Thursday - Aug 24, 2017

Tax-Free Retirement: Is It Possible?


What if you could invest your retirement money in a real hard asset like real estate and watch that asset grow in value over time, but with all that wealth accumulation happening tax-free? It sounds almost too good to be true. However, with the proper use of a self-directed IRA, you can buy and sell real estate as an investment without paying taxes until you withdraw the funds or, in the case of a Roth IRA, never paying taxes!

To benefit from this investment strategy, you must be interested and astute. First you establish your self-directed IRA with a plan administrator willing to allow you to use your IRA funds to buy real estate.

There are strict rules and regulations; be sure to do your due diligence to ensure that you are operating within the guidelines. Additionally, your plan administrator should be solely focused on administering your account, not promoting specific properties.

Once the account is set up, you will over your retirement funds to this new retirement account. You will need to have enough money in the account to make significant purchases of real estate. You want a property that will both appreciate in value and generate enough cash flow to cover all upkeep costs.

For interested folks who do not have enough money to buy property right away, there is the option of establishing accounts that allow more than the typical $5,000 contribution per year. A financial or tax advisor is a good idea if this route is needed.

When establishing your new account, you have a choice of a traditional IRA or a Roth IRA. If you establish a Roth, then any funds from tax-deferred retirement account contributed to the new Roth are subject to full taxation for the year of the conversion. While any money accrued in the Roth will be tax-free, the up-front tax burden may be too great and you will want to stick with a regular IRA.

On the other hand, if your account is new, you can establish it as a Roth-type account. It will take time to build your assets, but once you can start buying real estate, then all your assets will be tax-free when you retire.

The rules of a self-directed IRA investing in real estate dictate that you can only hold property that neither you, your family members, nor business partners can use. If you break these rules, then the tax-exempt status of your account is forfeited and you will have significant financial trauma.

The rules of real estate investment within an IRA are complex and, therefore, not for all investors. For example, there is the concept of unrelated taxable income. When you invest in a property, you likely will take a mortgage.

Some percentage of the money you collect in rent each month is allocated to the mortgage, but if the property increased in value, then as long as you have a mortgage, you will pay taxes on the percentage of the property under mortgage. An additional risk is losing a tenant and not finding a replacement. This will rapidly deplete your nest egg.

The key to success is to do your research, understand how things work, and, most importantly, find a property with a reliable long-term tenant. You need to have the steady, secure income flow to insure a successful investment. If you need to use a property management company to help you, then you will need to calculate that cost into the equation as well.

Other considerations when establishing a self-directed IRA are the administration fees. There can be both set-up costs and then annual fees. Again, it is essential that you understand all the potential fees and costs before establishing your account. Finally, make sure you have checkbook control with your account so you cut checks as you need to cover specific expenses.

Unfortunately, there are stories of people who have lost their nest egg with self-directed IRAs. However, these folks made their decisions without understanding how these accounts work. There are rules, but there are also opportunities. If undertaken with proper preparation and research, the self-directed real estate IRA offers the opportunity to build wealth and enjoy a prosperous retirement.

This article was written by Bruce Smith. Bruce is a wealth of financial knowledge – he enjoys sharing his know-how with as many people as possible.