Real Estate Investing with a Self-Directed IRA

Most of us have funds set aside for retirement, whether it’s a 401(k), 403(b) or IRA. Often, our employer will incentivize us to contribute to their sponsored plan with a company match.

The basic idea is that contributions are made pre-tax and any interest, dividends or capital gains are not taxed. In fact, the money is not taxed until you take a distribution. If you take a distribution during “retirement,” your income will be lower than when you were employed so your tax rate will also be lower.

Of course, it’s your money (after any vesting period) and you can withdraw it prior to retirement, defined as age 59½. The only catch is you will pay a penalty to do it and this defeats the purpose of having a retirement savings plan in the first place.

With employer sponsored plans, it’s possible to “loan money” to yourself and pay it back over time through payroll deductions. It’s also possible to withdraw a portion of the funds without penalty for certain specific reasons; education, first-time home purchase or medical expenses, for example.

More Options with a Self-Directed IRA

Within the structure of your 401(k), 403(b) or IRA you have access to a defined group of financial products. Usually these products were created by the financial institution which manages the plan.

If you move those funds to a self-directed IRA, you gain the ability to invest in anything you want, including real estate.

Remember, the IRA is a separate entity. It can purchase real estate the same way it can purchase stocks, bonds or mutual funds. The funds inside the IRA are pre-tax and if the IRA buys a property, all rental income and capital gains are not taxed. The funds inside the IRA are only taxed when you take a distribution.

Long-Term Tax-Free Investment Strategy

As long as your investments stay inside the IRA umbrella, the funds retain their tax-free status indefinitely. You can will the IRA to your children and they can will it to their children and nobody pays taxes on the funds inside the IRA until someone takes a distribution.

You’ve already made the commitment to secure your financial future by establishing your retirement account. With real estate investments inside a self-directed IRA, you have the opportunity to secure the financial future of your great-great grandchildren!

The 4X Concept

Most real estate investment loans will require at least 25% down. If you leverage your self-directed IRA’s funds, you could quadruple or 4X your IRA’s value when you close on the deal. Think about it.

If you put $50k down on a $200k property, your IRA owns a $200k asset, so your IRA’s value has increased 4X.

Additionally, if you buy the right property, the rental income will pay your principal, interest, taxes and insurance (PITI.)

Finally, even though the property is an appreciating asset, you can depreciate it over time.

This truly is learning to make your money work for you!

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