How to use a Self Directed IRA to Invest in Real Estate Crowdfunding
By The ArborCrowd Team
Dec 6, 2019

Retirement accounts can be great tools for investing in one’s future, but many retirement accounts are very limiting in the types of assets a person may invest in.

One type of retirement account – the Self-Directed Individual Retirement Account (SDIRA) – gives individuals the ability to invest in alternative assets, such as commercial real estate.

This article provides the basics of investing through an SDIRA, such as:

  • What is an SDIRA?
  • What are some advantages of using an SDIRA?
  • And how to access real estate investments through crowdfunding?

What is an SDIRA and how to set one up?

An SDIRA is simply a tax-advantaged investment account for retirement, where an individual has control to invest their funds in a wider range of asset types, compared to a traditional individual retirement account (IRA).

Often, an SDIRA account is established using a custodian, which is a company that holds the investor’s assets and assists in ensuring that the appropriate regulations are adhered to avoid jeopardizing the tax benefits. Today, in addition to more typical asset classes such as stocks, bonds, mutual funds and exchange-traded funds (ETFs), many custodians will facilitate investment in alternative asset classes including real estate, precious metals and tax liens.  This is appealing to people seeking ways to diversify their portfolios.

The parameters of an SDIRA

Like a traditional IRA, money contributed into an SDIRA is tax deductible, but for those whose modified adjusted gross incomes exceed $75,000 annually ($124,000 for couples), the benefits are only available if an employer doesn’t offer a qualified retirement plan, such as a 401k. Additionally, a 401k and other retirement plans can be rolled into an SDIRA if an individual changes or leaves their job.

When money is withdrawn from the SDIRA, the individual will be taxed on the money they contributed over the years and any growth on the retirement funds.

For 2019 and 2020, the maximum annual contribution to an SDIRA account is $6,000, or $7,000 for people age 50 or older. However, there is no limit on the amount that an individual can roll over from another retirement account, such as 401ks, 457s, 403bs and thrift saving plans (TSP).

(Note: SDIRA Income and contribution limits can change each year at the discretion of the IRS.)

The Advantage of an SDIRA

Most types of retirement accounts, including a 401k, 457, 403b and TSP, are severely limited in investment options.

Suppose an investor wanted to diversify their retirement funds from stocks to include real estate assets. The investor could choose to roll over their traditional retirement account into an SDIRA without concern for income limits or contribution limits. By having an SDIRA account, an investor can potentially achieve a broader set of investment goals such as additional income, and less reliance on a single asset class.

Using an SDIRA and crowdfunding to invest in real estate

With the advent of real estate crowdfunding, investors saw real estate as a great way to diversify their stock and bond heavy portfolios and many chose to invest using their SDIRAs. Initially, only a handful of SDIRA custodians were savvy enough to recognize this trend and facilitate these transactions.

There are numerous custodians who can help investors use their SDIRAs to invest in commercial real estate through crowdfunding. After identifying a custodian, the process is usually quick and easy.

At ArborCrowd, we’ve worked with a number of SDIRA custodians that have held accounts for our investors. While we do not provide tax, legal or investment advice, we can provide you with a list of SDIRA custodians that we have worked with in the past. Give us a call at 844-365-1200 or contact InvestorRelations@ArborCrowd.com for this information. If you already have an SDIRA account and would like to invest in real estate crowdfunding with us, just reach out and let us know.