House Your Retirement with Self-Directed Real Estate IRAs

House Your Retirement with Self-Directed Real Estate IRAs

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Direct real estate investing is becoming an increasing option for investors eying retirement and who want to take advantage of real estate's return potential and its abilities as a portfolio diversifier and inflation hedge. For the most part, real estate is not frequently invested in for retirement-account purposes, and with the exception of real estate-related funds, there are few options for investors to use direct real estate investments for retirement accounts. Although less than 2% of retirement accounts are invested in real estate, the emergence of IRAs for which the primary - and possibly only - investments are real estate products is beginning to change the situation.

In the form of a self-directed IRA, investors are now able to invest directly in real property, mortgages, private placements and other non-traditional assets. In some cases, IRA owners are given checkbook access to their IRA balances. With such structures, investors can achieve significant flexibility in investing options, greater control over their retirement assets and the investment potential provided by direct real estate investments.

A self-directed IRA is one that allows the account owner to make investment decisions and choose investments. For instance, the IRA owner can choose to invest in stocks, bonds and non-traditional investments instead of having the investment decisions made by the financial institution.

In order to invest using a self-directed IRA, the IRA must be held with a qualified trustee or custodian. Generally these trustees provide administrative services, such as maintaining records of contributions and other activity, filing required IRS reports, issuing client statements and providing information pertaining to the rules and regulations that govern IRAs (for example, the contribution limits and deductibility rules, the rules for distributions and the penalties for early distributions).

The investment options for self-directed IRAs are not usually limited to traditional asset types, but allow all of the IRS-permitted investment types. This creates a higher diversification potential than IRAs, where investments are limited to mutual funds or certificates of deposits (CDs). However, although all investment types are allowed under federal regulations, not all custodians provide for all asset classes, such as real estate or mortgages. Therefore, IRA owners should check with the custodian to determine which investment options they offer before establishing the IRA.

 

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