Did you know that you can use your IRA or 401K to purchase real estate and have those assets grow in your retirement plan? Most people don’t. This is a great way to increase the value of your retirement plan. Adding real estate to your IRA means these assets will increase in value tax-deferred until you begin pulling money out of your IRA or 401K. That’s right, you can buy real estate, let it appreciate, and not have to pay the IRS any income taxes on your income or gains from it until you retire!
Now, there are some rules, but they are, for the most part fairly simple and straightforward. There are several types of real estate investments that are eligible for including in your IRA. Rental homes or condos, raw land, timberland, commercial real estate or office buildings rented or leased to a business are all eligible. You could also add discounted real estate paper (where you purchase mortgages from someone at a discount) and even tax certificates. You can even purchase your future retirement home with your IRA. You just have to rent it out to someone else until you are ready to retire. This is not a comprehensive list, but it should give you some good ideas.
One rule concerning IRAs & real estate is that you cannot use it buy your own home or any property you live in, like a second vacation home for example. And I have also read it is not a good idea to rent out property you have purchased with your IRA to close relatives.
In order to use your IRA to purchase real estate, you must set up what is called a self directed IRA. This means you can direct your own investments. To do this, you will need the services of an approved IRA trustee or custodian or independent administrator. In order to fulfill their legal obligations, the trustee will most likely require that you hire a property manager to manage any rental property. This is to ensure that the property taxes are paid on time, to collect rents and maintain the property to local building codes. This can be an advantage for you, to let someone else deal with the day to day headaches of managing property.
There are many companies and individuals that offer IRA trustee services.
You can use a Roth IRA or a SEP IRA, for small companies and self-employed people. According to David Gass, president of Business Credit Services, the Roth IRA is his best choice for using an IRA to buy real estate for long term investments.
When you purchase real estate using your IRA, the trustee will most likely require that you purchase the property outright and not use any debt financing (a mortgage or trust deed). This is to protect your IRA from defaults on loans and other problems with long term contracts. If you are thinking, well, I can’t afford to buy a $150,000 or a$200,000 property for my IRA, don’t be put off. I have seen many properties in several parts of the country that can be purchased for under $50,000. You can even buy a mobile home and rent it out.
You need to think of your real estate investments like a business. All the income must be deposited into the IRA. And all expenses related to your property must be paid from the IRA. This will keep you out of hot water with the IRS. And when you sell the property, all of the gains will be added to your IRA, tax deferred.
This short article is just meant to introduce you to the idea that you can increase your wealth by adding real estate to your IRA. You will need to find and work with experts and professionals in this area. Your real estate agent can probably introduce you to several qualified people and companies that deal with this.