It’s never too late to begin planning for retirement, and it’s never too soon to diversify. Many investors don’t realize they can take the helm of their retirement ship with a self-directed Individual Retirement Account (IRA). According to a study recently published by The Entrust Group, “Real Estate Investor Market: 2015 Trends in Real Estate IRA Investments Research Report,” individual investors throughout the country are giving a boost to the economy while planning for the future. Working with a real estate attorney can help you clear the way for a smooth sail into retirement by making the best decisions regarding a self-directed IRA.
What is a Self-Directed IRA?
Typically, IRA custodians only allow investments in approved stocks, bonds, mutual funds, and CDs. A self-directed IRA is an option provided by some financial institutions which allows for alternative investments for retirement savings. Investment options in a truly self-directed IRA may include real estate, private mortgages, private company stock, oil and gas limited partnerships, livestock, and intellectual property. A qualified trustee or custodian holds the assets of the IRA on behalf of the owner, maintains records, files reports to the IRS, processes transactions, and helps investors understand the rules and regulations surrounding the account.
With a self-directed IRA, you can plan for retirement, enjoy rental income, and reap tax benefits. While the benefits are numerous, before you move your savings into a self-directed IRA, be sure to consult with an experienced real estate attorney. According to an article published on Kiplinger, “Federal and state securities regulators warn that a growing number of promoters, recognizing the popularity of these accounts, are steering investors into fraudulent investments.” Working with a real estate lawyer means you can rest easy and reap the benefits of investing in real estate.
A few advantages to using a self-directed IRA to invest in real estate:
Generating a revenue stream
According to The Entrust Group’s report: “Nearly half (42%) of real estate investors bought property for the purpose of generating a rental income stream. The opportunity for value appreciation (14%) and finding a deal that was too good to pass up (16%) were the next most common reasons. These reasons mesh perfectly with the purpose of -- and the laws governing -- holding real estate in an IRA: as an investment and/or to generate income.”
Unlike purchasing a primary residence, you can invest anywhere in the country.
While some people invest in property close to their primary residence, many others use their self-directed IRA property investments as a way to plan for the future, not just financially, but geographically as well. If you’re thinking of relocating after retirement, a self-directed IRA allows you to invest in your dream location so you can get the greatest return out of your investments.
Delay your taxes on investment gains
Taxes are inevitable, but when you invest in real estate through a self-directed IRA, it delays taxes on your real estate income -- as long as the money remains in your retirement account. In other words, if you were to invest in real estate outside of an IRA, then you would owe taxes immediately on your rental income or when you sold the property for a gain. An IRA delays taxes on your real estate gains and may help you to earn higher after-tax returns.
Tax-free growth through a Roth IRA
Many self-directed investors use traditional IRAs; however, savvy individuals may want to consider the benefits of setting up a Roth IRA. If you invest through a Roth IRA, your investment earning are tax-free when you withdraw earnings after the age of 59 ½. Which means you won’t have to pay taxes on your rental income, capital appreciation, or gains. (Here the catch: unlike a traditional IRA, you will not receive a tax deduction for your contributions into the Roth.) Discuss your options with your financial advisor or real estate attorney to decide whether or not a traditional or Roth IRA is best for you.
Leverage your growth over time
There’s no need to pay everything off at once. In fact, most investors choose to pay off a portion of the investment and then mortgage the rest. This allows you to leverage your money through borrowing to earn higher rates of return. Remember, your name won’t be on the title (it belongs to the custodians of your IRA), so if you default on your loan, the lender can seize the property.
Slow and steady wins the race
The real estate market tends to be more stable than Wall Street. And for many individuals, this makes investing in real estate less stressful but has the promise of high-reward. Historically, real estate returns outpace inflation, which means your retirement could become very, very comfortable.
As the economy continues to improve and the real estate market awakens from its slumber, real estate is back on the radar. American investors are lured to the consistent property appreciation and hooked by the promise of regular rental income.
If you’re considering investing in a self-directed IRA, it’s wise to understand your rights and your options. To learn more, contact Rochford Law and Real Estate Title at 615.269.7676.