Should I Open a Self-Directed Retirement Account to Invest in Syndications

So you’ve decided you’d like to venture into real estate syndications…..awesome! And perhaps you’ve heard of investing in syndications with a self-directed retirement account…..great. But should you make your start into syndications via a self-directed retirement account? Personally, I say no. In my opinion, I think if you are new to syndications, or real estate investing in general, that you should utilize your taxable funds to get started for the following reasons:

1. Climbing Two Learning Curves at the Same Time
To take on the goal of learning about syndications and how to invest in them wisely AND the task of understanding the use of self-directed retirement accounts for this purpose is a lot to be learning about at one time. Each topic deserves a fair amount of time and focus to get to a point where you feel like you know what all the considerations are. For example, learning about syndications involves not only understanding the concept of syndication and how syndications are structured but also includes figuring out the advantages/disadvantages to you as an investor, how to evaluate a particular syndication opportunity, how to vet a syndication sponsor (see a previous article here about this topic), learning what type of syndication is best for your investing, and much more. If you are going to be investing $25-100k into something, it’s worth taking your time to figure out and get comfortable with all of the moving parts.

On the other side, learning how to utilize a self-directed retirement account involves understanding what self-directed means, learning the limitations on what you can and can’t do with a self-directed account, figuring out the advantages/disadvantages of using these accounts, learning about the different types of self-directed accounts and determining which might be best for your purposes, investigating self-directed IRA custodians that handle these accounts and evaluating their customer service, reputation, and fee structure. All this is even before going through the process of setting up the account with all of the associated paperwork. As you can see, this is not a one weekend afternoon task. You could reasonably expect to spend a few weeks at a minimum learning about, choosing, and setting up a self-directed retirement account.

Can you take on learning about both syndications and self-directed retirement accounts all at the same time? Of course you can. I am just wanting to point out that it does require a bit of time and effort and it might be overwhelming to do a deep dive into both at the same time while likely juggling all of the other responsibilities in your life.

2. Tax Shelter Within a Tax Shelter
So what does this mean? Well, some would argue against putting an already tax efficient vehicle (real estate) into a tax deferred entity (self-directed retirement account). The argument would be that this would “waste” the opportunity for you to utilize the depreciation impact to potentially create a passive/paper loss outside of a retirement account whereas whatever net income is generated within a retirement account eventually comes out subject to whatever your going tax bracket is at that time.

I can certainly appreciate this argument, but if you have a preference for investing in real estate instead of the more traditional stocks/bonds/mutual funds then I don’t think it should stop you from investing retirement funds because of this. However, I do think that when you are just getting started in real estate investing or syndication it makes sense to consider the tax implications of investing pre- vs. post-tax funds, especially in terms of funding a retirement account for the sole purpose of investing in real estate.

3. Fees of a Self-Directed Retirement Account
Depending on which self-directed retirement account custodian you choose to utilize for your investing, your fee structure will likely be either some percentage of account value annually or an annual base fee with subsequent small fees for various transactions or a fee structure based on the number of assets held in the account. As mentioned in point #1 above, it can be a little overwhelming at first to figure out and certainly deserves some consideration as to matching the type of investments you plan to be doing with the fee structure of the custodian to make sure it does not result in a disproportionate amount of fees for the type of investing you are doing. The point I want to make here is that until you are SURE you are committed to the real estate game long-term and plan on investing significantly via this self-directed account, it probably doesn’t make much sense to spend the several hundred dollars to set up the account and pay the fees (not to mention take the time to evaluate and choose a custodian and complete all of the paperwork). In other words, it won’t really be worth it to spend several hundred dollars (minimum) plus time/effort in order to invest only $25-50k. You might end up paying a undesirable amount in fees compared to your investment amount with a small account just to “try” real estate investing via a self-directed account.

For the 3 reasons above, my recommendation is to “get your feet wet” investing in syndication with your non-retirement funds first. By doing so, you can first focus on learning what you need to about syndications and not try to master both topics of syndication AND self-directed retirement accounts at the same time. Also, you’ll be able to take full advantage of the tax efficiency offered to real estate investments. Once you get comfortable with syndications and are certain you would like to invest more in that way then it would make sense to take a deeper dive into how to utilize self-directed accounts for further real estate investments.

What do you think? Are you at this point and feel overwhelmed trying to learn about both subjects? Have you invested with self-directed accounts before? If so, what has your experience been and what would you recommend to others? Feel free to share your questions or experience on this topic.

2 thoughts on “Should I Open a Self-Directed Retirement Account to Invest in Syndications

  1. I think it is great advice to do syndications outside a retirement account first to see if it is for you. That’s currently what I am doing and have had great experience .

    It seems the added complexity and fees probably will be the biggest barrier for me doing this through a retirement account.

    1. Thanks for sharing your experience as well Xrayvsn. I think once you anticipate doing enough volume of real estate within the self-directed account it is worth it but just not an inexpensive, easy way to “try it out”.

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