Funding Real Estate Investments With An IRA

When I started real estate investing, one of the first hurdles I needed to jump was startup capital. I saved a bit of cash and partnered with a couple of private lenders in my sphere of influence, but in addition, I also was able to use an old 401K by moving the funds into a Self-Directed IRA. This was a prudent move for me, which I learned by having some in-depth discussions with my team members, especially my tax professional, accountant and attorney. All situations are different, so before moving forward, investors should make sure to discuss options thoroughly with their team members.

The basics of an IRA (Individual Retirement Account)

Traditional vs. Roth IRA

In a traditional IRA, contributions can be tax-deductible in the year the contributions are made, but withdrawals are subject to taxes.

In a Roth IRA, contributions have no impact on taxes when they are made, but withdrawals in retirement can be made without being taxed.

Either type can be used for real estate investing as long as real estate investing is allowed by the custodian.

Someone holding a pen and looking at a paper that says self-directed IRA

Regular vs. Self-Directed IRA

Every IRA needs a Custodian or Trustee, typically a company, who services the account. A custodian of a regular IRA will typically limit investors to traditional investment vehicles, such as stocks, bonds or mutual funds.A custodian of a Self-Directed IRA will allow a much wider range of investments: privately held companies, real estate, etc., in addition to stocks, bonds and mutual funds. The IRS does not specify what can be invested in, only what can’t: collectibles, life insurance, vacation homes which would be used at any time by the investor or buying or selling an asset to a disqualified person (like a family member).

How to Invest in Real Estate Using a Self-Directed IRA

Rules and Risks When Purchasing Investment Property Through an IRA

When investing in real estate using an IRA, it is necessary to follow the IRS rules and the policies of the custodian, as failing to do so could result in the IRA becoming disqualified from receiving tax benefits.

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