October 4, 2021
Disaster Preparedness in a Self-Directed IRA
The IRS has declared September to be National Preparedness Month. The timing certainly seems to be right. Extreme weather events have been battering the U.S. and many people find their properties severely damaged. This is obviously a huge headache for homeowners and tenants as they have to scramble to find temporary lodging. However, it can also mean big trouble for properties owned by a Self Directed IRA. Let’s take a look at what a Self Directed IRA account holder can do beforehand to prepare for unwanted disaster.
- Secure critical documents
Although almost everything can be found online these days, that doesn’t mean that important documents can’t be lost. If your Self Directed IRA owns a property, don’t rely on the bank or custodian to be able to access your key documents. All the important documentation for the property and Self Directed IRA account should have physical copies and placed in a waterproof container in a secure place. Documentation that falls into this category includes personal identification, as well as property documents like tax filings, insurance, deeds, and titles.
- Make copies
Redundancy is key for protecting critical Self Directed IRA documentation. You can make paper copies of your documents and keep them with a trusted friend or in a safe deposit box. You can also make digital copies by scanning the documents and uploading them to an online folder.
- Compose a property info list
Make a list of all the properties that are owned by your Self Directed IRA. Include in this list where to find information for each specific property if disaster were to occur. This is especially important if your Self Directed IRA owns properties out-of-state or internationally. The IRS has a number of resources which can help inform you for disaster scenarios. These include tax relief for affected areas and an Around the Nation page which can help you focus on specific states. There are also other government sites which can help you out for specific disaster types. For example, FEMA has a National Flood Insurance Program that can assist property owners during floods or hurricanes.
- Document your properties
Photograph or video everything in your Self Directed IRA property both before and after disaster hits. These photos can help tremendously when making an insurance or tax claim. With this kind of documentation, the more the better. If you have high value items in the property, then single them out for more extensive documentation. The IRS provides workbooks which can help you tabulate everything in the property. These come in a personal-use version and a business version.
- Recover lost records
Here also the IRS provides an extensive guide on how to recover lost documentation. For a Self Directed IRA property, record recovery can include the following:
- Contact the title company or bank for available documentation.
- Check with the mortgage company for a copy of the appraisal.
- Check with the state insurance department to get insurance records.
- Contact contractors who may have done work on the property.
- Emergency reserves
If your Self Directed IRA is invested in a rental unit, then it's very possible that the rental income will dry up after the disaster. This is not due to the loss of tenants, but rather to their inability to pay. Disasters often affect people’s ability to work and hence pay their regular bills. As we saw with the Covid response, the government actually legislated in certain cases that tenants could stay in place even though they didn’t have the ability to pay rent. Although that may be an unusual situation, it doesn’t hurt to be prepared. Think about how you will be able to continue paying bills associated with the property if the rental income is not there to provide it. You may have funds available in your Self Directed IRA account that can cover the down-time, but those may not be your best option. In these cases, it pays to turn to an accountant or financial advisor to structure your best response to the disaster.
- Optimize your insurance policies
Insurance can go a long way in mitigating any negative effects on your Self Directed IRA. However, that’s only if the insurance is optimized for your property. Although you may possess a basic insurance plan, you might be unpleasantly surprised at what it does or does not cover. Here are some of the questions you can ask your insurance provider to make sure that you’re getting appropriate coverage.
- Is flooding covered with this policy?
- Does this policy cover damaged household goods based on current value or based on replacement cost?
- Is temporary housing covered in the event that the property in unlivable?
- Contact the creditors
If your Self Directed IRA finds itself in a tough situation, chances are you’re not alone. Many institutionalized creditors have programs in place that acknowledge adverse conditions and provide temporary relief. Finding out about these programs is as simple as picking up the phone. Contact your creditors, see what contingency options are available, and gain a little piece of mind.