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Buy A Second Home With Your Ira
By Barry Waxller
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.
Using your IRA to buy homes and such might sound like an aggressive idea that might raise the ire of the IRS. In truth, it is not and the IRS has said as much. The language allowing it is right in the tax code, to wit, this is not a loophole strategy.
The simple fact is the law governing individual retirement accounts allows for a broad field of investments. You tend to only hear about mutual funds and stocks for one reason. That is what the investment firms are selling! They don’t make money on real estate investing.
To buy homes, commercial properties, rental properties and so on, you need to open a particular type of IRA. It can be a traditional or Roth version, but it must be self-directed and have a custodian. Most banks and trust companies offer them at a small cost.
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.
After setting up your account, you can invest in property.
That being said, there are some minor limitations put forth in the
tax regulations by the IRS. You cannot buy, for instance, your own
home, which would be self dealing.
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.
When the
actual property is obtained, it will be signed off on by the IRA custodian.
Self-directed IRAs have an independent custodian who oversees the account
do to IRA rules. After that, you just collect earnings from the property
tax free in your account.
While buying property with an IRA
is a good strategy, doing so with a Roth IRA is a much better one.
It works the same way, but the tax benefits are tremendous. All distributions
made from the Roth with be tax free. It is a nice way to build your retirement nest egg.
The above represents a very simplified look at maximizing
your IRA investment with property. That being said, it is one of the outside
of the box wealth building strategies that can produce tremendous returns.
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