If you are like many American investors, you are likely looking at your retirement accounts and wondering how you will ever accumulate enough money to actually retire. While the stock market has recovered from its doldrums of the past few years, many investors are still suffering at the hands of low returns on their hard earned money. In these conditions, individuals are turning to purchasing real estate in their IRAs as a way to diversify and build their portfolios.
Invest in Stocks, Precious Metals or Real Estate
If you are like most investors, you may be wondering how this works or if it’s even legal. The short answer is that it is legal, and has been since the 1970s, but there rules and regulations keep many folks from taking the plunge. Self-directed IRAs allow investors to invest in both traditional assets such as stocks and bonds, as well as assets such as precious metals, tax liens, and real estate.
These alternative assets are not handled by firms such as Vanguard and Fidelity. In fact, opening a self-directed IRA requires account owners to hire a trustee or custodian to hold the assets and administer all documents.
Real Estate offers Long-Term Growth
Owning and investing in real estate in a self-directed IRA is popular approach with these accounts. Many investors have professional experience with real estate and they understand how buying, selling, and renting properties works. Real estate also offers strong long-term growth opportunities, with returns often much higher than the stock market. With that said, all investing carries risk and understanding the intricacies of the self-directed IRA is critical for success.
Establishing a self-directed IRA typically takes more time than regular IRAs. You will need to perform due diligence to find a trustworthy and reputable custodian for your assets. Once the paperwork has been prepared, expect to wait a couple of weeks until everything is set. At this point, you can purchase your real estate investment, but remember that all expenses and income associated with a property must be paid out of and into the custodian.
This means that if the plumbing goes in your building, the money for repairs must come from IRA funds! Similarly, all income generated from rent or the sale of a property stays in the IRA.
Family on the Matter
Other restrictions on self-directed IRA investments include the prohibition on self-dealing. This means that your spouse, immediate families, or companies you have a 50% interest in cannot be involved in renting or using the properties. The investments are also unavailable as collateral and any income/profit generated by the properties must stay in the IRA until withdrawals during retirement.
The Benefits are Plentiful
Despite the potential pitfalls, the benefits of investing in real estate in your IRA are plentiful. With real estate, savvy and interested investors can direct their energies towards assets they know, enjoy, and understand. The potential for long-term growth is great and all wealth accumulation enjoys the tax advantages of regular IRA accounts.
Americans rely on their individual retirement accounts to fund their later years. In fact, recent estimates put the value of all retirement accounts close to $5 billion. Of this staggering sum, only 2 percent of those funds invested in self-directed IRAs. However, there is increasing interest in ways to diversify portfolios and grow wealth. The self-directed IRA offers interested investors this opportunity.
This article was written by John Cheevis. John has a wealth of knowledge about retirement and finicial savings.