Rental Property Investing with IRAs

By: Barry Waxller

Retirement vehicles such as individual retirement accounts come with an common understanding regarding how they can be used. This understanding can sometimes be incorrect as it is with IRAs.

If I have an individual retirement account, I have to invest in the stock market. Everyone know this is the way it works, right? Well, the literature and commercials spewed out by investment firms might suggest as much, but it is not true.

The average person will always invest in the stock market in some form or another with their IRA. The question is whether you want to be average when planning for your financial future. If not, you need to think outside the box.

Using your IRA to buy homes and such might sound like an aggressive idea that might raise the ire of the IRS. In truth, it is not and the IRS has said as much. The language allowing it is right in the tax code, to wit, this is not a loophole strategy.

Section 408 of the tax code states clearly you can invest IRA contribution in a variety of property. The wealthy have used this approach for a long time and more than a few now own big portfolios of commercial property, rental properties and so on through their IRAs.

The nuts and bolts of the strategy are fairly simple, but the devil is in the details. In general, you open a self-directed IRA and use that vehicle to invest in property entities. Get it right and you can make a bundle. Get it wrong and it is a nightmare, so do this with professional help.

Regardless, a self-directed individual retirement account works a bit different than the ones most people use. The account has a custodian who acts much like a trustee for a trust. The custodian can be a bank or other advisor and the fees are low.

Whenever dealing with the IRS, it is important to understand there are always some limitations. They are usually so complex that you get a headache trying to read them. In this case, they are not.

With money on hand, it is time to invest in property. There are surprisingly few rules. The only limitation is on self-dealing. You cannot buy your current home or a property you already own. Most people buy second homes or rentals.

The actual fundamentals of the buying process are a bit convoluted. You do not actually purchase property. The custodian of the IRA will do the purchasing. The IRA then reaps the gains in rents or appreciation.

While buying property with an IRA is a good strategy, doing so with a Roth IRA is a much better one. It works the same way, but the tax benefits are tremendous. All distributions made from the Roth with be tax free. It is a nice way to build your retirement nest egg.

Using this strategy to purchase property is fairly straightforward. If you are looking to build wealth in your IRA, make sure to speak with a financial advisor familiar with this strategy.

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Find out how using a self-directed Roth IRA can be used for wealth building at UFCAmerica.com.
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