Investing In Real Estate With Ira Funds
Investing in income producing real estate is one of the safest and most secure vehiclesavailable these days but many people arent aware that funds from Individual Retirement Accounts (IRAs) can now be utilized for this type investment. Considering the control a person has by actively managing their own IRA account and self directing its funds for investment in real estate themselves represents an attractive option for many. And for good reason
Currently there are approximately 47 million households in the United States with IRAs. Though its availability as an option hasnt always been clear, increasing numbers of people are discovering its many benefits. Investors have a direct hand in strategy and decision making and can ultimately create opportunities that contribute to (often rapid and significant) growth of their retirement accounts.
As with other IRA related instruments, returns from IRA real estate investment properties are tax-deferred when in the retirement account. The account also remains subject to the same conditions and early withdrawal limitations as with a conventional IRA.
One significant difference from traditional IRAs (stocks and bonds) is that income producing real estate is an investment that generates immediate cash flow which then is directed back into the IRA account. Over time the investment funds (account balance) begin to compound and grow exponentially.
There are two types of companies which help arrange self directed IRAs:
Self-Directed IRAs With a Self-Directed Custodian
Similar to existing conventional IRA custodians, these companies assist with non-traditional investments. Self-directed IRA custodians hold your IRA funds in their accounts until you decide and direct them to make an investment on your behalf.
For example, if you decide to purchase real estate with your self-directed IRA, you will apply for the investment through the custodian. An approval process for the investment then occurs. Once approved, the custodian then issues a check directly to the seller for the purchase of the property on the investors behalf.
Fees for self-directed custodial accounts are generally based on the value of the assets in the account (typically ~0.5 percent of the investment property purchase price). There may also be a transaction fee which usually ranges from $50 to $200. However, there are some companies that charge an annual flat fee, no matter the account balance.
Real Estate IRA Investing Through a Self-Directed IRA/LLC
These accounts are similar to self-directed custodial accounts with a couple of differences. Companies that offer self-directed IRA/LLC services will transfer your funds to a self-directed custodial account with a preferred partner; typically with an annual-fee arrangement. They will then create a Limited Liability Company (LLC) on your behalf. The self-directed IRA/LLC will direct your retirement funds into the LLC. You can then readily access these funds yourself through the LLC bank account.
Most self-directed IRA/LLC companies will encourage you to open a checking account for the LLC, which will enable you to make investments quickly at any time. When you decide to purchase a property as an IRA investment, simply make the purchase in the name of the LLC and write a check directly to the seller from the LLC bank account.
Fees for self-directed IRA/LLC clients usually include a one-time setup fee based on the complexity of account origination (i.e., multiple parties, multiple accounts investing in the same LLC or different LLCs, etc.), plus a flat annual fee.
Buying Real Estate as an IRA Investment
Whichever type account you establish, the process to purchase a piece of real estate as an IRA investment is relatively simple once the custodian or LLC is setup. You make the purchase in the name of your IRA or in the name of the LLC and pay for the property (only) with IRA funds.
There Are Restrictions
When investing in real estate with an IRA, one must be careful to avoid prohibited transactions. There are IRS mandated provisions in place which prevent investors from gaining personal benefit from their IRA accounts before reaching the age when the government allows withdrawal of penalty-free distributions.
One type transaction contained within an IRS restriction states that investing with disqualified parties involved is prohibited. Disqualified parties include yourself, direct ascendants or descendents (parents and children), your spouse, spouses of your descendants, and people with fiduciary responsibilities or associations with your account (accountants, financial advisors, etc.).
In other words, buying a home with IRA account funds that you plan to reside in or would be rented to direct family members is not allowed. These exceptions are in place to ensure that IRA account funds are utilized for true investment purposes only.
Overall, its a relatively straightforward process though professional advice is encouraged and necessary to create the account
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