As the Great Recession begins to ebb, people are turning their eyes towards retirement again, and whether or not having property in their self-directed IRA is a good idea or a bad idea. As with all financial questions, the answer is not a simple yes or no. There are different aspects of the matter to look at, and individual concerns to factor in.
First, it is important to understand what exactly IRAs are. IRA stands for Individual Retirement Account. There are a few different ways IRAs are set up. First, most contributions made to a traditional IRA are tax-deductible. They are made before taxes are taken out. However, when withdrawing from a traditional IRA after retirement, the funds are treated as taxable income. In what is known as a Roth IRA, contributions to the IRA are made after taxes. Withdrawals from a Roth IRA are tax-free. A Savings Incentive Match Plan for Employees,or SIMPLE, IRA has the employer match funds contributed by an employee. A self-directed IRA works differently from these.
In a self-directed IRA, a person is in control of what the IRA invests in. Investments can be made in diamonds or gold, stocks, promissory notes, or real estate. Real estate is one of the more popular choices, and it is not even necessarily just people at retirement age who are choosing to put real estate into IRAs. Over the last four years, $6.5 billion dollars has been put into IRAs, effectively doubling the amount previously put into these types of accounts.
Investors are seeing self-directed IRAs as a way of diversifying accounts. Instead of relying on pensions and 401(k)s, investors are looking at the alternatives that go into self-directed IRAs as a way of protecting against failures of mutual funds and other financial institutions. The question, though, lies in whether or not real estate is a good investment to put into an IRA.
There are a few different angles to look at when deciding on real estate for an IRA. One of the benefits is cost. While real estate can be costly, it does not have to be. Also, renting out a property is a smart way to keep income flowing in to a household once its occupants reach retirement age. After costs such as property tax and income tax are taken out from any rent generated, everything that goes into the IRA is profit. If the holder should sell the property in the IRA, any proceeds from that sale will enter the IRA in the same way.
There are some restrictions on having property in a self-directed IRA, however. The property cannot be held for personal use. It must be a business property. Also, a person with an IRA cannot transfer property that they already own into their IRA. Finally, any money earned by the property in the IRA can only be withdrawn with a penalty until the holder is of retirement age. It is also important to remember that the IRA holder’s spouse can cannot have anything to do with the property.
While having property in IRAs can be profitable, it is important for those interested to take note of the risks and restrictions that are involved. Once an investor has done their research, they can make then make an informed decision of how to handle their retirement.
Opinion by Bryan Levy