What are the Benefits and Risks of Using My IRA to Buy Real Estate?

By now, you may have heard that you can purchase real estate for investment purposes using money in your IRA, 401k or other retirement account, simply by rolling over the necessary funds into a Self-Directed IRA. There are no penalties or negative tax consequences associated with this smart money move, but many investors never even seriously consider the option, since most financial advisors never bring it up because they can’t make a commission on real estate purchases.

"Real estate has historically appreciated over time, making it ideal for an IRA", wrote Investopedia. "Any income the property generates is tax-sheltered within the IRA, [and] real estate helps diversify a portfolio, often moving counter to financial markets".

Here’s a straightforward explanation of the minimal risks and many benefits associated with using your Real Estate IRA, so you can see how to earn secure, tax-deferred income for retirement that is not tied to the ongoing roller coaster of stock market volatility.

Is there Any Risk of Using my IRA in Real Estate?

Although any "risk" associated with investment properties pales by comparison to the massive damage ongoing stock market volatility can wreak overnight upon your financial portfolio, there are a few things to keep in mind when buying real estate with an IRA.

1. Annual IRA Contribution Limits Still Apply. If you don’t have enough money in the account to cover the cost of maintenance, etc., you can’t just add more cash whenever.
2. Real Estate is Not a Liquid Investment. Real estate inherently has less liquidity than stocks, because it can take a while for property to sell and recoup your entire investment. (Fortunately, this is also largely be mitigated by the ongoing rental income, appreciation and other benefits that come with smart real estate investments.)
3. Some Transactions are Prohibited by the IRS. Finally, when you purchase real estate in an Real Estate IRA account, you absolutely MUST follow the rules, which include:
4. The IRS prohibits you as the IRA beneficiary from living in the home, renting to (most) relatives or using the property as collateral for another mortgage.
5. The cost of all repairs, improvements, taxes and homeowners’ association dues must be paid for directly from funds in the IRA account.

Benefits of Owning Investment Real Estate in an IRA

Compared to its minimal risks, the benefits of using your IRA to buy real estate for investment purposes are many, including a variety of tax advantages and other benefits for your financial portfolio that simply can’t be found with any other type of investment vehicle. Perhaps most importantly, real estate provides a hedge against inflation and the ability to earn reliable ongoing income for retirement, making it an essential part of portfolio diversification. Whether you buy land, decide to manage rental properties outright, or opt to become a Shareholder in a more passive option, real estate offers a stable alternative to the stock market, which is virtually guaranteed to have massive ups and downs… A harsh reality that can quickly destroy even the best-laid retirement plans.

"Real estate is REAL", wrote Kiplinger. "It is tangible, finite and has historically been a multigenerational builder of wealth. Rather than an alternative retirement investment, real estate can be a key vehicle for growing one’s IRA account".

Tax-Free Growth

When you invest in real estate with an IRA account, you are also making a smart tax move that will provide either tax-deferred or tax-free income - the choice is yours! If you choose to open a Self-Directed Roth IRA and pay taxes now, you won’t get a tax deduction up front when you contribute the money, but it grows tax free and - here’s the really exciting part - also comes out tax free at retirement! On the other hand, if you open a plain old Self-Directed IRA, you still get to defer paying income taxes on any investment income you earn until you withdraw the funds or otherwise cash in the investment after retirement.

"The idea is to put time on your side, allowing years of investment savings and income to compound, without having to pay tax on it", wrote The Balance. "When constructing your investment portfolio for long-term planning, you can defer your taxes as long as possible and take advantage of years or decades of compounding income."

Secure Future for You and Your Family

Perhaps best of all, including real estate investments in your retirement strategy can provide a much greater level of security for you and your family. Retirement is supposed to be a golden time, spent enjoying the fruits of your labor after many years of hard work and saving. Even if you aren’t ready to buy land outright and become a full (or part) time property manager, by selecting smart, income-producing passive real estate investments, you can still reap the many benefits… And provide the essential level of portfolio diversification it will require to come out on top and beat the stock market over the next 10-20 years!

Want to know more about how to invest in real estate with a Self-Directed IRA?