Should Your IRA Invest in Real Estate

Did you know your IRA can own real estate? Switching your traditional IRA to a self-directed IRA opens up new investment opportunities for your retirement funds. Real estate investments — especially some of the new REITs — can be profitable, but they can also be riskier than traditional investments. Are real estate investments a good idea for your IRA savings?

According to most investment experts, the answer is probably not, unless you’re a savvy investor with a strong working knowledge of IRA investments and IRS rules. In order to invest in real estate in your IRA, it must be a self-directed IRA — one that you manage and direct. The big banks that usually handle IRA investments don’t generally deal with self-directed IRAs. In order to take advantage of these non-traditional investments, you’ll need to move your IRA to one of the few smaller custodians that offer self-directed IRAs.

And that’s where things get tricky, especially when it comes to real estate investing. There are very strict rules about what you can and can’t do with your IRA, and if you break them, the penalties can be quite heavy. These pointers can help you decide if real estate investments with your IRA is right for you.

Avoid Self-Dealing

Self-dealing is a cardinal no-no. Because your IRA funds are tax-deferred, you can’t use them for anything that profits you or certain of your family members. Likewise, you can’t use your non-IRA funds to cover expenses for real estate owned by your IRA. For the purposes of your investment, you and your IRA are two entirely separate entities — that are forbidden to do business together. That sounds fairly simple, but it can be surprisingly difficult to do in practice. If, for example, you direct the custodian of your IRA to purchase a rental home in Florida, you cannot then stay there on your vacation, nor can you rent it to your son or daughter. You can’t do repairs on the house or pay for a management company to deal with collecting rents on it. It all has to be done through your IRA with all expenses and profits residing in the IRA until you can legally withdraw them. If you cross the self-dealing line, you may be required to immediately pay taxes due on your entire IRA.

Consider Distributions

Beginning at age 70 1/2, you must take a minimum distribution from your IRA every year. When your IRA is mostly in the form of liquid assets, such as cash and bonds, it’s not difficult to make those distributions. If, on the other hand, part of the investments in your IRA are not liquid, for example, if your IRA owns real estate, calculating and withdrawing the required distributions can get a lot more complicated.

Beware of Fraud

Like so many other real estate investment opportunities that offer a high potential for reward, the IRA real estate investment strategy attracts a lot of scammers and fraudsters. They prey on investors who are looking for a high return on their investments by assuring them that it’s an easy way to make money for retirement. Since 2007, federal and state regulators have seen an increase in fraud schemes that aggressively target people with self-directed IRAs. In traditional IRAs, the custodians have a responsibility to safeguard the investments entrusted to them. By contrast, self-directed IRA custodians nearly always emphasize that they do not provide financial advice and are not responsible if you direct them to make a poor investment.

The bottom line is this: yes, you can make real estate investments in your IRA, but do so with caution. Make sure you understand what you’re doing because, essentially, you’re on your own.


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