Confidence in traditional assets like stocks and mutual funds continues to vary among investors, so they’re beginning to move toward strategies that provide a higher degree of control. Among alternative assets involved in self-directed retirement, real estate is becoming an increasingly popular option. From vacant lots to rental homes, nearly any property that you may personally acquire for investment purposes may also be held by an IRA or 401(k).
Experienced real estate investors may utilize a strategy they know and trust, while motivated individuals with limited personal capital may have an opportunity to get started. Larger sums of liquid capital in retirement accounts can alleviate the potential financial inhibitions of investing one’s own money. Plus, contrary to earnings yielded by a personal investment, income generated from an IRA or 401(k)-held property will be tax-deferred or tax-free depending on the structure of your plan.
If you’ve ever bought a house, there’s a good chance you already understand a majority of what’s needed to initiate an investment with your tax-advantaged account. You’ll need to identify a piece of real estate and follow the necessary steps to execute the deal, just as you would if you were buying a home to live in. If your IRA or 401(k) is unable to purchase the property in full, it can finance the purchase with a non-recourse loan. Your personal assets may not be offered as collateral, and your personal funds may never be used to repay the loan. As the “owner” of the loan and the property, the retirement account must issue payments to satisfy the debt and the property itself will be the only collateral.
Once your retirement account has acquired the property, it’s important to remember that everything must be titled to the account and not to you personally. Your personal residence or direct involvement—or that of any disqualified persons—is not allowed by the IRS. Because the income produced by your asset will bear the unique tax advantages of your retirement account, any expense inherent to the asset must be paid by the account. For example, if a pipe bursts in your rental property, you may hire a plumbing service to resolve the issue and cover the applicable expenses with funds from your IRA or 401(k). You may not, however, reimburse the plumbing service with your personal funds, nor may you visit the property to complete the repair yourself.
Don’t let these additional factors deter you from considering a real estate investment with a tax-advantaged account. IRA providers that specialize in self-direction, offer administrative services for alternative investment options, and value client education are making it easier than ever to explore new retirement possibilities. Technological platforms for online asset management and ACH bill payments are becoming more available as well. New Direction IRA has been a leader in the self-directed retirement industry for well over a decade, and we take pride in equipping our clients with the information they’ll need to take control of their investment strategies.
By Jennifer Pfeifer: Director of Business Development, New Direction IRA, Inc.
Jennifer Pfeifer oversees front-end education of new clients and business partners for New Direction IRA. She teaches education classes for real estate professionals about self-directed IRA investing and works alongside the New Direction management team to support existing B2B partnerships and develop new on-boarding efficiencies. Jennifer has over nine years of experience in B2B relations and sales. She received her BA from the University of Arizona.
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