Include Real Estate in Your Retirement Account
Spooked by the stock market? Wondering what kind of return you’ll get with bonds? Getting minimal return in your money market fund?
Here’s an option you may not know about: The U.S. Internal Revenue Service allows you to have real estate investments in a self-directed IRA retirement account.
“It’s a wonderful way to increase your retirement fund,” says RuthAnn McBride (CDPE, CIAS), a real estate agent with RE/MAX Estates in Estero, Fla. “You can take any or all of the money that you currently have in an investment fund and buy real estate.”
You can invest in any type of real estate – single-family homes or condos, multi-unit properties, commercial real estate, even vacant land – through your retirement account.
The critical factor is that the investment must be in the name of your IRA – not your own name.
Taxes are deferred
As with any tax-deferred retirement account, income and capital gains accumulate tax-free until you tap into the funds. Once you do so – you can begin withdrawing funds with no penalty at age 59½ – you pay taxes on the gains. Rent or lease payments, then, flow directly into the retirement account. Expenses – maintenance and repair, costs for finding new tenants and so on – are taken directly from the IRA.
“This is for your retirement,” McBride says. “Not for income that you can use right now.”
Restrictions on real estate investments in retirement.
- The limit on the amount of new money you can invest ($5,000 annually if you’re under 50, $6,000 if you’re 50 or older) applies to real estate, just as it does to any other tax-deferred retirement investment.
- The property must be a true investment. Neither you nor your spouse can live or vacation in it, nor can lineal family members (parents, grandparents, children, grandchildren, great-grandchildren) or their spouses.
- You can’t write off expenses or losses on your taxes.
- The investment must be in care of a government-approved custodian, which holds the investment. (Only a small number of such custodians exist in the U.S.; a RE/MAX real estate agent experienced in investing can help you find one.) And a separate administrator must handle record-keeping and tax reporting.
- If you sell the property and make a profit, the gains go into the IRA, not to yourself. If you choose to re-invest the profits in real estate, you can do so – but still in the name of the retirement account
Such investments aren’t for everyone, McBride cautions.
“Liquidity might be an issue if you’re concerned about needing your money before retirement,” she says. “Like any other real estate investment, it may take time to sell. Your money is not liquid.”
McBride enthusiastically endorses real estate investments in an IRA.
“It’s the best of all worlds,” she says. “The beauty of it is, even when you begin withdrawing funds, you still have the underlying asset – the property – which can continue to appreciate in value. Over the long-term, real estate traditionally has been more reliable and made more money for investors than more traditional retirement investments. Another advantage is this: Suppose I buy stock in a company that folds. That money is gone. But real estate will always be there.”
Realtors aren’t qualified or authorized to offer tax advice, so you should consult an accountant or other tax expert before deciding whether real estate makes sense as a retirement investment – and how to structure the transaction.
When you do decide to invest in real estate, contact a RE/MAX real estate agent experienced in investing to help you find and purchase the right property.
The advice offered here comes from sales associates affiliated with independently owned and operated RE/MAX real estate offices and may not be applicable to all areas. Contact Matt Smith at 319-431-5859 an independent RE/MAX agent for expertise tailored to your locale.
