
  • Roth IRA – a retirement savings account funded with after-tax dollars that allows an investor’s money to grow; withdrawals made at retirement age are tax free with this particular account
  • Simplified Employee Pension Plan (SEP) – a traditional IRA for self-employed individuals and small business owners
  • Savings Incentive Match Plan for Employees (SIMPLE) – similar to an SEP but designed for businesses with employees; this plan allows employees to participate and requires employers to make contributions on the employee’s behalf

The Benefits of a Self-Directed IRA

One type of investment option that is not included in this list is a Self-Directed IRA (SDIRA). This vehicle provides gives investors more control over their financial futures while also giving them investment flexibility.

For example, a SDIRA allows the investor to invest in alternative assets such as real estate, private companies, green energy, and so on. A SDIRA also provides investors with a diversified portfolio than those who solely invest in traditional investment vehicles and trade securities. SDIRA is also protected under federal bankruptcy laws and real estate investments are insurable.

According to the industry estimates, there are more than 2.5 million of SDIRAs in the United States totaling over $146 billion.

Although there are some limits surrounding the amount of annual contributions and the usage of funds, investing with a self-directed IRA in crowdfunding is relatively straightforward. The two primary ways to fund an SDIRA account include rolling over funds from a 401K or another IRA or retirement investment account or making annual contributions similar to other IRAs. However, it’s important to discuss these strategies with a CPA or tax advisor before funding an SDIRA.

SDIRAs involve more of a “hands-on” investment approach than traditional investment vehicles, however, the benefits and potential rate of return with an SDIRA can significantly outweigh the risks. Investors must do their research and partner with a reputable company or invest in real estate that has a higher rate of return in order to maximize the rate of return.

All in all, by using retirement savings to diversify portfolios and boost real estate investments, investors will likely see more disposable income during retirement.