IRA investing is one of the best ways to save for retirement. Let's review what an IRA is and how it works for real estate investing.
What is Traditional IRA Investing?
A traditional IRA is a tax-advantaged retirement account that allows you to set aside pre-tax money to grow your nest egg until you retire and withdraw the funds.
You can invest in a wide range of mutual funds and individual stocks or bonds through traditional IRAs. The IRS sets limits on how much you can contribute each year, which changes every year depending on your income level and tax filing status.
You can open an IRA with any brokerage firm or bank that offers IRAs (though some offer more features than others). See our list of top IRA providers for more details on what makes these companies exceptional at providing financial services to investors.
The Right IRA for Buying Investment Property
You may want to invest in real estate through an IRA. You can use this account to buy a primary residence, second home, or investment property. To do so, you’ll need to choose the right type of IRA for this purpose.
There are two main types of IRAs: Traditional and Roth. The traditional IRA is tax deductible and grows tax-deferred until withdrawals are made at retirement age when they will be taxed as regular income (as opposed to being taxed while earned). With the Roth IRA, contributions are not deductible but your investments will grow without taxation upon withdrawal in retirement.
You should consider these factors when choosing between traditional vs Roth IRAs:
Your current tax rate now compared with what it will likely be when you retire
How much risk you’re willing or able to take on your investment portfolio
How to Invest in Real Estate Using an IRA
Learning how to invest in real estate using an IRA is a great way to diversify your retirement portfolio. If you’re ready to start buying investment property with your traditional IRA funds, here are some steps you need to take:
Find the right IRA for investing in properties. A self-directed traditional IRA allows you more control over where and how your money is invested than a standard brokerage account or custodial account would offer. You can use this type of plan to purchase real estate (and other types of assets) without having to pay taxes on any gains until they are withdrawn at retirement age.*
You'll need an IRA account at a brokerage firm. You will then be able to invest money in real estate with the help of your financial advisor.
Once you've opened an account and invested your money, you can use it to buy a property that qualifies for an IRA (such as a second home). This can be done through several lenders that work with these types of accounts—but make sure not to use the property personally! If you do so, all profits made will be taxed as income instead of capital gains.
Make sure that the property qualifies as an investment under IRS guidelines.* Get pre-approval from your bank or lender before committing any funds.* Complete the transaction within 60 days of opening the account, otherwise it will be considered taxable income and subject you to penalties
What Is and Isn’t Yours: Your real estate property must be purely an investment. You can’t use it as a vacation home, a place for your kids to live, a second home, or an office for your business. These rules apply to you and to people the IRS deems “disqualified.” So who is considered a disqualified person?
In the eyes of the Internal Revenue Service, if a person holds a majority interest in your property, they are considered a disqualified person. In other words, if you own 51% or more of whatever property you want to use as an IRA investment, that person cannot be your IRA beneficiary.
It’s important to note that family members (spouse, children, and parents) are not considered disqualified persons when it comes to real estate investments.
Your IRA balance will have to be pretty high because getting a mortgage to purchase property inside an IRA isn’t easy.
IRA online real estate investing is not for the faint of heart. You probably won’t be able to get a mortgage on your investment property inside an IRA, so you will have to use cash. And if you do get a mortgage, it will cost more than if you were buying the property outright.
Pros of Property in an IRA
Your investment will grow tax-free.
You'll be able to withdraw funds from your IRA without penalty at any time. If you need money now, you can take it out of your regular investment account without penalty as well, but if you do, the amount withdrawn will be subject to taxes in addition to a 10% penalty; however, if you're over 59 1/2 years old then this isn't a concern for you (you can just take out as much money as needed).
When buying property through an IRA (or another retirement account) less money may need to come out at closing than if buying outside of one; this means lower closing costs and perhaps even better terms on the loan itself because sellers know they're dealing with someone who has more liquid capital than they normally would have access too!
As you can see, it's possible to invest in real estate using traditional IRA money, but it's not as simple as simply buying an investment property outright - even though you don't have to pay taxes on your earnings!
- You must have a high enough income to meet the minimum IRA contribution limit.
- You will have to pay taxes on the property's income.
- You will have to pay taxes on the property's capital gains.
- You will have to pay taxes on the property's depreciation.
We hope this article has helped understand more about traditional IRA investing. If you have any questions or comments, please leave them below and we'll get back to you ASAP!