Living off the land: Self-Directed Real Estate IRAs

Published on February 14, 2014

, you can invest in real property to fund your retirement.

A self-directed IRA is one in which the individual account holder makes all his or her own investment decisions, in order to direct the types of investments made within the retirement plan—real estate being just one, but a very popular type of alternative asset. In fact, in a recent article on Hedgeweek.com, the results of a Morgan Stanley Wealth Management Investor Pulse Poll revealed that the majority of millionaire investors cite real estate as the most popular alternative asset class. 77 percent of millionaire investors polled say they own real estate while 35 percent say they own a real estate investment trust (REIT).

Nontraditional investments have reached record levels in the past few years with growth expected to continue. That, coupled with very attractive real estate prices in most markets, makes real estate a good alternative to traditional IRA investments. As with any investment, know your market, and understand how this investment can work for you within a self-directed real estate IRA. You can watch our helpful video about how to invest in real estate through your self-directed IRA here.

Some things to keep in mind:

• In order for investors to get the tax benefits of a self-directed Traditional IRA or Roth IRA, investors are prohibited from buying an investment from or selling an investment to a disqualified person. This would include spouses, parents, themselves as the owner of the IRA, etc. For example, funds from your self-directed IRA can’t be used to buy a rental property for your own personal use.
• The real estate must be held by a custodian. Therefore, the legal title of the property must be in the name of the IRA.
• All income and expenses related to the real estate in the IRA have to flow through that same IRA.
• All income from the real estate is tax-deferred or tax-free with a Roth IRA. That includes rental income and capital gains. If you plan to be in a lower tax bracket at retirement, this is quite favorable. You can also make tax-deductible contributions to the self-directed IRA.
• There are also tax implications if a self-directed IRA account holder makes an investment and there is debt associated with it—for example,  if you buy a rental property and then  the IRA takes a mortgage on it, some of the investment income could be taxable. This can be a complicated topic; for more information, contact your tax advisor or the Next Generation office.

Once you understand the rules, funding and investing through a self-directed real estate IRA can be a great way to build retirement wealth. However, it helps to have an experienced professional by your side. At Next Generation Trust Services, our professionals are available to answer questions about self-directed retirement plans and our transaction specialists ensure you are investing within IRS guidelines. We strongly recommend you consult your trusted financial advisors about your investments and any tax implications they have for your unique situation.

For more information about self-direction as a retirement strategy, or to open a new self-directed IRA and invest in real estate through your IRA, contact Next Generation at (888) 857-8058 or read through our Starter Kits at https://www.nextgenerationtrust.com/open-an-account/.