Retiring with real estate presents a compelling strategy for those who have a keen understanding of a local property market or are seeking alternatives to Wall Street products such as stocks, bonds, and mutual funds. With a Self-Directed IRA, you can invest in real estate with tax advantages. It functions similarly to its standard IRA counterpart but instead allows alternative assets including many different types of real estate.
A Self-Directed IRA with Checkbook Control, also called a Checkbook IRA and sometimes even referred to specifically as a Real Estate IRA, gives you an additional sense of freedom in the ability to manage your everyday investment transactions without involving your Self-Directed IRA custodian. If you’re self-employed with no W-2 employees other than perhaps your spouse, you can also consider a Self-Directed Solo 401(k) for similar flexibility and tax treatment.
Investing your retirement funds into real estate with a Self-Directed IRA offers several benefits that many retirement investors find exciting and empowering. The advantages include:
Unlike stock market assets, which tend to fluctuate based on uncontrollable factors, real estate generally allows you more control over your retirement investments. You generally have discretion in property choice, pricing, renovations, and deal-making, giving you a more direct influence on your investments’ outcome.
Real estate provides tangible assets that possess intrinsic value. Unlike stocks, which are abstract and can lose all value, real estate generally retains some level of value regardless of market conditions.
Real estate offers various methods to potentially generate retirement income. From property appreciation to cash-flow rentals and quick fix-and-flip opportunities, different investment styles can thrive within a self-directed account. This versatility allows investors to choose strategies that align with their goals and risk tolerance.
Using a Self-Directed IRA, Checkbook IRA, or Solo 401(k) to invest in real estate provides tax advantages. Profits from real estate investments can grow tax-deferred in a self-directed traditional account or tax free if it’s a Roth account. These tax advantages can enhance the growth of your retirement savings by allowing your gains to compound over time.
Self-Directed IRAs, Checkbook IRAs, and or Solo 401(k)s are all similar options to invest in real estate with tax advantages. The main difference is in the platform you prefer for your selected account.
Classic SDIRAs involve a regulated custodian, such as our sister company, Madison Trust, holding your retirement funds and releasing them upon your investment requests. To place an investment, you will submit a form to the custodian to process the transaction. An SDIRA can be suitable for investors who prefer a more hands-off approach and do not need immediate access to their funds for frequent transactions.
Checkbook control eliminates the need for custodian involvement in your everyday investment transactions. To gain checkbook control, you will open an IRA Trust or IRA LLC along with a checking account for your investments. This setup allows you direct access to your retirement funds, enabling you to place investments by simply writing a check or sending a wire. The Checkbook IRA platform is often preferred for real estate investments because it offers greater flexibility and quicker transaction capabilities. It can be particularly beneficial for investors who need to act swiftly on investment opportunities or manage ongoing property expenses.
For many real estate investors, the Checkbook IRA platform is advantageous due to its flexibility and ease of use. However, if you plan to invest in a property with minimal interaction after the initial purchase, the custodian platform might be more appropriate. Your choice will ultimately depend on your investment goals and management style.
There are numerous strategies for utilizing property to potentially provide retirement income. The appropriate strategy depends on the investor’s mindset and retirement goals. Here are a few common approaches:
This classic real estate transaction involves buying a property at a reasonable price and holding onto it, ideally for appreciation over time. This strategy can be desirable for investors who are patient and looking for long-term gains. With a Self-Directed IRA or Checkbook IRA (as well as a Self-Directed Solo 401(k)), you can acquire properties that you believe will increase in value, while also benefiting from tax-deferred or tax-free growth.
Rental properties can include single-family units, multi-family homes, apartment buildings, or commercial real estate like strip malls. These properties, known as cash-flow properties, generate income through tenant rent payments. Investing in rental units can provide a steady stream of income, which can be particularly appealing for those seeking regular cash flow during retirement. Using a Checkbook IRA can simplify the management of rental properties by allowing you to handle transactions such as collecting rent and paying for maintenance directly through your dedicated investment entity and checking account.
Flipping involves buying a property at a discounted price, renovating it, and quickly reselling it for a profit. This strategy requires a more hands-on approach and a keen eye for properties that can be improved and sold at a higher value. Flipping can yield significant short-term profits but can also involve more risk and effort. Gains generated from flipping could, in some cases, be considered active income. This active income may be subject to Unrelated Business Income Tax (UBIT). It’s considered best practice to speak to a financial advisor to determine if UBIT might apply to your investment.
Choosing the right strategy depends on factors such as the size of your retirement account, your desired level of involvement, and your profit goals. In any event, using a self-directed account allows you to tailor your investments to fit your unique strategy and preferences.
Real estate, like any other investment, is subject to market forces. While this article provides a general overview, diving deeper into the most profitable real estate investment strategies is beneficial if you plan to enter the market. It's also important to understand the concept of prohibited transactions in self-directed retirement accounts.
At Broad Financial, we specialize in setting up Checkbook IRAs and Self-Directed Solo 401(k)s that are designed to facilitate tax-advantaged real estate investing. To learn more, schedule a free discovery call today!
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