- Pros & Cons of a Self-directed Roth IRA
- How to Convert a Self-Directed IRA to a Self-Directed Roth
- Tax Consequences of a Self-Directed IRA
- Is a Self-Directed IRA Insured?
- Tax Implications of Retiring With a House Owned by a Self-Directed IRA
- Tax Reporting Requirements for a Self-Directed Rollover IRA
With the uncertainty of the usual Individual Retirement Account investments, such as stocks, bonds or mutual funds, you may want to choose alternative investments for your retirement accounts. Tax liens are one type of investment that can be owned inside of an IRA. To make these unconventional investments, you must open a self-directed IRA account, and fund that account, using a self-directed IRA trustee.
A self-directed IRA requires a special trustee who handles nontraditional IRA investments. An IRA trustee usually handles mutual funds, bank accounts and individual stocks, but often only serves as a trustee for the types of investments he sells. A self-directed trustee will hold other types of investments in your IRA account, such as real estate, privately held business and tax liens. Ask a trusted financial adviser for a recommendation on a self-directed IRA trustee. Check the references of any candidate you consider, and make sure the trustee handles tax-lien investments.
You will need to fund your self-directed IRA and establish an account to purchase tax liens. While you can fund your IRA with an annual contribution of up to $5,500, or $6,500 if you are age 50 or older, you will probably need more money to fund the investments you wish to make. Your self-directed trustee can handle the paperwork to transfer funds from any other IRA accounts you own. A transfer from a 401(k) with a previous employer is also a possibility. A trustee-to-trustee transfer done this way has no tax implications and preserves the tax-advantaged status of your invested money.
Research Tax Liens
Different communities offer tax liens for sale using various methods. Some offer tax liens through traditional auctions, while others offer online auctions only. While auctions sell liens to the highest bidder, some auctions sell the liens to the person bidding the highest dollar amount for the lien, and others sell the lien to the person who will accept the lowest interest rate, while paying the full dollar amount for the lien.
Your self-directed IRA trustee will need to make any purchase of tax liens that you bid on and win at auction. This will preserve the tax-advantaged status of your IRA. You cannot handle the funds yourself for the purchase. The trustee will also hold the ownership of the liens in the name of your IRA account, and will collect the interest and payments to hold in the account as well. If the lien matures, and you end up owning the property, the self-directed trustee will also take ownership of the property for your IRA.