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Rental Property Investing with IRAs

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Retirement vehicles such as individual retirement accounts come with an common understanding regarding how they can be used. This understanding can sometimes be incorrect as it is with IRAs.

The idea of buying a home through an individual retirement account may seem out of sorts. It is not. Most people incorrectly assume they can only invest in mutual funds, stocks or bonds.

The average person will always invest in the stock market in some form or another with their IRA. The question is whether you want to be average when planning for your financial future. If not, you need to think outside the box.

Before we go on, I should mention this is not a wealth building strategy that involves loopholes or dubious interpretations of the tax code. The IRS readily approves of such investments.

Section 408 of the tax code states clearly you can invest IRA contribution in a variety of property. The wealthy have used this approach for a long time and more than a few now own big portfolios of commercial property, rental properties and so on through their IRAs.

The nuts and bolts of the strategy are fairly simple, but the devil is in the details. In general, you open a self-directed IRA and use that vehicle to invest in property entities. Get it right and you can make a bundle. Get it wrong and it is a nightmare, so do this with professional help.

As the name suggest, you are in control of the individual retirement account. This means you get to set the parameters of what can be invested in and what cannot so long as it is legal. Homes, condos and so on are legal investments under the tax code.

Once up and running, it is time to put money into the account. How you do this is entirely dependent upon your specific situation. You can roll money in from another account or perhaps just make contributions. Consult with your financial advisor for the best answer.

You cannot buy property from yourself or family members. That is it. Doing so would be considered self-dealing, which is a no-no in the tax world. The prohibition applies even if you buy the property at fair market value.

The actual fundamentals of the buying process are a bit convoluted. You do not actually purchase property. The custodian of the IRA will do the purchasing. The IRA then reaps the gains in rents or appreciation.

You might recall I mentioned the Roth option above. Yes, you can use this strategy with the Roth account. In fact, it is preferable. Why? When you retire, all distributions from the Roth will be income tax free. That makes for an excellent investment.

You probably have a number of questions regarding this strategy. This article is admittedly a simplification of the strategy. To find out more and take advantage of it, speak with an advisor experienced in the field.