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The Basics of Self-Directed IRA Real Estate Investing for Those in Transition

For someone used to the hustle and bustle of work, being in-between jobs can be confusing and a little scary. Should you spend your free time furthering your education or embarking on a new career? It may be a good idea to direct some of your energies into a focus on your financial health. One question you should ask is, what should I do with my employer-sponsored retirement account?

If you’re looking for something new and different that will also give you greater control over your investment decisions, you could try a self-directed IRA. Self-directed IRAs offer both tax advantages and the ability to hold a variety of alternative assets, such as real estate.

Fortunately, the process of rolling over funds from a qualified retirement account into a self-directed IRA is relatively easy (and iPlanGroup can help!). Once you’ve opened an account, you can start investing. Before you start buying real estate, however, you should be aware of the benefits and risks.

The Benefits

Self-directed IRAs are quickly gaining in popularity and for good reason. Investors are finding that there are more ways to build wealth within a self-directed IRA, particularly when investing in real estate. The benefits of investing in real estate include:

  • Potential for higher returns. The flexibility to invest in real estate allows you to take advantage of investments in properties that have greater ROI potential and that align with your risk tolerance. Furthermore, while you’re enjoying the capital appreciation that comes with a physical asset, real estate can also provide an ongoing income stream.
  • Protection against market fluctuations. The ability to diversify in a self-directed IRA means you can invest in a physical asset such as land or rental property that provides protection against market fluctuations. It can also hedge against rising inflation, which is typically bad for stocks and bonds.
  • Tax advantages. If you purchase real estate with your self-directed IRA, any gain from its sale would be tax-deferred (traditional IRA) or tax-free (Roth IRA).

The Risks

As with any investment, the benefits must be weighed against the risks. Investing in real estate in a self-directed IRA has a number of drawbacks, including the following:

  • Illiquidity. Unlike stocks and bonds, physical assets can be hard to sell. If your IRA needs to cover an expense related to the property, or you personally are in need of funds (and are willing to incur penalties), real estate may not be able to provide the immediate cash you need.
  • IRS rules and restrictions. It’s important to be aware of the IRA Prohibited Transaction Rules, which prohibit disqualified persons (including the IRA owner and certain family members) from engaging in certain types of self-dealing transactions. For example, you cannot sell property to, or live in property owned by, your self-directed IRA. Additionally, any expenses incurred by property owned by the IRA must be paid from, and any income must be returned to, the IRA. If you are unaware of the rules and fail to follow them, you are opening yourself up to costly taxes and penalties or even the disqualification of your IRA.
  • Ongoing expenses. While real estate can offer a steady income stream, it also has a number of ongoing expenses. A self-directed IRA needs to have cash available to cover items like repairs, maintenance, and property taxes. It’s important to be aware of the potential costs of a property so that you know whether your IRA can afford the investment.

While being in transition can be challenging, it can also open up many opportunities that you may not have considered before. Perhaps one way to give yourself a mental and financial boost in these uncertain times will be using your self-directed IRA to invest in real estate.

If you’re interested in learning more about self-directed IRAs, or using one to invest in real estate, schedule a free consultation with an iPlanGroup professional below.

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