Retirement accounts like IRA can be invested in alternative investments like real estate. The Internal Revenue Service allows a person to invest in any variety of investment. The only exception is investing in life insurance, collectibles, and a disqualified person. A Solo 401(k) or self-directed IRA can be used to buy real estate. Such a move brings multiple benefits like tax-free growth or a tax referral. In comparison, if the same property is bought using personal funds, then this gain would be subjected to federal income tax. In a majority of cases, a state income tax will also be imposed. A self-directed IRA may permit you to make investments in known hard assets like a piece of land or rental property. An excellent investment diversification can be achieved by enjoying the ability to invest in alternative assets.
Think before buying
A number of factors must be considered before making that leap to purchase any self-directed IRA. Price is a vital factor. Purchasing real estate means an increase in continuing expenses like taxes and repairs. It is important to ensure that you are buying an asset which the IRA can afford. It makes a wise practice to keep a 10 percent reserve of asset value in times of emergencies.
A thorough research comes on top of the list. It is vital to do all due diligence and research on real estate assets you will purchase via the IRA. It is important to be familiar with that particular real asset which your IRA will buy. You must not only know about the property but also about the locality and the costs that come with such a transaction.
There is also the matter of IRA custodian options. The majority of the traditional financial institutions and banks disallow the IRA holders to purchase real estate with IRA as they do not generate profit. It is, however, possible to find self-directed IRA custodians all over the US which permit clients to make a number of alternative asset investments, like real estate. Retirement funds are utilized to arrive at these aims. The IRA holder in such cases has two options- Custodian Controlled and Checkbook Control. Both are self-directed IRAs. The Custodian Controlled involves the IRA holder to direct the IRA custodian to invest IRA funds to a number of alternative asset investments. The Checkbook Control IRA involves setting up a special purpose LLC or limited liability company. The latter will be fully owned by IRA and managed by that particular IRA holder via a local bank account.