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  • Scott Westfall

Investing in Real Estate with Your Retirement Account in 2024

Updated: 5 days ago

Did you know real estate can be held in an IRA? Check out this guide to self-directed IRAs with real estate to discover a new way to grow your wealth.

How to Invest in Real Estate Using Your Retirement Account in 2024: A Complete Guide | CGP Real Estate

Are you looking to diversify your retirement portfolio and‌ grow tax-advantaged wealth? Investing in real estate through a self-directed Individual Retirement Account (IRA) might be the solution for you. Let's dive into how you can leverage your retirement account to invest in real estate and the benefits and rules you need to know.

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What is a self-directed IRA real estate investing?

A self-directed IRA is a type of retirement account that allows you to invest in a wide range of assets, including real estate, tax liens, promissory notes, private entities, and more. Unlike traditional IRAs that are typically limited to stocks, bonds, and mutual funds, self-directed IRAs give you the freedom to diversify your portfolio with alternative investments, such as real estate.

What types of retirement accounts can be used for real estate investing?

Several types of retirement accounts can be used to invest in real estate. Here’s a quick look at common types of retirement accounts that could aid your wealth-building strategy:

  • Traditional IRA: Contributions are made with pre-tax dollars, and investments grow tax-deferred. Distributions are taxed as income.

  • Roth IRA: Contributions are made with after-tax dollars, and investments grow tax-free. Qualified distributions are tax-free.

  • SEP IRA: Designed for small business owners and self-employed individuals, allowing for‌ larger contributions than Traditional and Roth IRAs.

  • SIMPLE IRA: Another option for small businesses, offering tax-deferred growth and yearly tax deductions.

  • Solo 401(k): Individual retirement plan for business owners. Similar to a traditional 401(k), but you must be self-employed with no employees to contribute to a solo 401(k).

What if I have a different type of retirement account?

If you have a different type of retirement account like a 401(k) or 403(b),  you may be able to roll over the account into a traditional or Roth IRA, depending on the type of account you are rolling over from.

Keep in mind that there may be tax consequences for transferring funds from one type of account to another, especially if rolling from a post-tax account to a pre-tax account.

Note: If you have a company retirement plan with a current employer, in most instances your current employer’s plan will restrict you from rolling funds out of that plan.

Additionally, these two tax-advantaged investment savings accounts can also be structured for self-directed investing: 

  • Health Savings Account (HSA): For individuals with high-deductible health plans, allowing tax-advantaged savings for medical expenses.

  • Coverdell Education Savings Account (CESA): For paying qualified education expenses, offering tax-free growth and distributions.

What’s different about purchasing real estate with an IRA?

Purchasing an investment property is a great way to build wealth. If you would like to purchase real estate through a self-directed IRA, the process and management will look a bit different from traditional real estate investing.

Ownership of IRA Real Estate

When you use an IRA or other retirement or savings account to invest in real estate, that account becomes the “owner/operator” of the investment property you purchase. The account name, and number will be written on the deed to the property.

IRA Real Estate Restrictions of Use

Real estate owned by an IRA account has some restrictions for how it can be used. It must be operated strictly as an investment property. Personal use of the property can’t be made by you or disqualified persons, such as family members or business partners.

Definition of "Disqualified Persons" for self-directed IRA transactions

There are other restrictions regarding how you use or manage real estate within your self-directed IRA. You’ll need to make sure you adhere carefully to IRS rules and the guidelines for your account to avoid prohibited transactions — as those could lead to penalties or disqualification of the IRA.

Income, Expenses, and Taxes

The self-directed account not only “owns” the investment property, but all transactions related to the property happen within that account. All rental income goes directly into the IRA or retirement account, and the profits remain there tax-deferred or tax-free until distribution during retirement. Likewise, all expenses must be paid from the IRA. 

Financing Limitations for IRA Real Estate

If you need a mortgage to purchase a property through your retirement account, you are limited to securing a non-recourse loan, which means they are secured by collateral, usually real estate. 

Graphic defining a non-recourse loan. The only type of mortgage that can be secured when purchasing real estate with an IRA or retirement account.

This type of loan doesn’t hold the borrower personally liable, but it comes  with higher interest rates and fees than traditional loans. Those higher expenses on loan payments are important to consider when budgeting for an investment property to see if it will be a lucrative venture.

Liquidity of IRA Real Estate

Real estate in any form is not exactly a liquid asset. However, if you want to access the equity in a property owned by your IRA without a penalty, you’ll need to wait until you are eligible to start taking distributions.

Not located in Hampton Roads, Virginia? CGP offers independent consulting services for those around the country looking to start or expand their investment property portfolios.

How do I invest in real estate with my retirement account?

Investing in real estate through your retirement account involves a few key steps:

  • Open a Self-Directed IRA: Choose a custodian that specializes in self-directed accounts, like Equity Trust or IRA Financial. Make sure they specialize in real estate investments, and discuss whether you can roll over a previous retirement account if desired.

  • Find an Investment Opportunity: Look for real estate listings, network with other investors, or explore investment districts. You’ll want to work with a top real estate agent who is experienced in identifying and acquiring cash-flowing investment properties.

  • Decide How to Fund the Investment: You can purchase the investment in full with cash from your retirement account, partner with other investors, or use a non-recourse loan.

  • Direct Your Custodian to Fund the Investment: Use your custodian's platform to start the investment and make sure all transactions follow IRS rules.

Book a free 15-minute consultation with our experts to get started on your real estate investment journey today.

What is a real estate self-directed IRA custodian? 

All IRA accounts, no matter whether self-directed or not, are held for investors by what is called a “custodian” – an entity approved by the IRS to safeguard the investments and make sure all regulations are adhered to.

Graphic explaining  what an "IRA custodian" is and their role as the entity approved by the IRS to manage and hold IRA investments.

For a traditional or Roth IRA, custodians are traditionally banks, brokerages, mutual funds, or trusts serving as a fiduciary and working in the best interest of the investor. In these cases, the investor can choose to have their custodian make most (or‌ even all) investment decisions for them.

Unlike a custodian of a regular IRA, a self-directed custodian cannot provide financial advice & is not a fiduciary. They primarily serve to help you avoid violating IRS rules and regulations in your self-directed investing.

Because all expenses and transactions for a self-directed IRA containing real estate must go through the retirement account, the IRS requires you to have a custodian who is responsible for administering the account and holding custody of its assets.

Finding the right custodian for you depends on the type of IRA account you need and the types of investments you want to make. 

The Pros of Real Estate Investing with Your Retirement Account

Investing in real estate through your retirement account offers several advantages:

  • Tax Advantages: Depending on the type of account, your real estate investment can grow tax-deferred or tax-free. If done properly, you can avoid paying capital gains tax on real estate in an IRA.

  • Diversification: Real estate can provide a hedge against inflation and market volatility, diversifying your retirement portfolio.

  • Potential for High Returns: Real estate investments have the potential to generate significant returns – whether used as a long-term rental or short-term rental – through rental income and property appreciation.

The Bottom Line

Investing in real estate with your retirement account can be a powerful strategy for diversifying your portfolio and growing your wealth in a tax-advantaged environment. By understanding the rules and working with a knowledgeable custodian, you can unlock the potential of real estate investments in your retirement planning.

To find the perfect investment property to grow your IRA, make sure to connect with a top real estate agent group like CGP that knows the ins and outs of acquiring rental properties.

Remember, always consult with tax, legal, and financial professionals before making any investment decisions. Happy investing!


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