Welcome to the world of self-directed investing with your retirement accounts! David Moore from IRA Advantage explores how you can use your IRA and 401(k) funds to purchase your own property. This is an exciting opportunity that not many know about, but it’s been possible since retirement accounts were established back in the mid-70s. Now, let’s look at the basics!
Understanding Self-Directed Accounts
A self-directed account is not an officially defined term but rather a way to describe an account that allows you to invest in a wide range of assets, including real estate. Many investment firms offer self-directed accounts, but they often restrict you to a limited menu of investments. A truly self-directed account gives you the freedom to invest in anything the law allows.
Why Invest in Real Estate with Retirement Funds?
There are several compelling reasons for putting the money you make from your retirement in real estate:
- Tangible Assets: Real estate provides a sense of security as it’s a physical asset that you can see and manage.
- Diversification: By adding real estate to your portfolio, you reduce reliance on traditional stocks and bonds, which can be volatile.
- Tax Advantages: Investments in real estate can grow tax-deferred or even tax-free, especially if done through a Roth IRA.
- Control: You have the autonomy to make investment decisions without waiting on third-party approvals.
Types of Accounts for Real Estate Investment
Investing in real estate gives you two main options: self-directed IRAs (SDIRAs) and self-directed 401(k) plans. Each account has its own specifics.
Self-Directed IRA (SDIRA)
The process begins with the acquisition of a self-directed IRA (SDIRA). SDIRAs are different from the typical IRAs as they allow you to invest in a variety of assets, including real estate. Here’s the basic idea of how it works.
- You can use both traditional and Roth IRAs for real estate investments.
- Keep in mind that you cannot personally benefit from the property while it’s in your IRA.
- All income generated from the property must go back into the IRA, maintaining its tax-advantaged status.
Self-Directed 401(k)
Similar to a self-directed 401(k), a self-directed 401(k) is a plan with the same benefits but it allows you to contribute more and it gives you the chance to take a loan from your account:
- Typically suited for self-employed individuals or small business owners.
- You can take a loan from your 401(k), which is not an option with an IRA.
- Invest in real estate directly without worrying about unrelated business taxable income (UBTI).
How to Get Started
Here’s a step-by-step guide to investing in real estate using your retirement funds:
- Choose Your Account: Decide whether you want to use a self-directed IRA or a self-directed 401(k).
- Open Your Account: Work with a custodian to set up your account. This is crucial as they’ll help manage compliance with IRS rules.
- Fund Your Account: Roll over funds from your existing retirement accounts into your new self-directed account.
- Identify Investment Opportunities: Search for real estate properties that fit your investment strategy.
- Make Your Purchase: Direct your custodian to make the investment on your behalf.
Common Mistakes to Avoid
While the process may sound straightforward, there are specific things to be careful of and avoid:
- Prohibited Transactions: Avoid transactions that benefit disqualified persons (like yourself or family members).
- Ignoring Compliance: Ensure all transactions are compliant with IRS regulations to avoid penalties.
- Overextending Your Funds: Always keep a cushion in your account for unexpected expenses related to your investments.
Conclusion
Investing in real estate with your retirement funds is not just a possibility; it’s a powerful strategy for building wealth. Whether you choose a self-directed IRA or a self-directed 401(k), the opportunities are vast, and the potential for growth is significant. If you’re ready to take the plunge, don’t hesitate to reach out to us at IRA Advantage, 800-475-1031. Our team is here to guide you through the process and help you make the most of your investment journey!
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The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 800-475-1031.
