How to Invest in Real Estate with My Self-Directed IRA?

Most investors still don’t know they can use money in their existing retirement account to invest in real estate with a Self-Directed IRA, and those who do know this option exists tend to underestimate its potential for wealth building and diversification. Read on to see how to invest in real estate using a Self-Directed IRA and learn how this often-overlooked investment tool can be essential to establishing long-term financial security.

What is a Self-Directed IRA? A Self-Directed IRA account is simply a traditional or Roth IRA in which the custodian permits a wider range of investments to be held in the account, including various forms of real estate, as well as precious metals, notes and tax lien certificates. An IRA custodian is the financial institution responsible for record keeping and handling all IRS reporting requirements.

"With standard IRAs, your investment options are usually restricted to securities such as stocks, bonds and mutual funds", wrote Investopedia. "That means if you’re looking to branch out with more novel choices, such as real estate, a Self-Directed IRA is your ticket".

Use the table of contents below to navigate through the blog:

1. This is how your IRA works in real estate - easy!
2. Tax-free retirement income
3. Find properties that generate income
4. Find real estate agents with IRA experience
5. Pros and Cons of Investing with an IRA

1. This is how a real estate IRA works

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The first step is simply to set up a Real Estate IRA account(A Real Estate IRA is a self-directed IRA focus on real estate investments). Fortunately, there are a variety of well-established companies who can help individual investors open a Self-Directed retirement account. The custodian will also provide guidance and help you navigate the IRS tax code. Once you have established the Self-Directed IRA account and have chosen a suitable real estate investment, you will need to transfer funds from your existing retirement accounts, then complete a Direction of Investment form. This includes the details of your investment, including where to send the funds and how much to invest. Once the investment has been finalized, your IRA will be the title owner of the asset you acquired, whether that involves ownership of a tangible income producing rental property, or becoming a Shareholder of a real estate investment fund.

"The wider range of investment options with a Self-Directed IRA gives you the opportunity to pursue assets that have a potential for higher yields over time", wrote Investopedia. "When choosing a custodian, consider their experience, fees, areas of expertise and check out their rating with the Better Business Bureau".

2. Tax-free retirement income

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Perhaps the single largest advantage of using a Self-Directed IRA to invest in real estate is the potential for enormous tax benefits. As with any IRA investment, you will enjoy tax-deferred income until the day you start to take mandatory withdrawals. You can also elect to open a Roth Self-Directed IRA, which means you pay the taxes up front when you contribute the money, rather than when you withdraw it at a later date. This means your retirement money will grow tax free and, even better, you are also likely to pay a much smaller amount on the taxes owed up front than you would have owed years later after you retire!

Also Read: How You Can Earn 15% (or More) With the KASA Investment Fund Get Secure, Tax-Free Income for your IRA with the KASA Investment Fund How to Use Your 401k Retirement Money for Real Estate Investing

3. Find properties that generate income

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One key to successfully investing in real estate using a Self-Directed IRA involves finding investments that offer secure, proven ongoing income. This will give you and your family members the peace of mind that only comes with enjoying a secure retirement, and it also offers a pathway to achieving true financial stability. You could decide to buy real estate income producing rental properties, or opt to go the passive route and become a Shareholder in a real estate fund that offers strong annual ROI. Either way, the ongoing income you receive will be tax deferred or tax free, providing a clear path to financial freedom that you and your family members simply can’t find if you are only invested in traditional stocks, bonds and mutual funds.

4. Find real estate agents with IRA experience

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There truly is no substitute for experience, and this is definitely true when you are using a Self-Directed IRA for real estate investing! Working with an experienced real estate agent in IRA who understands the nuances of investing with a retirement account is an important part of the process and will help ensure you find the best real estate investments to meet for your needs. Ask for references and make sure you partner with someone who also has a deep understanding of the local market and/or the type of real estate fund you are considering.

5. Pros and Cons of Investing with an IRA

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In addition to the incredible tax benefits, investing in real estate with an IRA allows you to buy, sell or flip properties and move funds from one project to another, all while keeping your tax-free or tax-deferred status. Self-Directed IRAs also allow you to own property and other investments that you are familiar with, instead of forcing you to buy into confusing stocks and mutual funds that will often charge outrageous fees and have no qualms about leaving you with less than you initially invested! Just remember that you are responsible for doing the due diligence on each investment, and that real estate is typically not as liquid as other types of alternative investments. Finally, be aware that you must follow all rules in order to avoid creating a taxable event.

In conclusion, there are definitely a wide variety of advantages to opening a Self-Directed IRA account, and it is important to fully understand the nuances and rules that govern this type of investment. Also, make sure you work with a trusted real estate investment advisor and Self-Directed IRA custodian who can guide you through the entire process.