Did you know that retirees have only about 39% of the recommended savings to retire comfortably.
Like many Americans, you may be wondering when can I retire or you may wonder how you can invest in real estate using your retirement funds. Historically, most retirement savers invested their IRAs, 401(k)s, and other retirement accounts into traditional investments such as mutual funds, Vanguard index funds, bonds, stocks, and treasury notes. However, today’s retirement savers have the freedom to choose a number of other types of assets, including real estate.
Make sure you do your due diligence and be aware of the basic investment rules involving your IRA before you actually invest.
Using your retirement funds to invest in real estate is a broad concept because it involves various types of investment vehicles, each carrying a varying amount of risk, demanding varying level of your involvement.
In this article, we’ll discuss the various ways you can use your retirement funds to buy real estate.
1. Using your retirement account to directly invest in real estate
If you are an experienced investor, this is probably a lucrative way to grow your retirement nest egg.
Although investing IRA funds directly in a piece of property is entirely legal, many IRA administrators may not allow such investments.
If you have got an IRA with a company that does not allow direct investment in real estate, you might want to open a self-directed IRA that allows such investments.
A Solo 401(k), a personal retirement account for business owners with no employees, can be another option to purchase real property directly.
However, there are some basic rules to follow if you’re using these retirement accounts to purchase real estate:
- You cannot work on the property, even if it means carrying out repairs and you need to hire people to work on the property.
- You can’t mortgage the property.
- The property cannot be used for any personal benefit. The property has to be used strictly for investment purposes.
- All expenses associated with the property has to be paid out from your IRA. And all rental income must be deposited into your IRA. Your IRA has to have enough funds to cover property expenses. Otherwise, this can put you in a bad situation.
2. Using your retirement account to buy real estate stocks, mutual funds or publicly traded REITs (real estate investment trusts)
If your retirement account is an IRA, you can simply use the funds to purchase real estate-related equity shares, bonds, or publicly traded real estate investment trusts (REITs).
Your plan may have limited or no real estate-related investment opportunities if you have an employer-sponsored 401(k). If you cannot find real estate-related investment opportunities with your 401(k), you can consider opening an IRA (traditional IRA or a Roth IRA) that gives you the freedom of investing in a broad range of real estate investments.
3. Borrow against your IRA or 401(k) to invest directly in real estate
Some retirement plans, including Solo 401(k)s and employer-sponsored 401(k) plans allow you to borrow money from your retirement account to use it for buying real estate.
However, you have to conduct thorough research and educate yourself on the legal consequences, tax implications, and financial risks before borrowing against your retirement account to fund a real estate investment.
4. In some cases, you may use a real estate crowdfunding platform to invest your IRA or 401(k) directly in real estate deals
This is one of the innovative ways of investing your funds directly into real estate. This newest way of investing has the potential of providing you with the aspects of both passive and active real estate investing.
Through a crowdfunding platform, you get the opportunity to invest in commercial real estate deals, which were only available to wealthy individuals or large investment companies.
However, as with all types of investments, thoroughly research to determine the restrictions, risk, and tax issues before investing.
Finding the right crowdfunding platform is crucial to ensure the success of your investment. Research your options thoroughly, and read reliable platform reviews from people who have used them before.
5. Invest your self-directed IRA in a non-public REIT
This is a new form of retirement investing in real estate. As an investor, you get access to a non-public real estate opportunity that you might not otherwise be able to.
Whatever dividends you earn from non-public REIT can be automatically invested back into your REIT, so that you can enjoy compounded returns over time.
However, just like any other investment vehicle, there are possible risks to investing in the non-public REIT. So, do your research and review the offering materials before investing.
If you are interested in other super interesting strategies, you should check out Physician On Fire’s article covering tax loss harvesting and backdoor Roth IRA contributions.
In Conclusion
Real estate is a tried and tested investment strategy. Using your retirement funds to buy real estate can offer you a number of positive financial benefits. The list of real estate investment options outlined above should be of help if you are looking to buy real estate with your retirement funds. However, you must be mindful of the IRS prohibited transaction and UBTI rules. Therefore, before you make the investment, it is recommended that you consult a tax professional on how to keep your retirement account from breaking any of the IRS rules.
Author Bio: Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning. Over the last 10 years, he has turned his focus to self-directed accounts and alternative investments.
