How to Invest in Real Estate Using your IRA

There are many ways to invest in real estate with your retirement account, but it depends on how much you know about real estate investing. 

An IRA (Individual Retirement Account) is a personal investment account that allows individuals to set aside a portion of their income tax-free to save for retirement. Investors can purchase stocks, bonds, mutual funds, or exchange-traded funds (ETFs). Real estate can be an excellent investment for an IRA because of its long-term appreciation potential and cash flow. 

For instance, you can buy single-family or multiplex homes, apartment buildings, commercial properties such as retail stores, hotels, office complexes, raw land and lots, and even boat slips.

However, buying real estate through your self-directed IRA is more challenging than purchasing a few hundred shares of stock. You need to follow specific rules—there are many of them.

Should you invest in real estate with your IRA? 

The answer depends on how much you know about real estate investing and where your IRA is invested. If your IRA is invested in stocks or mutual funds, then an investment in a single-family home might be a great place to start. 

Is investing in real estate with your Individual Retirement Account (IRA) right for you? You should thoroughly research the pros and cons of doing so before you make a move.

What is an Individual Retirement Account (IRA)?

An individual retirement account (IRA) is a tax-advantaged investment account designed to help individuals save for the future.  It is one of the most lucrative ways to invest for your future. 

This type of account is available only to people with earned income who need access to workplace retirement accounts such as 401(k) plans, which are offered only through employers. 

Real estate is a popular investment choice for people with IRAs, including self-directed IRAs, Individual 401(k)s, SEP-IRAs, SIMPLE IRAs, and Roth IRAs. The benefits of investing in real estate through your IRA include the following:

  • Real estate is a good investment for retirement
  • There are many different types of IRAs available to you (see below)
  • You can invest in real estate using an IRA
  • With tax issues and red tape, purchasing real estate within an IRA can take time and effort. However, the property can provide you with a good (or great) rate of return and diversify your portfolio.

 You must have sufficient funds to invest in real estate with your self-directed IRA. If you are new to investing and have only a small amount of money that you want to put towards investing, then it may be best for you to start small and build up over time.

If the properties you choose are not sold or transferred within five years, they may be subject to a 10% penalty plus taxes on any gains (the profits made after subtracting costs of sale).

Buying Real Estate with a Self-Directed IRA

To invest in real estate with a self-directed IRA, you first need to open an account with a custodian who allows such investments. Many companies will enable you to open an IRA, but these accounts can be complex and should only be considered if the investor thoroughly understands the IRS tax code.

Though most people consider stocks, bonds, and mutual funds when looking at an IRA or 401(k), you can use these accounts to invest in other assets.

Setting up an account

You must have an Individual Retirement Account (IRA) to make non-traditional investments. All IRAs have more flexibility regarding what types of investments you can hold in them, compared with 401(k)s or similar retirement accounts. Not all brokerages offer IRAs that allow for non-traditional investments. However, you can search online for “IRA custodian” or “self-directed IRA provider” to locate one. 

Self-directed IRAs share the same rules and restrictions with regular IRA along with the benefits of tax-free or tax-deferred growth. Contributions to self-directed IRAs are limited to $6,000 in 2022 unless you’re 50 or older. Your maximum contribution increases to $7,000. If your current IRA isn’t self-directed, you can roll the funds to a self-directed IRA.

Finding a custodian

A self-directed IRA differs from a traditional or Roth IRA because the custodian of a self-directed account is not an investment advisor and does not offer financial advice. Instead, the custodian facilitates all transactions involving your self-directed account, ensuring that all IRS regulations are followed and that proper financial reporting is completed. You could find your IRA disqualified if these rules need to be followed precisely.  This can negatively affect your future retirement savings and prompt a taxable event for your funds.

Buying a property

The property a real estate investment trust (REIT) invests in must be an investment property, not a home for you or your family, a second home, or even a property for your parents. You can face serious financial consequences with improper use of your real estate IRA’s property. 

For example, you could be penalized if you make any prohibited transactions with the property, such as buying it from or selling it to a disqualified person.

Investing in real estate with your IRA can help you diversify your portfolio, but it’s essential to understand the risks.

  • Real estate offers tax advantages. In addition to the tax-deferred growth of an IRA account, you can deduct your costs associated with buying and selling properties from your taxable income.
  • Real estate investments can also be an excellent way to earn passive income by renting out the property after you’ve purchased it. This can provide some stability for retirement planning because rental income is guaranteed and often fixed even if market conditions change negatively; however, this does not mean real estate investing is risk-free. You must thoroughly research what type of property or location best suits your needs and investment goals. 

Real estate can provide an excellent option for investors looking to diversify their portfolios. However, it should be noted that real estate is something you can only walk into with proper knowledge and experience. Before investing in property with your IRA or other retirement accounts, you’ll need to research local laws and regulations.

If you have any questions about Investing in Real Estate Using your IRA, you may contact us here:

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