5 Ways to Use Retirement Money to Invest in Real Estate
Is real estate a good retirement investment? It surely is. Many Americans are living a comfortable life by building a real estate property portfolio with their retirement money.
If you want to invest in real estate using retirement money, the least you can do is educate yourself to go about it the right way. Your real estate investment can help you build a steady source of retirement income if you are patient enough to strategically work to build an income-producing real estate property portfolio.
Basic Rules for Investing Retirement Money Into Real Estate
With an IRA, you enjoy tax-deferred funds, but if you use the funds improperly to buy real estate, you may lose the tax benefits, and all your funds may get taxable. Therefore, it’s important that you follow the basic rules to have a qualified real estate purchase with your retirement money. Here are the rules:
- You can’t work on the property by yourself. You have to hire a person to do any repairs on your property.
- You can’t mortgage the property.
- All costs associated with the property have to be paid out from the IRA and all rental income generated through the property has to be deposited into the IRA.
- If you are operating at a loss, you don’t get the tax breaks, nor can you claim depreciation.
- You cannot use the property for any personal benefit, nor can you live in it.
Key Benefits of Owning Investment Real Estate in an IRA
The biggest benefit of using a Self-Directed IRA to purchase real estate is its potential tax benefits. You benefit from tax-deferred income until you make withdrawals. And if your investments are with Roth IRA, you can enjoy tax-free investment as well as tax-free withdrawals.
However, you need to reach the age of 59½ to withdraw your funds. Otherwise, you are subjected to an early withdrawal penalty, and the withdrawal amount will be treated as ordinary income on your tax return. That said, active investors can sell, buy, and flip properties by moving funds from one project to another while the funds in the IRA are in the tax-deferral state.
Another benefit of owning real estate in an IRA is familiarity. Self-Directed IRAs allow you the freedom to make investments that you know and understand.
Ways to Invest In Real Estate Using Your Retirement Funds
1. Invest your retirement account directly in real estate
This is the most active and risky way to invest in real estate. But if you have done your due diligence and thoroughly researched its pros and cons, then it is possibly the most lucrative way to grow your wealth.
Although investing your IRA funds into buying a property is legal, many IRA administrators do not allow such investments. If your IRA administrator does not allow real estate investing, set up a self-directed IRA to carry out such investments.
Using a Solo 401(k) is another option to purchase real property directly. Ensure that you comply with the rules of investing your retirement money into real estate.
2. Invest in real estate mutual funds, stocks, or publicly-traded REITs
This is the commonest way of investing in real estate. If you own an IRA, simply use the funds to purchase bonds, debt shares, or equity shares of real estate-related businesses. These could be mortgage companies or publicly traded real estate development companies that are invested in the real estate business themselves.
If you have a 401(k) through an employer, there may or may not be real estate-related investment opportunities available in the plan. That said, an employer-sponsored 401(k) has limited investment options to choose from as compared to a personal IRA.
If your 401(k) through your employer doesn’t have the right real estate-related investment opportunities, you can establish an IRA — either a traditional IRA or a Roth IRA — and invest in real estate through that account.
3. Borrow from your IRA or 401(k) to invest directly in real estate
Retirement plans, such as employer-sponsored 401(k) plans and Solo 401(k)s, allow you to take a loan from their retirement accounts and use it to buy real estate. In this case, the real estate is not held within the retirement account. This means that it doesn’t get to enjoy the tax-deferred benefits the plan offers.
However, the benefit here is that the investor can use the funds without tax or penalty to buy real estate, provided the borrowed money is repaid within the scheduled time.
4. Use a real estate crowdfunding platform to invest your IRA or 401(k) directly in real estate deals
This way of investing provides both passive and active aspects of real estate investing. When you invest in real estate through a crowdfunding platform, you get the opportunity to take part in commercial real estate deals that were only available to affluent individuals or large investment groups.
5. Invest your self-directed IRA in a non-public REIT
This type of retirement investing in real estate allows you the access to non-public real estate opportunities that were not available to you earlier. Whatever profits you earn can be automatically reinvested into your non-public REIT. By doing so, you can enjoy the compounded growth of your earnings.
You should make the decision to invest in real estate via your retirement account after carefully evaluating your larger retirement goals. Consider taking advice from your financial advisor or an accountant before making that decision to avoid retirement planning mistakes.
About The Author
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm in Goodyear, Arizona. Rick has more than three decades of experience working with investments and retirement planning. Over the past 10 years, he has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement, as well as other sites. Email him at [email protected].