Real Estate IRAs
Real estate aficionados love the self-directed IRA that gives them the opportunity to maximize their participation in a growing market. It is the perfect inflation hedge to guarantee sufficient income for retirement while it generates profits. Given time and the inevitable boom and bust cycles of the economy, it will perform well in the long run. Most people have considered or own real estate mutual funds. This is a more direct method of taking advantage of the second most lucrative investment historically (next to the stock market). It is a growing area that requires information and education to be successful.
Knowing the Ropes
The options for the self-directed IRA include, but are not limited to commercial and residential property, income vehicles like apartments or condos, notes and loans, mortgages, REITS, private placements, and LLCs. It is virtually open-ended. The flexibility appeals to investors with a bent toward real estate as do the significant tax benefits. You make the decisions and are in control, not a financial institution. To diversify, you may opt for stock and bond mutual funds or annuities, but you can add real estate to your heart’s content as well.
You must start with a qualified custodian who will hold the IRA account and provide administration and reports. Next you must read the relevant rules and regulations set forth by the IRS for all asset classes. Right out of the box certain self-dealing transactions are prohibited such as buying a property to live in full or part time, or renting a property to close family members such as parents or children. Furthermore, you cannot buy a property from your business or immediate family. Furthermore, you may not invest in collectibles such as art or jewelry or insurance. You are responsible for what you choose, not the custodian.
What is Legal?
There are plenty of options apart from the few prohibitions mentioned. Apart from the vehicles noted above, you can participate in joint ventures, commercial paper, equipment leasing, raw land, foreclosures, tax sale certificates, and car paper. The custodian must have the ability to handle your choices and will advise you of tax liabilities such as on income from a debt-financed property (involving UBIT) and explain check book control and self-management (such as advertising and paying bills). You can even collect your own rents. It is a hands-on way to prepare for retirement which appeals particularly to entrepreneurial and independent people.
There is always risk and reward in any type of investing and the former should be kept to a minimum when it comes to retirement savings. However, knowledgeable and experienced investors can enhance their returns with more aggressive vehicles and diversification into real estate. It is still an uncommon choice, but is growing in popularity as information becomes more readily available. The tax-deferred benefits of traditional IRAs now have an extra advantage with an inflation hedge built in. Whether you chose a Roth IRA, a SEP, or SIMPLE IRA, a more secure retirement is on the horizon with real estate.
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