Did you know that you can purchase real estate with a Roth IRA? Many banks lead you to believe that you can only use your Roth IRA to invest in stocks, bonds, and mutual funds. However, you can use your Roth IRA to invest in alternative investments, including real estate. You simply need to open a Self-Directed Roth IRA with a custodian that allows you to invest in real estate. With IRA Financial’s Self-Directed Roth IRA, you can invest in anything you can possible imagine, so long as it is not prohibited by the IRS.

Introduction to Real Estate IRAs

A Real Estate IRA, which can also be known simply as a Self-Directed IRA, is a powerful tool for diversifying your retirement portfolio with real estate investments. Unlike traditional IRAs, that limit you to stocks, bonds, and mutual funds, a Self-Directed IRA opens the door to a broader range of investment opportunities, including rental properties, commercial properties, and raw land.

This type of retirement account allows real estate investors to leverage their knowledge and expertise in the property market, all while enjoying the benefits of tax-deferred growth and income. By holding real estate within your retirement account, you can potentially increase your retirement savings and create a steady stream of income.

What is a Self-Directed Roth IRA for Real Estate?

A Self-Directed Roth IRA to purchase real estate may be the best decision any investor can make. Setting up a self-directed account is crucial for those looking to diversify their retirement holdings beyond traditional assets. As you may know, there are many benefits to establishing this type of retirement plan. Further, when utilizing an after-tax Roth account, you’ll never have to worry about taxes from your retirement investments ever again!

Again, with a Self-Directed IRA, you can invest outside of traditional investments. This allows you to diversify your portfolio and better protect your assets/funds. As you may know, in the 2008 financial crisis, many retirement holders lost almost 25% of their retirement assets. As a result, diversification is steadily growing in popularity. Plan participants realize they don’t have to invest in Wall Street.

To wit, alternative investments, such as real estate, have always been possible IRA investments. Yet, prior to 2008, very few people knew about self-directed retirement plans as a conduit to make alternative investments.

Real Estate Investments in a Roth IRA

Here is just a partial list of domestic or foreign real estate investments you can make with your Self-Directed Roth IRA.

• Residential homes
• Raw Land
• Commercial properties
• Apartments
• Duplexes
• Condos/town homes
• Mobile homes
• Real estate notes
• Real estate purchase options
• Tax liens certificates
• Tax deeds

These options provide a variety of ways to purchase investment property using your Self-Directed Roth IRA.

Purchase Real Estate with a Roth IRA – The Benefits

Real estate has emerged as a highly popular non-traditional asset for retirement investing. But why is that? Here are some compelling reasons:

1. Familiarity and Confidence: People tend to invest in what they understand. Real estate, being tangible and familiar, inspires confidence. Many individuals possess substantial knowledge about the property market, making it an attractive investment choice.
2. Inflation Protection: Investing in real, physical assets can shield retirement savings from the erosive effects of inflation. Unlike other forms of investment, real estate tends to appreciate over time, providing a hedge against rising prices.
3. Tax-Free Income and Gains: Did you know that all income and gains from real estate can be tax free? It’s true! When real estate is owned within a retirement account, it enjoys tax-exempt status. One of the key tax advantages of using a Roth IRA for real estate investments is the potential for tax-free withdrawals during retirement. Let’s illustrate this with an example:
   • Suppose you purchase a property using your IRA for $100,000. Later, you sell the property for $300,000, resulting in a gain of $200,000. That gain is tax free while it’s held inside of the account. Further, if it was held inside a Roth IRA, and the account has been open for at least five years, and you are at least age 59 1/2, when you withdraw those funds, there would be no tax!
   • Contrast this with using personal funds (non-retirement funds), where the gain would be subject to federal and state income taxes.

Real estate remains the most common asset held by IRA Financial clients. However, IRA Financial does not limit what you can invest in. Some Self-Directed IRA custodians only allow clients to invest in certain assets. Many do not allow real estate investments. At IRA Financial, you can invest in real estate and extensive alternative investments for a low annual fee.

Tax-Deferred Income

One of the standout benefits of a Real Estate IRA is the tax-deferred growth and income it offers. When you invest in rental properties through your IRA, the rental income and any appreciation in property value are not subject to immediate taxation. Instead, these earnings grow tax-deferred within your retirement account, allowing your investment to compound over time.

If you hold it in a Roth IRA, the advantages are even greater. All qualified distributions taken during retirement are tax free, providing you with a source of tax-free income. This means you can maximize your retirement wealth without the burden of annual taxes on your investment gains.

Why Buy Real Estate with a Roth IRA?

Self-Directed Roth IRA with Checkbook Control

Most financial institutions don’t allow real estate investments. In the end, the IRA custodian makes the decision on what you can invest in with your retirement plan. However, a Checkbook IRA, you are the manager of the IRA-owned LLC, and can make decisions on what to invest in. Of course, this includes real estate. It is important to be aware of the IRA rules to ensure compliance and avoid penalties.

To reiterate, (you can find this information in our other Checkbook IRA content), now making investments is quick and easy. You no longer have to pay high custodian fees or wait as custodians approve (or deny) your investments. With a Checkbook IRA, you write a check or wire funds from your IRA LLC bank account, and the investment is yours!

Learn More: Top Retirement Plans for LLC Owners: Options You Need to Know

How to use a Roth IRA to Invest in Real Estate

Open a Self-Directed Roth IRA

Find a Self-Directed IRA custodian, such as IRA Financial, and set up a Self-Directed Roth IRA. It is important to note that not all custodians allow you to invest in real estate using a Roth IRA. To open an account, simply use our online platform. An account number will then be generated.

Once an account number is generated, you will need to fund your account using a rollover, transfer or contribution. If you have a traditional funds you will need to perform a conversion to fund the Roth IRA. Understanding the different types of retirement accounts available can help you make an informed decision.

Find and Purchase the Investment Property

Once your account is open, you will need to find an investment property. With IRA Financial’s Checkbook IRA solution, you simply use your IRA account to write a check to purchase the property. There is no need for approval or oversight from the custodian. If you elect to choose a custodian-controlled IRA, the custodian will purchase the property on your behalf.

The title to the investment property and all transaction documents must be in the name of the IRA, or the IRA LLC if using a Checkbook IRA. The LLC manager must sign the documents pertaining to the property investment.

Remember that all expenses, including property taxes, must be paid from your Self-Directed Roth IRA. Likewise, all gains, including rental income, must go directly into the account. No IRA investment checks should be deposited into your personal accounts. Owning real estate within an IRA comes with specific responsibilities and regulations that must be followed.

Enjoy Tax Free Gains

Once you have successfully purchased your real estate investment with the Self-Directed Roth IRA, all you have to do is sit and watch the money flow through your account. Since you are using a Roth IRA, all income derived from the investment property will flow back to your Roth IRA tax free! Furthermore, you can use your Self-Directed Roth IRA to invest in a wide-range of alternative and traditional assets, including stocks and bonds, precious metals, cryptos, private businesses, hard-money loans and more.

Learn More: Why Real Estate May Outshine the S&P 500 for the Next Decade

Important Items to Remember

Using a Non-Recourse Loan

For real estate investors looking to maximize their purchasing power, a non-recourse loan can be an invaluable tool. A non-recourse loan is a loan that is secured solely by the property being purchased, not by the investor’s personal assets or credit. This type of financing allows you to leverage your Roth IRA funds to acquire properties that might otherwise be out of reach.

However, it’s important to be aware that using a non-recourse loan within your IRA can trigger UBTI on the income generated by the property. Despite this, the ability to use leverage can significantly enhance your real estate investment strategy within a Self-Directed IRA.

Property Management and Maintenance

Owning a rental property comes with the responsibility of property management and maintenance. As the investor, you are responsible for ensuring that the property is well-maintained and that tenants are managed effectively. However, to comply with IRS regulations and avoid prohibited transactions, you cannot personally perform any work on the property.

Instead, you must hire a property management company or contractors to handle these tasks. All expenses related to property management and maintenance must be paid from your IRA funds, and all rental income must flow back into the IRA. This ensures that the income generated by the property remains tax-deferred.

Selling Property in a Roth IRA

When it comes time to sell a property held within your Roth IRA, the process is straightforward and tax-advantaged. You can sell the property to a third party, and the proceeds from the sale will be deposited back into your Roth IRA. The significant advantage here is that the gains from the sale are tax free. This allows you to reinvest the full amount of the proceeds into other investments within your IRA.

When it comes to time to withdraw funds from the Roth, no taxes will be due on qualified distributions. Alternatively, if you still own real estate inside the account, you can take possession of it personally, at that time. Just remember, any Roth must have been opened five years prior, and you, the IRA owner, must be at least age 59 1/2. If not, you will face penalties and taxes. Consult with a professional before deciding to distribute a real estate property.

Summary

Investing in real estate through a Self-Directed Roth IRA offers a powerful way to grow your retirement wealth with tax-free gains. By leveraging the flexibility of a self-directed account, you can diversify beyond traditional assets and tap into the long-term potential of property investments. While this strategy comes with unique rules and responsibilities—like avoiding prohibited transactions and ensuring compliance—it can be a game-changer for those looking to take more control of their financial future.

As always, it’s wise to consult with a qualified advisor to make sure your investment strategy aligns with your retirement goals. With the right planning, a Self-Directed Roth IRA can be your gateway to building lasting, tax-free wealth through real estate.

Frequently Asked Questions