With a truly self-directed IRA, you're not limited to stocks, bonds, or mutual funds. You can buy real estate assets ranging from residential and commercial properties to untreated land, mobile homes, and even Gold based IRAs as alternative investments for your IRA. Real estate can be used to generate rental income, and rents can be increased over time to keep up with the market. Similarly, rising prices can increase the resale value of real estate and Gold based IRAs. Those real estate revenues have their own potential for tax-advantaged growth when held in an IRA.
An IRA is a powerful financial planning tool that allows you to save for retirement or provide tax-advantaged benefits to your heirs. Most people invest their IRA funds in stocks, bonds, and mutual funds. However, others opt for non-traditional investments, such as real estate, in the hope of increasing their returns. While the idea of holding real estate in your individual retirement account sounds good and may offer higher returns than stocks or bonds, the process has some pitfalls and pitfalls.
Annual contribution limits still apply, so if you don't have enough money in your IRA, you can't just invest more to cover the purchase. To purchase real estate within a retirement account, you must first set up a “self-directed IRA” with a custodian. Once you've established the IRA, you can use it to purchase virtually any type of real estate, including vacant land, single-family and multi-family homes, commercial properties, cooperatives, and condominiums. Finally, as a solid asset, real estate helps diversify a portfolio that would otherwise be invested in stocks and other securities, wouldn't be the worst idea in the world.
Investors should use a custodian who specializes in the custody and management of non-publicly traded investments, such as real estate, to manage real estate transactions within an IRA. For some investors, it may make sense to include real estate in a retirement portfolio by keeping the property in a self-directed IRA. This is an indirect form of real estate ownership, but they are a simpler and more liquid proposition, and can also be held in regular IRAs. An experienced depositary can help streamline the real estate investment process in a self-directed IRA, as investors work to create a diversified multi-asset portfolio that helps them achieve their financial goals.
As the CFA Institute points out, investing in real estate together may be a better option, especially for smaller investors. Investors who hold real estate in traditional IRA accounts must make the required minimum distributions (RMDs) starting at age 70 and a half and must ensure that the IRA contains enough liquid assets, beyond the value of any real estate they own, to cover those withdrawals. Investors must ensure that there are sufficient funds in the IRA to cover potential significant capital expenses, as well as ordinary maintenance costs and property taxes. While the IRA is in your name and the ownership of the account is for your maximum retirement benefit, you cannot receive any current direct or indirect benefits from any assets held in your IRA.
Instead of keeping all of your investments in a single type of asset, such as stocks and bonds, real estate can reduce your risk at a time when the overall market is in recession. IRAs, in general, are more flexible in terms of the types of investments you can make in them, compared to 401 (k) or similar retirement accounts. If you're determined to invest in real estate but aren't quite convinced that an IRA is the best vehicle, consider these alternatives. You can more easily invest in real estate investment trusts (REITs) or mortgage-backed securities (MBS) through your IRA than buying private investment property.