How to start investing your IRA in Real Estate
Did you hear you can invest your IRA in real estate; but you don’t know how it works or how to start investing? Then read on, because in less than 3 minutes you will finish this article and know exactly how the process works.
The good news it’s a simple, fun, and easy process once you decide to take control of your retirement account and your future. In fact it’s so simple, investing your IRA in real estate consists of only 3 steps. Let’s walk through them one at a time.
Step 1:
First, you will need a self directed IRA. What makes an IRA self directed? You need to choose a self directed IRA custodian like Horizon Trust Company, not commissions based institutions like Bank of America or UBS, and open your new Self Directed IRA. Commission based financial institutions will not allow you to make individual real estate investments. Only a self directed IRA custodian will do that, and there aren’t that many out there. Once you’ve identified who your custodian will be, it only takes a few minutes to open a self directed IRA account, most of the process can be handled over the phone or online.
Step 2:
Next you deposit money in your new self directed IRA. You can do this a few different ways. First you can make a contribution. Contributions come from your earned income and you can simply take money from your savings or checking account and deposit it into your new self directed IRA. Second you can roll over an old 401(k) or 403(b) directly into your new self directed IRA. Third, you can transfer assets or cash from an existing IRA at your bank or brokerage to your new self directed IRA. Now that you have an account with money in it, you are ready for the third and final step in our process, to make your first real estate investment.
Step 3:
This is the final step. You make an investment, in this case, a real estate investment. All you need to do is call your custodian and they will assist you with this part of the process. The initiation of the real estate investment process is triggered when a purchase offer is made. In this case it’s not you purchasing the property, it’s your IRA. Therefore, when you write your offer to purchase the purchasers the name should read as follows:
Horizon Trust Company Custodian FBO Your IRA, #12345.
When your IRA owns the investment, all the expenses will need to be paid from your IRA. You are not permitted to pay expenses personally. Also, and here’s the best part of all, all income and profits will return to your IRA, tax protected! No income tax, no capital gains tax – no tax! How cool is that?!
By following this simple, fun and easy process you will become an expert real estate IRA investor in no time.
About the Author
Edwin Kelly is CEO of The Horizon Trust Company and is considered America’s leading expert on Self Directed IRA’s. To learn more about getting started please visit: www.horizontrust.com
An Introduction to Real Estate IRA Investing
Why invest your IRA in Real Estate?
There are so many reasons why investing your IRA in a real estate deal will be the real turning point in your life and pave your path to wealth, freedom and security. For the sake of brevity, let me just give you the top 4 reasons the most successful real estate investors (many of whom are my clients) give me for doing so.
1. You can diversify away from the gut wrenching swings in the stock market and pathetically low yielding CD’s at the bank.
2. Your IRA can own a real asset that serves as security for your retirement.
3. Instantly and effortlessly boost your returns on real estate by eliminating or deferring taxes on your profits and income. (More on that later)
4. “It’s a fun way to do real estate,” says Dave Ramsey and after all, who doesn’t need a little more fun in their life?
The Single Most Important Decision you will make in life
Well, it may not be number one, but it’s certainly in the top 3. The question is, “Who do you want to be in charge of your financial future?” Recognize that you, I, and everyone we know, have only 3 ways we can answer this question.
The first is the government through their various social and entitlement programs. It won’t afford you that new car you’ve been eyeing or allow you that well deserved vacation to Hawaii you’ve contemplated, but it is an option.
Second is a commission based, fee driven financial institution that gets paid to acquire and keep assets from new clients, not grow them. Realize 97% of Americans rely on these first 2 choices.
Option number three is you take control of your destiny and design your future the way you want it! If you want to be in control and call the shots when it comes to your financial future then one way you give yourself the opportunity is to self direct your retirement account.
What’s possible when you invest yourself directed RA in real estate?
Let me give you an example of how this worked for one of my clients and how it can work for you too. Just this week, I received a call from a client, a real estate investor named Tom who lives in the Washington D.C. area. He was structuring a creative real estate investment that required very little capital put up, about $100, however it was going to generate a profit expected to be $10,000. Tom asked me, “Can I do this inside of an IRA, if so how is it done and what would be the benefit to doing so?”
Yes, it can be done! Below I will walk you through the 3 step process, just like I did for him. As for the benefit, I asked him, “How much do you expect to pay in taxes on your $10,000 profit check.” He stated somewhere between $3,500 and $4,000. So I said, “You get to make $10,000 but you only get to keep $6,000. Using a self directed Roth IRA to do this transaction, you will make $10,000 and you will keep $10,000. So would you rather have $6,000 or $10,000, that’s just one of the benefits to using a self directed IRA?”
Oh yeah, and do you want to know the best part?
So, as if keeping all his profits, eliminating the tax bill and boosting his real return through the roof by simply doing the real estate investment inside of a self directed Roth IRA wasn’t enough – it gets better! Tom said to me, “But what if I don’t want to wait until I’m 59 _ years old to spend the money, what if I want it now?” Keep in mind, Tom is about 40 years old. So can he spend the $10,000 this year without paying taxes or penalties? Yes, in this specific case I engineered a strategy that allowed him to spend the $10,000 tax free this year…but that is a topic for another day.
So how do you start self directing your IRA into real estate?
The good news it’s a simple, fun and easy process once you decide to take control. Here’s the simple 3 step process to invest your IRA into real estate.
1. Choose a self directed IRA custodian like Horizon Trust Company, not a traditional institution like Bank of America or UBS, and open your new Self Directed IRA. (Traditional financial institutions will not allow you to make individual real estate investments.) It only takes a few minutes to open an account and most of it can be done over the phone.
2. Put money in your new self directed IRA. You can do this by making a contribution or roll over an old 401(k) or transfer money from an IRA at your bank or brokerage.
3. Make an investment, in this case, a real estate investment. All you need to do is call the office and they will assist with the paperwork. One thing to keeping mind is that it’s not you purchasing the property but your IRA. It would be titled this way: Horizon Trust Company FBO Your IRA, #12345. All the expenses will be paid from your IRA and all income and profits will return to your IRA.
About the Author
Edwin Kelly is CEO of The Horizon Trust Company and is considered America’s leading expert on Self Directed IRA’s. To learn more about getting started please visit: www.horizontrust.com/
More on Investing Your IRA in Real Estate
You may have wondered why you haven’t heard about using your IRA or other retirement fund to invest in real estate before. It’s because banks and brokers want you to invest in bonds, stocks and mutual funds. IRA and other retirement fund investing is allowed and there are many opportunities out there for you to invest. For example you can invest in real estate, tax liens, or even pay for your own business. The only types of investment that you are not allowed to use your IRA for are Life Insurance Contracts and Collectibles such as artwork. Check out IRS Code SEc. 401 IRC 408 (a) (3)
There may not be many restrictions as to the type of investment you can make using your IRA, but there are a number of what are called prohibited transactions. A prohibited transaction is when the IRA owner uses the IRA investment to benefit himself/herself instead of solely benefiting the IRA. Also, using any disqualified person(s) in your IRA investing would also be considered part of a prohibited transaction. If you are found to have committed a prohibited transaction then the tax-free status or tax deferment of the IRA could end. For example:
Section 4975(c)(1)(D)2 defines a prohibited transaction to include any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan. In addition, § 4975(c)(1)(E) defines a prohibited transaction to include any act by a disqualified person who is a fiduciary whereby the fiduciary deals with the income or assets of a plan for his or her own interest or for his or her own account. (taken from www.irs.gov)
The above seems like a very broad guideline to what a prohibited transaction is. Since the details of a what is included in a prohibited transaction can get rather complicated, it is important to find the right professionals to work with you on your IRA investing. Now as to what a disqualified person is defined as is a little more clear. The following is a list of disqualified persons:
• The IRA owner
• The IRA owner’s spouse
• Ancestors
• Lineal Descendents
• Spouses of Lineal Descendents
• Investment advisors
• Fiduciaries
• Any business entity in which any of the disqualified persons have a 50% or greater interest
Once again there are other people with whom you could have a transaction with that are not on this list, but that the government would consider part of a prohibited transaction if they find that the IRA is not being invested for the sole benefit of the IRA itself. This is why you need to seek out professional help when deciding what to do with your IRA. Although this is not to be used in place of professional advice, a quick and easy guide to see what a prohibitive transaction consists of :
Plan ( such as your IRA, or other tax-favored plan or even a plan asset) + Disqualified person = Prohibited Transaction
Investing your IRA in real estate is not something that has been widely used but it is predicted to grow substantially in the near future. The following is a list of the types of retirement funds you can use to invest. Keep in mind there may be other retirement funds you can use to invest that this list doesn’t include. Also, some of these funds will only allow you to use a portion of the funds to invest before you retire. You can check with your retirement fund provider to find out details.
• Traditional IRA
• Roth IRA
• SEP IRA
• SIMPLE IRA
• Keogh
• 401(k)
• 403(b)
• Profit Sharing Plans
• Qualified Annuities
• Coverdale Education Savings
• Money Purchase Plans
To invest your self-directed IRA it must be held with a Custodian that is open to non-traditional investments. There are not very many of these. A Custodian is a association or entity that is approved by the IRS to be a Custodian and is a registered Trust Company. If the IRA owner desires, a Retirement Account Facilitator can be used to set up everything so that the IRA owner has checkbook control of the funds and then contract a custodian to hold the funds. To do this the facilitator would set up the IRA as a LLC or C Corporation. This way the custodian never has control of your money. Even if you don’t set the IRA up to be a LLC or C Corporation, the Custodian has to keep your funds in a separate account where they are fully safe from any creditor.
Using your retirement fund to invest in real estate may seem complicated, but with the right professional guidance and advice this could be the best investment you ever make. It is definitely worth the time and effort to find out.
