Retirement is something you can’t run away from. People who plan for their post-retirement life well before the time arrives are the smartest kinds of people. Retirement can be a very stressful phase, especially if you don’t have sufficient finances to sustain without an income stream.
One of the wisest ways to plan for retirement is to open a self-directed individual retirement account (SDIRA). A self-directed IRA is different from a regular IRA. When you open a regular IRA, you can invest your retirement mutual funds, stocks, and bonds, and that’s pretty much it. You also have to pay taxes on your earnings. However, a self-directed IRA allows you to diversify your retirement investment portfolio. You can use your retirement funds to invest in real estate, private placements, commodities, precious metals, and other alternative investments. The best thing about a self-directed IRA is that your income goes tax-free! Another thing that sets self-directed IRAs apart from regular IRAs is that you’ll need a trustee or a custodian to carry out transactions on your behalf. Although you control everything, a custodian does the actual work for you.
If you’re planning to invest in real estate using your self-directed IRA but want to be sure how you can do it, you should read this blog post! We’ve covered everything you would like to know, from how you can use a self-directed IRA for real estate investments to why it is a good idea.
How to Invest in Real Estate Using a Self-Directed IRA?
You can open a self-directed IRA any time after you turn 21 years of age. You can start saving for your retirement long before retirement hits you. This will ensure that you’ve got plenty of funds in your self-directed IRA at the time of retirement. The more funds you have, the more investment options you’ll have.
In this section, we’ll walk you through the process of how to open and use a self-directed IRA for real estate investments.
Opening a Self-Directed IRA (SDIRA)
You’ll have to explore the market to see which companies are offering self-directed IRAs because there are few companies working on this type of IRA.
The first and most important thing to kickstart your self-directed IRA journey is finding the right company. Make sure you’re choosing a company with sufficient experience in the type of investments you’re interested in. For example, getting a self-directed IRA from a company that’s known chiefly for precious metal investments when you’re more interested in real estate investments isn’t the wisest thing to do. You certainly wouldn’t risk your retirement funds.
Once you’ve chosen a company and initiated the process of self-directed IRA opening, your account will be assigned a trustee or custodian who’ll be responsible for the due diligence on your SDIRA. The custodian is in no way an investment advisor or broker.
Using Self-Directed IRA for Real Estate Investments
The process is pretty simple. You can choose any real estate you like. It can be a residential property or commercial. You can also invest in mobile homes and raw land. Once you’ve picked the property of interest, you’ll have to tell the custodian of your self-directed IRA, and they’ll complete the transaction on your behalf.
Since you’re using the funds in your self-directed IRA to buy real estate, the property won’t be under your name, but it’ll be in the name of the IRA. If you plan to put your property for rent, all the rental income will go into your IRA, and any expenses that you wish to make for the property you purchased will also be made from the self-directed IRA.
You don’t have to pay taxes on your income or withdrawals from your self-directed IRA. However, if you took a non-recourse loan to purchase real estate (which is when the funds in your SDIRA aren’t sufficient), you’ll have to pay the tax on the debt-financed portion of the earnings or profit from the real estate investment.
Why Should You Get a Self-Directed IRA for Real Estate Investment
One of the biggest questions we get is why one should use a self-directed IRA to invest in real estate. Well, there’s not one but plenty of reasons for it.
You Can Invest in Any Property You Like
The first and biggest reason you should use a self-directed IRA to invest in real estate is that there aren’t any restrictions or limitations. You can invest in raw land, commercial or residential properties, mobile homes, or apartment complexes anywhere in the world that allows it.
Your Investment is Protected
One of the major drawbacks of investing your retirement funds in the stock market or precious metals is the volatility. You can never be sure that the value of your investment will appreciate. That’s not the case with real estate investments. Investing in real estate protects your investment. You can capitalize on your funds in the best possible way.
You Don’t Have to Pay Taxes
The biggest reason you should use a self-directed IRA for real estate investments is that your income and withdrawals will be tax-free! You’ll be very well aware of the hefty property taxes. But there’s nothing to worry about when you’ve used a self-directed IRA to buy real estate.
You Can Invest Anywhere You Like
You can use your self-directed IRA to purchase real estate anywhere in the world that allows it. So, you don’t have to stay restricted to your country. If you like a property in another state or country even, you can most definitely invest your money there, provided that the country allows the purchase of real estate using a self-directed IRA.
By putting your retirement funds and savings in the right place, you can safeguard your retirement phase. And rest assured that you’re all sorted financially. Real estate investments are usually profitable, provided that you make smart ones. Using an SDIRA for real estate investment is an excellent way to secure your post-retirement days. As you don’t have to worry about paying property taxes!
For more information on IRAs and tax laws, you can visit Spirit One legal blog and educate yourself with all you need!