You can hold real estate in your IRA, but you’ll need a self-managed IRA. Any property you buy must be exclusively for investment purposes. You and your family can’t use them. Buying property within an IRA typically requires a cash payment, and the IRA must cover all property costs. An IRA is a powerful financial planning tool that allows you to save for retirement on a tax-deferred basis or provide benefits to your heirs.
Most people invest their IRA funds in stocks, bonds, and mutual funds. Others, however, opt for unconventional investments, such as real estate, in the hope of boosting their returns. While the idea of holding real estate in your individual retirement account sounds good and can offer higher returns than stocks or bonds, the process has some pitfalls and traps. Annual contribution limits still apply. So if you don’t have enough in your IRA, you can’t simply deposit additional contributions to cover the purchase.
To buy real estate in a retirement account, you must first set up a “self-managed IRA” with a custodian. Once you’ve set up the IRA, you can use it to buy virtually any type of real estate, including vacant land, single and multi-family homes, commercial properties, co-ops, and condos. A real estate IRA is defined by real estate investments held as part of retirement savings. It is not a unique or separate account type.
Each IRA can be self-directed to invest in real estate. This strategy offers greater diversification and control. You can use your IRA funds to buy a retirement home abroad. Even if you never plan on living in it, offshore real estate can be a great way to diversify your portfolio and earn high returns (depending on the investment).
Since your IRA owns your property, your IRA will also benefit from any growth. That means that if you ever sell your properties, the gains are deposited into your IRA. It can be a great way to boost your retirement savings without the same tax impact as buying and selling on your own. Violation of these rules will disqualify the IRA and the full value of the IRA will be taxable, plus a 10% penalty.
Self-directed IRAs providers include Charles Schwab, Equity Trust, uDirect IRA, and Alto IRA. You can invest in real estate investment trusts (REITs) or mortgage-backed securities (MBS) more easily through your IRA than you can buy a private investment property. If you don’t have enough money in the IRA to fully buy a property, you may be wondering about a mortgage. If you’re not sure whether buying real estate with an IRA is right for you—or how to do it the right way—contact a financial advisor.
As Ward notes, buying real estate through your IRA can mean potential land mines for the user. Compared to other retirement accounts such as managed IRAs or 401 (k), a self-directed IRA offers plenty of flexibility. One of the biggest differences between self-directed IRAs and traditional IRAs or Roth IRAs is that a self-directed account is managed by a custodian bank. For example, you and your beneficiaries cannot sell or lease real estate to your IRA, buy or lease real estate from your IRA, use IRA real estate as a personal residence or office, lend to your IRA or borrow from your IRA, guarantee a loan to your IRA, pledge IRA assets as security for a loan, or offer goods or services to your IRA.
The growth of these investments can be kept in the IRA until retirement age. Then, depending on the type of IRA you have, they can either be tax-free or withdrawn at your current tax rate. Self-directed IRAs have the same principles and restrictions as regular IRAs and offer the same benefits of tax-free or tax-deferred growth.