Many people aren’t aware of it, but real estate investing with your individual retirement account (IRA) is possible. You have to be careful, however. Do it wrong and it will cost you a lot in taxes.
To start, open a self-directed individual retirement account. It must be managed by a custodian or trustee. Not all mutual fund companies offer the self-directed vehicles, so you’ll have to shop around. Your taxes on a self-directed account are deferred until you pull the money out unless it is a Roth IRA. Self-directed individual retirement accounts give you more control over your investments than traditional individual retirement accounts.
There’s another benefit to investing in real estate through your individual retirement account. Real estate is tangible, so you can walk on your property and see it.
It’s also a great way to diversify your portfolio because if most of your investments are in stocks and bonds, which are tied to the stock market, then there is a lot of unpredictability. Real estate is a good hedge against market volatility and creates more of an asset protection for serious investors interested in growing their investment portfolios over time.
IRA Rules to Follow for Real Estate Investing
In order to stay safe and protect your IRA investments, you’ll need to follow the rules of the IRA. You should consult a tax accountant and/or a tax attorney for advice specific to your situation, but here are the general rules you need to know about investing in real estate through your individual retirement account.
- Investment Properties Only— You cannot put your primary residence into your IRA. All properties must be investment properties only.
- Any Type of Real Estate is Okay— You can invest in any type of real estate— residential, commercial, raw land, condos and townhouses, rental properties, flipping, and multi-family are all legitimate investments.
- You Cannot Move Property You Already Own Into Your IRA— If you own five rental properties and you set up an individual retirement account, you cannot move that property into your IRA. You also cannot purchase real estate from disqualified persons, which includes your spouse, children, parents, and corporations in which you own 50% or more stock.
- You Cannot Rent the Property to Your Children— IRA rules disallow personal use of property in your IRA, and they also prohibit you from renting your property to your parents and children.
- All Investment Income Must go Into the IRA— You cannot have your investment property income go to you while your real estate is in an IRA. However, you can distribute funds from your IRA as long as you pay the taxes due, if any. And upon retirement, you can transfer your real estate out of your IRA to live in.
- Cash Contribution Limits Do Not Apply— Individual retirement accounts have cash contribution limits based on your age. Your total contributions cannot exceed $5,500 ($6,500 if you are age 50 or more). However, these cash contribution limits do not apply to real estate. If you have enough money in your individual retirement account, you can spend exceed these cash contributions in real estate value as long as all your profits from the sale of real estate go back into your IRA. If you flip properties, there are limits to how many times per year you can flip real estate.
All of these rules apply to real estate crowdfunding investments. As long as you follow the rules, you can invest in real estate through your individual retirement account and save for your retirement, but do your homework first.