When it comes to saving for retirement, the first thing that comes to mind for most investors is stocks and bonds purchased in their retirement accounts, which will appreciate over time and be sold as needed once you decide to leave your career days behind.   

While this is the most common way to invest, you may be surprised to learn that purchasing real estate may also be a viable option for your retirement plan needs. In this article, we will discuss the best way to invest in real estate through your retirement account and the pros and cons of doing so. 

HOW CAN I INVEST IN REAL ESTATE THROUGH MY RETIREMENT ACCOUNT? 

In order to invest in a retirement account, you will first need to establish a self-directed retirement account with your financial institution.   

A self-directed IRA is different from ordinary IRAs as they allow for alternative investment assets such as real estate and precious metals, among other assets. Not all financial institutions provide for self-directed IRAs, and so you will want to research financial services companies that can accommodate your needs.   

The account can be funded by rolling over funds from an existing Traditional or Roth IRA or by transferring funds from a dormant 401(k). 

HOW CAN I PURCHASE REAL ESTATE THROUGH MY SELF-DIRECTED IRA? 

As the real estate asset will be owned by the IRA rather than you personally, it may be challenging to secure a mortgage for the purchase of the real estate. Most IRA accounts will need to purchase the real estate with cash, representing a significant portion of your account assets. The IRA will be responsible for any fees and expenses associated with the purchase of the property. 

For investors who can secure non-recourse financing for the property’s purchase, you should work closely with your tax advisor to ensure that you understand circumstances that may trigger Unrelated Business Income Tax (UBIT) within your IRA. Entities subject to UBIT tax must file a Form 990 with the IRS and may owe additional tax, which would be paid directly from IRA funds. 

Real estate investing within an IRA is not limited to residential real estate property. Funds can be used to purchase commercial property, offshore real estate, among other types of assets. 

WHAT TYPE OF PROPERTY CAN I PURCHASE IN A RETIREMENT ACCOUNT? 

The real estate purchased with retirement assets must be used for investment purposes only. This means that you can rent the property to unrelated third parties but may not maintain the property for your personal use or that of any family members. 

HOW IS THE INVESTMENT PROPERTY MAINTAINED WITHIN THE RETIREMENT ACCOUNT? 

As with regular IRA accounts, you may contribute up to the maximum limit the IRS determines in any given year ($6,000 for the year 2020, $7,000 if you are 50 and over). Also, any rent received from the property will continue to increase the value of the IRA. Conversely, all expenses, repairs, and other maintenance related to the rental property are also paid from the IRA funds.   

If the IRA account does not cover the cost of maintenance and repairs, you may be subject to excess contribution penalties. Should it be necessary to use personal assets to cover the costs. 

For IRA accounts, once the owner reaches 70 ½, you are required to take required minimum distributions from your accounts as prescribed by the Internal Revenue Service (IRS). Be sure that your retirement accounts will have enough cash on hand to cover the distributions required.  

WHAT ARE THE PROS AND CONS OF PURCHASING REAL ESTATE WITHIN YOUR RETIREMENT ACCOUNT? 

Pros 

  • Steady rental income within your portfolio 
  • Diversity in an investment portfolio, which can protect you against market volatility and fluctuations 
  • Control over the investment decisions related to your assets 
  • Ability to purchase an asset that can be used in retirement 
  • Real estate values typically appreciate over time, and appreciated assets sold within the retirement account would not be subject to tax upon the sale 

Cons 

  • You can’t claim tax deductions typically associated with property ownership (mortgage interest, taxes, etc.) 
  • It may be difficult to secure mortgage financing related to the property. 
  • Real estate investments are typically purchased with cash. 

ARE THERE OTHER WAYS TO INVEST IN REAL ESTATE WITHIN MY RETIREMENT ACCOUNT? 

While purchasing real property is a viable option for your self-directed IRA, some alternatives may be more suitable for your needs. 

Investors looking to contribute a portion of their retirement resources to real estate can also consider REITS, real estate related exchange-traded funds (ETFs), or mutual funds as viable alternatives. 

Investing in real estate can be a great alternative when considering where to place your retirement account investments. The potential for the real property’s value to grow, portfolio diversification, protection against market fluctuations, and financial control that you receive can make it a viable option. 

Work closely with your CPA or financial advisor to ensure a smooth process. 

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