How To Buy Real Estate With Your Self Directed IRA

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Many seek investment opportunities beyond conventional realms due to the large sums in retirement accounts. IRAs hold around $11.7 trillion in US retirement assets (Investment Company Institute, Q2 2022). While the stock market has been profitable, the volatility of publicly-traded stocks feels unpredictable. Real estate investment gains popularity as a way to diversify retirement portfolios, offering long-term appreciation and stability compared to stocks, bonds, and mutual funds.

A powerful tool for this strategy is the Self-Directed IRA (SDIRA), allowing investors to buy real estate. With an SDIRA, gains and rental income are tax-free until distributions occur, making it enticing. It also provides control over investments and the ability to select properties aligning with objectives.

So, what is a Self-Directed IRA? Also known as a Checkbook IRA, it’s a retirement savings account that allows broader investments beyond stocks and bonds. This includes real estate, private firms, tax liens, and precious metals. You can use pre-tax funds from a traditional IRA or after-tax dollars from a Roth IRA to buy real estate. Essentially, you act as your own investment manager, but understanding different investments and mechanisms is crucial.

Investing in real estate through a self-directed IRA requires all revenue and costs to flow through the retirement account. Profits can be withdrawn upon reaching retirement age, allowing for tax deferment or tax-free gains. The 2023 contribution limit is $6,500 ($7,500 for those aged 50+). Both traditional and Roth self-directed IRAs are available, with the same pre-tax and post-tax contributions set by the IRS. Investors often finance SDIRAs with retirement funds rolled over from different accounts due to these limits.

Using a Self-Directed IRA for real estate investments has pros and cons. It offers potentially higher returns and greater control over investment choices compared to traditional retirement accounts. However, balancing risks and rewards is crucial.

Benefits of incorporating real estate into a self-directed retirement portfolio include rental income and tax advantages. It offers diversification beyond traditional financial products and the potential for higher returns through tax-deferred income and gains. Drawbacks include strict regulations, penalties for accessing profits early, and the challenge of finding approved custodians.

When setting up an SDIRA, two main options are available: custodial and checkbook accounts. Custodial accounts involve a third-party trust company handling account details, providing insulation but less control. Checkbook SDIRA accounts give more control but require compliance with IRS rules and thorough record-keeping.

Using a self-directed IRA (SDIRA) for real estate investment is just the beginning. Follow these steps for a smooth transaction:

  1. Find a suitable custodian or trustee based on fees, portfolios, and service.
  2. Open your SDIRA by providing necessary documents like identification and financial records.
  3. Start investing in real estate by determining property type, location, and potential value appreciation.
  4. Find investment opportunities online or with a broker specializing in SDIRA investments.
  5. Understand local laws, secure a non-recourse loan if needed, and finalize the purchase.
  6. Use SDIRA funds exclusively, staying compliant with IRS regulations.
  7. Manage your investment property according to IRS rules by filing paperwork, submitting tax returns, and keeping records.
  8. Remember to only use SDIRA funds for purchases and avoid transactions with disqualified persons.
  9. Pay expenses like management fees and property taxes from your IRA funds.
  10. Partner with a trustworthy IRA custodian and conduct due diligence on investments.
  11. Resist the urge to withdraw funds early and hold onto your property for long-term appreciation.

Concluding Remarks on SDIRAs

Self-directed IRAs (SDIRAs) offer a promising opportunity for real estate investment, but they also bring their own challenges and rewards. If you’re considering using your SDIRA funds to purchase a residential or rental property, conducting thorough market research and seeking advice from a seasoned financial advisor is crucial. 

Please note that the views expressed in this article are for general informational purposes only and do not provide specific advice or recommendations for any individual or investment product. The opinions expressed in the commentary are subject to change without prior notice. For more information, please review Foothold’s disclaimers.

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