Roth & Traditional IRA Real Estate Investments
Did you know that you can invest in real estate through a retirement account? Below are some things you should know:
- 1. Investing with retirement money gives consumers an opportunity to build their retirement fund since all proceeds from the real estate investment, from rental cash flow to selling the property, go directly back into the retirement account.
- 2. Utilizing funds from a retirement account to purchase investment homes with cash, or at least with a large down payment, can give individual buyers an opportunity to purchase real estate and to compete in the market, which has become tighter.
- 3. Retirement funds can be a good fit for some investors but it’s not for everyone. Your age and the type of property should be considered when looking at this strategy. Rental property can be a good investment at any age, especially at the lower end. It’s usually profitable and easy to sell. On the other hand, buying land in outlying areas in anticipation of population growth is something only those under the age of 50 should consider.
You should know these rules:
- Title: Any property purchased by an IRA is owned by the IRA – not an individual.
- Purchase money: Any money used to purchase a property with an IRA has to come directly from your IRA, not you individually, and you can’t be reimbursed by your IRA. This includes earnest money and closing costs.
- Rehab and carrying costs: This is similar to purchase money. Any costs associated with rehabbing or carrying the property must be paid directly by the IRA. An IRA custodian can help with this.
- Income: Any income generated from the property has to flow back into the IRA.
- Prohibited transactions: Purchases made with an IRA need to be for investment, not personal use. Also an IRA cannot do business with family members of “lineal descent,” which includes you, a spouse, parents, children, grandparents, grandchildren and great-grandchildren. In addition, you cannot borrow money from a self-directed IRA or use it as security for a loan.
Using a Roth IRA might be a better idea than using funds from a traditional IRA because, although a traditional IRA allows for tax-free contributions, the earnings are taxed when pulled out for retirement down the road. For a Roth IRA, you pay taxes as you go and are not taxed when they are pulled out during your retirement years.
It is also best to buy in your comfort zone and to plan an exit strategy. There are also creative investing strategies. For example, you can set up your own 401(k) under a real estate investing business, which allows contributions up to $50,000 per year plus $50,000 for a spouse. You can also make it a family affair and multiply your purchasing power. For example, a husband and wife might each have a Roth IRA, and both may have a 401(k). In addition, they might have a couple of kids who each have a Roth IRA and the family can use all six accounts to purchase a deal and share the percentage.
Please note that it is wise to have an attorney or accountant who can help you with this investment strategy.