Should You Invest In Real Estate Using Your IRA?
Have you ever considered investing in real estate, but wondered where the money would come from? You are not alone. Do what others have done and use your retirement funds in your IRA or 401K account.
If I were you, I would be thinking, “How does that work?” Well, as it turns out, it’s not as difficult as you would imagine. There is a special kind of IRA or 401K – called “self-directed” – that allows you to invest in whatever you want, whatever you understand. Real estate is included.
There are several benefits to doing this, the first of which is that your investment dollars will continue to grow on a tax deferred basis, just as they do now. By not losing a piece of every investment dollar to Uncle Sam, you are insuring that you will have more money to reinvest in property deals when they become available.
Second, your self-directed retirement account will let you put your money where you are most comfortable – and where you know something. If real estate is your thing, why not invest your money there, instead of some mutual fund you know absolutely nothing about? How about buying a rental house in the neighborhood right next to yours?
Of course, you must follow the IRS rules for setting up such an account. Don’t worry, though, because the trustee you choose to manage the account will know the rules, and they will be able to advise you accordingly. Probably the primary rule is that the real estate must be owned and paid for completely by the retirement account, not by you individually.
Because of this rule, every penny that is paid out or received related to that property must come or go through the retirement account, not your personal checkbook. As you might imaging, this can add to your costs and headaches, because you need to involve the account manager / trustee whenever you need to have a check written, or pay a bill. It’s not the end of the world, just something to be aware of.
As with every other IRA or 401K, all of your capital is at risk. The nature of real estate investing is that it is possible to lose money. It’s rare, but it does happen. At least with a self-directed account, you control the investments, and therefore you can insure you don’t invest in money losers.
Lastly, think carefully about whether or not self directed IRA or 401K investing in real estate is right for you. It’s simple to put in place, and it just may be the vehicle you have been searching for. Should you really allow some anonymous money manager in some distant city to control YOUR retirement funds?
