How To Use a Self-Directed IRA to Buy Your Retirement Home Now

Self-directed IRA real estate purchases can be a convenient and rewarding investment. In today’s economy, with many properties being snapped up at sub “priced-to-sell” prices, thousands of self-directed IRA …

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Self-directed IRA real estate purchases can be a convenient and rewarding investment. In today’s economy, with many properties being snapped up at sub “priced-to-sell” prices, thousands of self-directed IRA holders are aggressively growing their accounts by investing their funds in domestic, commercial, rental and foreign real estate purchases.

Those using self-directed IRA LLC structures enjoy even more benefits. This vehicle—structured by a handful of financial services companies—enables checkbook control of funds and allows account holders to make on-the-spot purchases while avoiding time-consuming custodial permission processes and transactional fees.

Thanks to these many advantages, “real estate IRAs” (as some people call self-directed IRAs) are rapidly gaining in popularity. Yet, despite, this growing interest, many have never considered the one particularly attractive possibility these types of accounts present: buying a retirement home now—at today’s prices—to occupy after retirement age has been reached.

Buy now, occupy later

You may have said yourself while strolling down some scenic street, “I’d love to retire here. But by the time I actually retire, I won’t be able to afford the real estate.” The great news is you don’t have to wait.

If you already have an IRA, 401(k), 403(b), SEP, Roth, or other retirement account with substantial funds in it, you can roll that money into a self-directed IRA then use that capital to purchase the retirement home of your choice as rental property. Since this investment is done on behalf of your retirement account (and not you personally), the income you receive from rental payments is realized tax-deferred within your account.

Limitations on IRA assets

Due to conflicts of interest, neither you nor a close relative can live in the home now, as this would be considered a prohibited transaction with a disqualified person (IRC §4975(c)(1)(a)). However, you can hold onto the property, lease it out to “arms-length” renters, build your retirement account with the rental payments, then take the real estate as a distributed IRA asset when you can take distributions penalty free (after age 59 and a half). After that, you can move in and enjoy the home you’ve waited so long to occupy!

Benefits of IRA LLC vehicles

If you have a self-directed IRA LLC vehicle, you have an added advantage. With this structure, you can act as your own property manager—a role disallowed with traditional self-directed IRAs. You’ll be able to buy rental properties as an IRA investment and be your own property manager (landscaper, handyman, roof repairer)—potentially saving hundreds to thousands in fees you might have to pay others to manage the property.

Taking the property out of the account

Do be aware that you will need to pay IRA distribution taxes based on the fair market value of the property at the time you take it out of the account (determined by a then-current written appraisal) and according to whatever tax bracket you are in at that time. If, by that time, you happen to be in a lower tax bracket, the savings could be substantial.

And if you invested in the real estate using a Roth IRA, you might save even more. Because your taxes were already paid upfront, you will not have to pay any taxes when you take the property as a distribution to use personally.

Conclusion

Self-directed IRAs have already enabled thousands to grow their funds with rental money from their future retirement home—and thousands more to enjoy life in the retirement home of their dreams. Ask any of these folks what they think of the arrangement, and more often than not, they’ll tell you that buying you future retirement home now could be the best “real estate IRA” investment you ever make!

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