When people think of saving for retirement, they often think of investing in stocks, bonds and mutual funds using a 401(k) plan or an individual retirement arrangement (IRA). But those investments are just the tip of the iceberg when it comes to your retirement options. Investing in real estate, either in Atlanta or elsewhere, is another possibility. With a self-directed IRA, you can purchase real estate and enjoy the profits either tax-free or on a tax-deferred basis. In this article we will discuss Investing in real estate with a self-directed IRA.
What is a self-directed IRA?
A self-directed IRA is a simply an IRA that you have full control over. With a self-directed IRA, you hand the money over to a custodian, who is responsible for managing the account and filing the paperwork. You can choose a variety of investment vehicles, including basic stocks and bonds as well as real estate. The IRS does have a short list of things you aren’t allow to invest in, including collectibles.
When you go the self-directed route, you can choose either a traditional or Roth IRA. With a traditional arrangement, you pay taxes on the earnings and the original amount you contributed when you get to retirement. With a Roth account, you pay tax on the original contribution before you put it in the IRA. Any earnings on that contribution can be collected tax-free in retirement.
Using it to buy real estate
If you decide to use your IRA for investing in real estate, you can either purchase a property and rent it out or purchase a property, fix it up and flip it (sell it at a profit). Typically, you’ll want to be able to purchase the property outright, without taking out a mortgage. If you do need to borrow to invest in real estate, things get a little complicated when it comes to taxes.
When you use an IRA to purchase a property, the money comes from either a tax-exempt or tax-deferred account, and any income it generates is also tax-exempt or deferred. If you use some money from your IRA, then finance the rest, any income you get on the mortgaged part of the property is considered unrelated business taxable income, according to the IRS. If you use your IRA to put down 40 percent on the property, then finance 60 percent, you’ll need to pay tax on 60 percent of your rental income or 60 percent of the profit you earn when you flip the house.
Restrictions and considerations
Investing in real estate using a self-directed IRA means you are limited in what you do with the property. Since it’s an investment, you can’t live in the house or lease it to family. Any businesses you have a stake in also can’t use the property.
A self-directed IRA can be a great way to get into real estate investing while stashing money aside for retirement. Just be sure you understand the rules, risks and rewards before you get started.
We hope that you enjoyed our article about Investing in real estate with a self-directed IRA.