Grow your account with tax-deferred profits from real estate investments It sounds almost too good to be true: IRA holders can use their retirement funds before retirement age to purchase real estate as an investment inside their retirement account without incurring penalties or taxes.
Depending on the account structure, they can even purchase these investments using a checkbook tied to their IRA funds. Since 1974, IRA and 401(k) account holders have had the option to control the ways in which their retirement monies are invested, including real estate, tax liens and other alternative assets. Because the investment is made on behalf of the retirement account—just like the IRA investing in stocks and bonds—the acquisition is made without triggering a taxable event.
The stock market’s volatility has Baby Boomers and many others more closely examining their retirement funds—and demanding to know how they personally can make their accounts grow faster. Creating an account through which an IRA could purchase real estate and other nontraditional investments is a daunting task to take on by oneself. Fortunately, there are financial services companies that structure these self-directed IRAs for you.
Once the program is created by an experienced provider and the client has been given means to self-direct their account investments, the client takes complete control from there and can invest retirement funds in a broad variety of assets, including real estate (residential, commercial and foreign), tax liens, foreclosures, personal loans and a nearly unlimited list of investment opportunities.
With a slightly different structure—a self-directed IRA LLC or real estate IRA you can use a checkbook to make time-sensitive investments on the spot. A self-directed IRA LLC has the potential to save you hundreds to thousands of dollars usually spent on transactional and asset-based custodial fees. Self-directed IRA LLC’s structure also lets you personally manager your rental properties, make repairs and collect the rent—potentially saving you a substantial amount in property management costs.
With a self-directed IRA comes the responsibility to ensure that every investment is made with the IRA in mind. You are the “fiduciary” for that IRA account (almost as if you were the trustee for your goddaughter’s trust, for example), so you are required to avoid any “prohibited transactions” with “disqualified persons” that could create a conflict of interest. This means that you can’t buy your own primary residence, use your property as a summer vacation home or invest in anything that will benefit a close relative.
You can, however, buy a house, rent it out to an unrelated third party, collect the rent tax-deferred inside your IRA and claim the home as your own when you take your final IRA distribution after the age of 59 ½. It’s a great way to buy your future retirement home at today’s lower prices. “Considering today’s economic climate, everyone, no matter what their age, should be concerned about the health of their retirement accounts,” advises David Nilssen, co-founder of Guidant Financial Group, a leading financial services company offering a self-directed IRA LLC. “It’s never too early to seek out more secure and lucrative means for growing them.” As with every investment decision, the more informed you are, the wiser your decision will be. Remember, these retirement monies represent your future security.
by Alfonso Galindo
Director at I GO YUCATAN.com (Real Estate and Expat Affairs Specialist)
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