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Purchasing Real Estate with Retirement Money

Purchasing Real Estate with Retirement Money

Most workers saving for retirement tend to think of their retirement investing in terms of stocks and bonds. These forms of investment have been a way of life for many years, and traditional retirement advice tends to focus on these two asset classes. Most workers, however, do not know that there are other options available for retirement investing outside of the traditional choices. Some of these investments can lead to higher investment returns, while at the same time carrying higher risk.

Self directed IRA real estate investment offers tax and other investment advantages to account holders. The main benefit of this investment is that taxes in individual retirement accounts are deferred until the investor makes a withdrawal. One can purchase and flip homes with an IRA and not have to pay any taxes until at least the age of 59 1/2. Being able to compound investment at an annual rate without having to pay tax on the investment leads to a significantly higher rate of return on the investment. Investors are familiar with real estate, and the asset class can offer steady returns, which may make this an attractive investment with an IRA.

The first step towards making an investment in real estate with an IRA is the actual establishment of a self-directed account. To do so, one must find a custodian who permits these types of accounts, as not all custodians have the expertise to do so. Preferably, these custodians should be knowledgeable in the tax rules that govern these accounts because one wrong move can subject the investor to a large and unwelcome tax bill. One should establish a limited liability corporation to purchase real estate with their IRA to cap their exposure. In addition, investors should ensure that the properties that they purchase generate significant enough cash flow to cover maintenance expenses because, once investors are forced to use their own money to finance these expenses, the tax treatment could change.

There are many considerations that go into a decision whether to purchase real estate with an IRA. There is a myriad of rules that investors must follow to receive the favorable tax treatment. For example, investors may not live in the home that they purchase with their IRA. Investments must be more passive than active, and investors cannot personally benefit from the property that they purchase. When investors start to receive a personal benefit, they lose the favorable tax treatment.

Also, investors who make money on their real estate purchases may not begin to withdraw their profits before the age of 59 1/2. Otherwise, the withdrawals are subject to not only tax, but also an early withdrawal penalty. There is different treatment in a Roth IRA, where investments are made with post-tax dollars, and investors can be withdrawn tax-free. Also, investors are required to take minimum distributions when they turn 70 1/2, and if their assets are tied up in real estate, that may be difficult.


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