Is the Self-Directed IRA the right plan for police officers?
A Self-Directed IRA for police officers is a great way to save for retirement while using retirement funds to invest in assets you understand, like real estate and private placements. The Self-Directed IRA is essentially an IRA account that allows for alternative asset investments. As a result, you won’t find the term “self-directed IRA” anywhere in the Internal Revenue Code (IRC). Below, we touch on the major points of why retired police officers may benefit more from a Self-Directed IRA.
What is the Self-Directed IRA Advantage?
A self-directed IRA refers to a specially created IRA that allows one the ability to invest in alternative assets, such as real estate. Not all self-directed IRA providers are the same. Most self-directed IRA providers claim they are offering self-directed IRA type accounts but in actuality what they are offering is the ability to self-direct the investment products they offer. This includes stocks and other traditional assets. As a result, the self-directed IRA industry was born to service clients that wish to purchase IRS approved alternative investments with their retirement funds, such as real estate.
The ability to purchase real estate with retirement funds, such as an individual retirement account, has always been allowed by the IRS. Since the creation of IRAs back in the early 1970s, the IRS has permitted IRAs to purchase or hold real estate or raw land. You can find this on the IRS website. By using a self-directed IRA to make alternative asset investments, retirees will have the ability to diversify their retirement portfolio, invest in hard assets, and more importantly, invest in what they know and trust.
5 Benefits of the Self-Directed for Police Officers
1. Investment Diversification
The idea of investment diversification has become a hot theme with many sophisticated investors over the years, especially retirees. The 2008 financial crisis cost retirees almost 40% of their retirement assets. Many are still trying to get back to where they were prior to the crisis. The sudden and steep stock market fall, along with the lack of faith in Wall Street and the global financial markets, have Americans seeking a retirement portfolio with more balance and diversity. With this came a sharp increase in the number of Americans looking at a self-directed IRA as the vehicle for some degree of account diversification, as well as gaining the ability to invest in hard assets, such as real estate.
A self-directed IRA offers one the ability to use his or her retirement funds to make almost any type of investment and generate tax-deferred or tax-free gains in the case of a Roth IRA. As a retired police officer, the self-directed IRA offers you the ability to invest in assets you know and understand, such as real estate, private businesses and more, while attaining a higher level of investment diversification.
2. Self-Directed IRA Investments
The IRS and the Internal Revenue Code is always changing, which is why they do not describe what a self-directed IRA can invest in, but detail what a self-directed IRA cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain type of transactions. These are:
- Life insurance
- Essentially any transaction that directly or indirectly benefits a disqualified person
The definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest. In essence, one should not engage in transactions that involve a disqualified person or that directly or indirectly personally benefits a disqualified person. The purpose of these rules is to encourage the use of IRAs for accumulation of retirement savings and to prohibit those in control of IRAs from taking advantage of the tax benefits for their personal account.
3. Retirement Accounts that Can be Self-Directed
One of the most common questions is what type of retirement funds can be used in a self-directed IRA with the checkbook control structure. The simple answer is that as long as it is a retirement account, the retirement funds can be used in a self-directed IRA structure. Thus, the following types of retirement accounts can be used in a self-directed IRA structure:
- Traditional IRA
- Roth IRA
- Plans for Self-Employed (Keoghs)
- Money Purchase Pensions Plans
In the case of pre-tax funds (Traditional IRA, 401(k), 403(b), etc.), those funds will roll into a self-directed IRA. In the case of Roth IRA funds, those fund will roll into a self-directed Roth IRA. Whereas in the case of a SEP and SIMPLE IRA, those funds will also roll into a SEP Self Directed IRA and SIMPLE IRA respectively.
There are two primary types of self-directed IRA:
- Custodian controlled self-directed IRA
- Self-Directed IRA LLC
4. Custodian Controlled
With the custodian controlled self-directed IRA, a special IRA custodian will serve as the custodian of the IRA and allow you to make alternative asset investments, such as real estate. The IRA custodian will then invest the IRA funds at the sole direction of the client. The investment will be held in the name of the IRA custodian, such as IRA Financial Trust Company FBO John Doe IRA. The IRA custodian will be responsible for making all payments regarding the IRA investment, including paying expenses.
5. Checkbook Control
When you establish a self-directed IRA with checkbook control, making a real estate investment is as simple as writing a check. With a self-directed IRA with checkbook control, a special purpose limited liability company (LLC) is established. The IRA (individual retirement account) is owner of the LLC, and the LLC is managed by you, the IRA holder. As manager of your self-directed IRA LLC, can make real estate investment decisions on behalf of your IRA on your own without the consent of an IRA custodian. A self-directed IRA LLC with “Checkbook Control’ allows you to buy real estate by simply writing a check. Since all your IRA funds will be held at a local bank in the name of the IRA LLC, all you need to do to make the real estate transaction is write a check straight from the IRA LLC bank account or simply wire the funds from the IRA LLC bank account.
Get in Touch
The Self-Directed IRA for police offers is a great way to make alternative asset investments and make investments they know better than Wall Street, and perhaps even trust more than Wall Street, such as real estate. It allows you to diversify your retirement portfolio while gaining the power to generate tax-free income.
If you have any questions about how to take advantage of the self-directed IRA, contact IRA Financial Trust directly at 800-472-1043. We also encourage you to fill out the form to speak with an IRA specialist. We look forward to hearing from you, and to help you make savvy investments.