In Your Retirement Quest Put Real Estate Investments In Your IRA And Watch It Grow
Over the years I have had many clients ask me if it was possible to put real estate investments inside of their IRAs. The answer is “Yes” but the IRA has to be specific and has to not have certain restrictions. Thinking outside the traditional investment box can reap many rewards for you and your family. Here are some IRA basics and some ideas for getting real estate investments inside of your IRA.
Individual Retirement Accounts Have Several Typical Categories
The traditional IRA is the most common wherein an individual can contribute money each tax year and receive a tax deduction for an equal amount of the contribution. The money earned in the IRA is tax-deferred and will be taxed after retirement at a hopefully much lower tax rate than the earner is paying presently. Non-penalized withdrawals are allowed after age 59-1/2. These traditional IRAs are what many financial institutions and financial advisers are constantly pushing on investors.
The Roth IRA is a more creative investment instrument. The Roth allows the individual to contribute money each tax year however the contribution is not tax-deductible. The bonus is that the money earned is tax-free and the withdrawals at retirement are tax-free. There are some restrictions on the amount of money the earner can earn per year, but this vehicle can be very powerful because of its tax-free benefits.
The SEP IRA, or self-employed IRA is a simplified employee pension that is tied to a company and adopted by business owner for their employees. One benefit of this vehicle is that employees can contribute large amounts of money each tax year. Additionally the funds invested can be used in similar manner as traditional and Roth IRAs.
The Education IRA allows contributions for children’s education. The contributions and earned income can also be used to purchase a first home.
The Simple IRA is very similar to a 401K as it is an employer-sponsored plan in which the company can match employee contributions.
A True Self Directed IRA Is Necessary For Real Estate Investments Within An IRA
The Self Directed IRA is actually all of the IRAs above however most IRAs are dictated by the custodian or company that is servicing them and only allow the investor certain type assets in the IRA. Technically any asset may be placed into an IRA with the exception of insurance and collectibles. Most larger financial institutions limit what you can direct into your IRA. If you want to have real estate in an IRA you will need to employ a truly Independent Self Directed IRA through an independent or “boutique” custodian who will allow non-traditional assets as permitted investments such as real estate, gold, silver, platinum, life settlements, private placements, etc. There are many of these boutique companies servicing IRAs in the marketplace and they can be located and researched fairly easily. During your research you may be surprised to find out all of the ways you can invest in real estate within your IRA.
Costs For Real Estate IRAs
Self-directed IRAs for real estate investment are typically higher than your average run-of-the-mill IRA, but the long-term benefits can be substantially greater. If you have a commercial building, a single-family residence or an apartment building during the last twenty years your IRA would have ballooned much greater than the average stock market return in the typical IRA. However some investments may not have fared so well as with any investment.
Downfalls For Real Estate IRAs
As with any asset class the investment is subject to ups and downs of the marketplace. Moreover, you will not be able to actively manage the property (and receive compensation) that is within the IRA nor will you be able perform any services or work unless you are not paid for it. There are some very specific rules about the management and servicing of property held within an IRA. The best rule of thumb is to allow a professional property management company handle the management affairs for the property. This way you will not run afoul of the IRS restrictions and at the same time allow a professional to help you maximize your return on investment.
Income Produced In Real Estate IRAs Are Subject To Same Rules
The income produced by the real estate IRA will be subject to the same rules and regulations as any of the other IRAs. You will not be able to use the income prior to you being 59-1/2. The earned income will be placed into the IRA account and can’t be spent until you reach retirement age. The investement property expenses including the fees associated with a professional property manager are tax deductible however.
Investing In REITs Within Your IRA
Another way to invest in real estate within your IRA is to purchase and hold shares of investment grade REITs or real estate investment trusts. REITs are incredibly popular and are available for every type of real estate imaginable. Another benefit of a REIT is that the better positioned ones are well diversified and can hold many different types of building and properties within one investment.
You Should Consider A Real Estate IRA To Diversify
Many people ask me why they should consider a real estate IRA. My answer is simple, diversification. There are many pros and cons and this type of investment may not make sense for everyone for all sorts of reasons. However, it makes absolute sense to look into these, to research these, and to see if they make sense for you. I believe that having a well-diversified portfolio of real estate, stocks, bonds, and other investment assets for your future and retirement is a sound way to approach preparing for the future. I have always believed that owning assets where other people pay off the debt is a great way to prepare for the future. Owning investment real estate whether that asset is a commercial building, an apartment, or a single-family home where other people are investing for you is a sound investment strategy which everyone should look at and seek to employ for themselves and their families.
If you have questions please don’t hesitate to email me or give me a call.