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Self-directed Individual Retirement Accounts (IRAs) have become increasingly popular among investors looking to take control of their retirement savings and diversify their investment portfolios. One investment option gaining significant attention within self-directed IRAs is mortgage funds. These funds offer several benefits, including consistent monthly income, tax deferral of income, and protection against Unrelated Business Income Tax (UBIT) when structured as Real Estate Investment Trusts (REITs). In this article, we will delve into the reasons behind the growing popularity of mortgage funds in self-directed IRAs.
1. Consistent Monthly Income
One of the primary attractions of mortgage funds for self-directed IRAs is the potential for a consistent and reliable monthly income stream. Mortgage funds invest in a portfolio of mortgages or mortgage-backed securities, which typically pay out interest and principal payments on a regular basis. These consistent payments can provide a stable source of income for retirees and investors looking to supplement their retirement savings.
2. Tax Deferral of Income
Another significant advantage of investing in mortgage funds through a self-directed IRA is the ability to defer taxes on the income generated by these investments. Traditional IRAs and Roth IRAs offer tax advantages, but they have different tax treatment for income generated by investments. In a traditional IRA, income is tax-deferred, meaning you won’t pay taxes on the income until you withdraw funds during retirement. In a Roth IRA, qualified withdrawals are tax-free.
By holding mortgage funds within a self-directed IRA, investors can benefit from the tax-deferred status of their account, allowing their investments to grow without the immediate burden of income tax. This tax deferral can significantly boost the overall returns on your investment over time.
3. REIT Structure and UBIT Exemption
Many mortgage funds are structured as Real Estate Investment Trusts (REITs). REITs are specialized investment vehicles that own and manage income-producing real estate assets, including mortgages. When a mortgage fund operates as a REIT, it can enjoy several tax benefits that make it particularly attractive for self-directed IRAs.
One of the key advantages of REITs is their exemption from Unrelated Business Income Tax (UBIT). UBIT is a tax that applies to certain types of income generated by tax-exempt organizations, including IRAs, when it is considered unrelated to their primary purpose. However, when you invest in a REIT, the income generated from the fund’s real estate-related activities is generally exempt from UBIT. This tax advantage can help preserve more of your investment returns for your retirement savings.
Conclusion
Mortgage funds have gained popularity as an investment choice within self-directed IRAs for several compelling reasons. They offer a reliable source of monthly income, tax-deferral benefits, and exemption from UBIT when structured as REITs. These advantages make mortgage funds a suitable option for individuals seeking to diversify their retirement portfolios and achieve consistent returns while minimizing tax implications.
Before investing in any mortgage fund or REIT within a self-directed IRA, it’s crucial to conduct thorough research, consult with a financial advisor, and understand the specific terms and risks associated with the investment. While mortgage funds can be a valuable addition to a self-directed IRA, it’s essential to make informed decisions that align with your long-term financial goals and retirement strategy.
Brock VandenBerg is the President of TaliMar Financial and Fund Manager of TaliMar Income Fund I. Mr. VandenBerg started investing in individual trust deeds in 2008, providing capital to real estate investors taking advantage on the housing crisis. He soon brought in outside investors to share in this lucrative opportunity to earn above market returns. After funding over $375 million in short-term loans and attracting over 500 investors, Mr. VandenBerg launched TaliMar Income Fund I in 2021 to offer investors a much more efficient way to invest in individual trust deeds. Currently, TaliMar Income Fund I invests on behalf of over 220 individual investors with over $60 million in assets under management.
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