Purchase Real Estate Within Your Self-Directed IRA
The increased volatility in the stock market recently has probably got you thinking where you should park your money. One interesting investment option that is overlooked by many is using your IRA to purchase real estate. If you think the real estate market has hit its low, you can purchase a rental home now; using your tax-deferred IRA. Let’s say you use a Roth IRA to purchase your future retirement home. You can collect rental payments and put them back into the IRA and watch the homes value grow tax free. Upon reaching age 59.5–the age you can withdrawal penalty free from an IRA–you can then move into your IRA home. Now that’s an investment!
I’m realistic and I know that many of us do not have enough in our IRA to purchase a home. But for some it’s a reality and for the rest of us, it can be a goal. Using your IRA to purchase real estate is really like buying a mutual fund within your IRA. Think of like this, you are basically substituting dividends with rental payments and the overall value of the fund with the homes value. A type of IRA that allows such a purchase is called a self-directed IRA and investment options don’t stop at just real estate, it’s possible to purchase private equity, small businesses and other investments that generate cash flow.
The basic rules to a self-directed IRA is you have to stay at an arms length from the real estate. You cannot take vacations in your purchased IRA or have relatives live there. If you violate the terms, it can be costly. It’s possible to end up paying a 10 percent penalty as well as paying income tax on the IRA’s balance. Usually, it’s best to pay a company to manage and the real estate for you, taking rental payments and putting them back into your IRA. It is possible to take out a loan within your IRA to purchase real estate, but taxes will get you. If a loan pays for 50 percent of your investment, you could owe taxes on 50 percent of your profit.
While this isn’t for everyone, it’s an option many don’t realize exists. Put it in your memory bank and maybe you’ll retire in the vacation home of your dreams, without paying interest, but making it! $
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Comments
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Another self-directed IRA custodian to consider is Lincoln Trust Company. I am the Product Manager at this company.
Good article. Please need to have a good custodian to help facilitate self-directed IRA investments.
If anyone would like additional information, check out Equity Trust Company – http://www.trustetc.com. Equity Trust Company is an industry leading custodian that can provide you with the services you need to start making self directed IRA investments. Or, feel free to contact me directly at j.roth@trustetc.com if you have any questions.