Rental Property Investing With Iras

Retirement vehicles such as individual retirement accounts come with an common understanding regarding how they can be used. This understanding can sometimes be incorrect as it is with IRAs.

If you have an IRA, you need to invest the contributions in stocks, bonds or mutual funds, correct? Actually, this common perception is wrong. You can make far more money by actually investing in property such as homes, condos and so on.

The average person will always invest in the stock market in some form or another with their IRA. The question is whether you want to be average when planning for your financial future. If not, you need to think outside the box.

Before we go on, I should mention this is not a wealth building strategy that involves loopholes or dubious interpretations of the tax code. The IRS readily approves of such investments.

The simple fact is the law governing individual retirement accounts allows for a broad field of investments. You tend to only hear about mutual funds and stocks for one reason. That is what the investment firms are selling! They don't make money on real estate investing.

To buy a home with your IRA, we need to back up a few steps. You cannot open an IRA at your stock broker. Instead, you must open a self-directed IRA. IRAs held by investment firms restrict you to stock marketing investing since that is where they make their money.

As the name suggest, you are in control of the individual retirement account. This means you get to set the parameters of what can be invested in and what cannot so long as it is legal. Homes, condos and so on are legal investments under the tax code.

After setting up your account, you can invest in property. That being said, there are some minor limitations put forth in the tax regulations by the IRS. You cannot buy, for instance, your own home, which would be self dealing.

Most people use their IRA to purchase secondary properties. The classic example is using the strategy to buy rental properties. Millions of Americans now own second homes, and the IRA strategy is a perfect way to pursue ownership. Heck, you can even buy an RV.

From a procedural point of view, you do no actually purchase anything. The IRA does. Technically, the custodian of the IRA will sign on behalf of the account and so on. You then relax and watch your balance grow as rental payments come in or appreciation occurs.

You might recall I mentioned the Roth option above. Yes, you can use this strategy with the Roth account. In fact, it is preferable. Why? When you retire, all distributions from the Roth will be income tax free. That makes for an excellent investment.

The above represents a very simplified look at maximizing your IRA investment with property. That being said, it is one of the outside of the box wealth building strategies that can produce tremendous returns.