With a truly self-directed IRA, you’re not limited to stocks, bonds, or mutual funds. You can purchase real estate assets ranging from residential and commercial properties to land, mobile homes, and more as alternative investments for your IRA. Real estate can be used to generate rental income and rents can be increased over time to keep pace with the market. Rising prices can also increase the resale value of real estate.
This real estate income has its own tax-advantaged growth potential if held in an IRA. An IRA is a powerful financial planning tool that allows you to save for retirement with tax relief or provide benefits to your heirs. Most people invest their IRA funds in stocks, bonds, and mutual funds. Others, however, opt for unconventional investments, such as real estate, in the hope of boosting their returns.
While the idea of holding real estate in your individual retirement account sounds good and can offer higher returns than stocks or bonds, the process has some pitfalls and traps. Annual contribution limits still apply. So if you don’t have enough in your IRA, you can’t just deposit additional contributions to cover the purchase. To buy real estate in a retirement account, you must first set up a “self-managed IRA” with a custodian. Once you’ve set up the IRA, you can use it to buy virtually any type of real estate, including vacant land, single and multi-family homes, commercial properties, co-ops, and condos.
Compared to other retirement accounts such as managed IRAs or 401 (k), a self-directed IRA offers plenty of flexibility. The SEC recommends that you always review the information in your SDIRA account statements, avoid unsolicited investment offers, doubt any claims for guaranteed returns, and consult a professional such as an attorney or licensed investment professional about investing in this IRA. Instead of keeping all your investments in a single investment type, such as stocks and bonds, real estate can lower your risk at times when the overall market is in a downturn. Violation of these rules will disqualify the IRA and the full value of the IRA will be taxable, plus a 10% penalty.
An experienced custodian can help streamline the process of investing in real estate in a self-directed IRA as investors work to build a diversified multi-asset portfolio to achieve financial goals. It’s important to remember that IRA funds (cash) are generally used to purchase the property. Furthermore, the IRA owns the property and it can only be used for investment purposes. If you don’t have enough money in the IRA to fully buy a property, you may be wondering about a mortgage. After all, real estate as a hard asset helps diversify a portfolio that is otherwise invested in stocks and other securities, which isn’t the worst idea in the world.
Also remember to factor in the recurring custody fees for the self-governing IRA as well as a buffer of additional funds for real estate improvements. Every dollar that comes out of your IRA is a dollar that no longer has a few decades to appreciate in value tax-free. IRAs are generally more flexible about the types of investments you can hold in them than 401 (k), s, or similar retirement accounts. If you’re looking to invest in real estate but aren’t entirely convinced that an IRA is the best remedy, consider these alternatives.
Although the IRA is in your name and the assets in the account are for your final retirement pension, you cannot currently receive benefits, directly or indirectly, from assets in your IRA. Other alternative assets that you can often invest in with your self-directed IRA include promissory notes, private placement securities, tax liens, and cryptocurrencies. We’ve mentioned so many issues and drawbacks that at this point, you might be wondering whether it makes sense to invest real estate in an IRA.
.
