Jason Craig is President of IRA Resources, Inc (IRAR), one of the fastest growing self-directed IRA custodian in the nation.
As real estate agents near retirement, they are looking for ways to reap the rewards of their hard work. But to retire comfortably, they need income that can last them throughout their retirement.
Investing in real estate can be a good way to do this because of the potential rental income and property appreciation. And you can do it using a self-directed individual retirement account (IRA), a retirement savings account that is tax-deferred and allows you to invest in real estate.
As a self-directed IRA advocate working with the largest real estate association in the country, I want real estate agents to realize they can use self-directed IRAs to their advantage.
Help Others Achieve Their Dreams, But Don’t Forget About Yours
Buyers and sellers turn to agents to learn about the real estate market and make informed decisions. Agents work to help others achieve their dreams. The problem is many agents don’t know they can use IRA funds to invest in real estate and so can their clients.
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Building their dream retirement is sometimes put aside because of lack of knowledge in investments, too. Many think that a retirement plan is limited to a stock portfolio. This couldn’t be further from the truth. If you are a real estate agent, there is a world of opportunities for you — not only as an investor, but also as an agent for real estate IRA investors.
An Opportunity To Diversify Your Retirement Portfolio
Real estate agents are in the best position to spot good deals, and investing in real estate provides them an opportunity to diversify their retirement portfolio with an asset they understand. When it comes to real estate investing with an IRA, sometimes the common thought is, “I don’t have the savings in my IRA to buy this deal.”
With a self-directed IRA, you can invest in real estate even with a small IRA. Some investors with small IRAs partner with other IRAs or even personal funds to make a real estate investment. Others invest in private equity shares in real estate. You can even lend from your IRA to a non-disqualified person who is purchasing real estate. These real estate notes are usually secured by the real estate.
How To Invest In Real Estate With A Self-Directed IRA
You can fund your account through savings, or if you have a 401(k) plan from a previous job, you can roll it over to a self-directed IRA. There are also self-directed IRAs for individuals (Roth, traditional) and for small-business owners and the self-employed (SEP, SIMPLE.)
As a self-employed agent, which most agents are, a SEP IRA allows for higher contribution limits — up to 25% of compensation, with a maximum of $58,000. This helps you reduce your taxable income and save more for your real estate investment.
To get started, the first step is to find an IRA custodian that allows you to have a true self-directed IRA. A true self-directed IRA custodian allows investments in non-traditional assets, such as real estate and real estate-related investments such as notes. Make sure you compare custodians before you hire a company.
Another thing to keep in mind is not all self-directed IRA custodians are the same. Some specialize in a certain type of asset; others may charge more for real estate assets. Fees also vary from one custodian to the next. This is why it’s so important to do a comparison.
Then, you will need to decide on a strategy. For example, you can pool IRAs, get a loan for your IRA or even lend money for a mortgage as mentioned earlier. There is always risk involved when entering any kind of investment. Make well-educated decisions when deciding on your strategy. Think about your exit strategy, as well.
Last, once you have a self-directed IRA custodian and know your strategy, put your expertise to work: Find that right real estate opportunity that only agents like yourself can spot. Make sure you conduct due diligence on your investment just like you would for a client because self-directed IRA custodians will not do this for you.
Avoiding Tax Pitfalls
The most notable challenge you may face as an investor new to self-directed retirement is avoiding prohibited transactions with disqualified persons. The IRS is very specific on what is a prohibited transaction and who is a disqualified person to your IRA. It’s important that you follow the rules to avoid major tax penalties.
A disqualified person to your IRA is you, the IRA owner; your IRA beneficiaries; and certain family members (spouse, parents, grandparents and great-grandparents, children and their spouses, grandchildren, great-grandchildren and their spouses). This means you cannot live in, or vacation in, the IRA-owned property. Any sort of personal benefit is off limits to you and the family members listed. In other words, the real estate purchase must be at arm’s length and for investment purposes to grow and benefit the IRA.
Also disqualified are the IRA service providers and anyone giving you investment advice for a fee or compensation, an entity where a disqualified person owns more than 50%, or one in which the account holder is an officer, director or a 10% or more shareholder. As a real estate agent, you can represent your IRA in the purchase of a property, but you cannot get paid for the transaction.
Breaking IRS rules can be costly. The IRA loses its tax-sheltered status the moment a rule is broken, and then all the assets in the IRA are automatically subject to taxes and fines. So, follow the rules to keep your IRA’s tax-advantage status.
Self-directed IRAs provide another avenue for individuals looking to invest outside traditional stocks, bonds and mutual funds. Don’t let the fear of doing something new to you prevent you from saving for retirement and investing in what you know best, real estate.
The information provided is not investment, tax, financial, or legal advice. This article is for educational purposes. Individuals who believe they need advice should consult with the appropriate professional(s) licensed in that profession.