January 17, 2018

Tax free incoming rent is one of the more popular strategies for IRA real estate investors.  This commonly occurs when a Roth IRA has purchased one or more rental properties.   Once the account holder is over 59.5 years of age and the Roth has been open for at least five years, they can take distributions from the account tax free.

Incoming rent is paid to the Roth IRA which then sends distribution checks to the account holder who is able to accept them without having to pay tax on that money!  This procedure can go on as long as the property continues to have renters … so pretty much indefinitely.

A Roth IRA that holds stocks and other publicly traded securities often has to sell that stock in order to produce cash for a distribution.  At some point then, you will run out of money-making ability with stocks, not so with real estate. 

That being said, the benefit at the end is contingent upon action now.  It isn’t particularly hard to have your tax-advantaged account purchase real estate; in fact, you get to use your existing real estate team to find the right property and manage it.

If you don’t have a Roth IRA, keep in mind that current legislation allows you to convert as much money as you like without restriction.  A conversion is a taxable event of course, but the new tax brackets in 2018 may make this an advantageous time to take action.

Since we are talking about long-term, sustainable tax free income, remember another feature of a Roth IRA is that Required Minimum Distributions do not exist.  Traditional IRAs and most employer sponsored plans dictate annual distributions starting at 70.5 years of age that eventually consume all the cash and assets in the account.  What if you live longer than the IRS’s actuarial table says you will?  What if you want to leave something for your beneficiaries?

Self-Directed IRAs are powerful because they allow account holders to invest in a variety of assets that correspond to that investor’s needs and goals.  And when the account holder matches tax advantages with the financial performance of certain investments, tax free retirement income becomes attainable.

If you liked this article, subscribe to Rentometer's email newsletter to stay up-to-date on the latest trends in rental housing.