Using your IRA to invest in real estate can be a powerful way to grow your retirement account so you can enjoy your golden years to the fullest.
Typically, an individual retirement arrangements (IRA) can only be used to invest in traditional assets like stocks and bonds.
But with a self-directed IRA, you can invest in nearly any asset under the sun, including private equity, precious metals, or real estate — all while enjoying the tax benefits afforded to retirement accounts.
In a real estate hotspot like Palm Springs, investing in properties with a self-directed IRA can be a smart way to grow your retirement account with passive income.
Your IRA can invest in rental houses, condominiums, or any other single or multi-family residential property in Palm Springs — not a bad idea given that the area’s real estate market is one of the most popular in California these days.
In this guide, we’ll explain how a self-directed IRA works, and 5 ways it can help you increase your retirement wealth through real estate investments.
What Is a Self-Directed IRA?
A self-directed IRA is a flexible retirement platform that allows for full diversification of investments into anything the IRS rules allow.
This account structure puts you, the retirement investor, in full control of all your investment activities.
You can self-direct nearly any type of IRA account, including:
- Traditional IRA
- Roth IRA
- SIMPLE IRA
- Inherited IRA
- Solo 401(k)
- SEP IRA
Although the IRA account is held by a trust company, you can use your self-directed IRA to invest in assets with which you may have knowledge and experience — like precious metals, cryptocurrencies, crowd-funded ventures, or real estate.
And with a self-directed IRA, you get to utilize your personal experience, knowledge, and networks to make wise investments for the growth of your retirement savings.
Here are 5 benefits of investing in real estate with a self-directed IRA.
Tax-Deferred Income
When you invest in Palm Springs real estate with a self-directed IRA, the income you generate from rent is tax-sheltered. And if you have a Roth IRA, you can make tax-free distributions from your account when you reach legal distribution age.
You Don’t Have to Pay the Full Price of the Property
If your retirement account doesn’t have enough funds to pay the full price of a property, there are financing options available to help you with the initial purchase price.
One way to invest in a rental property is to partner with another IRA-holder/investor to put together the money to purchase it. This partner entity acts as a tenant-in-common with you, and allows you to pool resources to purchase a property you otherwise may not be able to afford.
Your self-directed IRA can also use debt financing, like a mortgage, to purchase a rental property. In keeping with the rules related to self-dealing, any mortgage you take out must be non-recourse loan, meaning you or a disqualified party can’t pledge a personal guarantee. You also can’t pledge your assets as security for the IRA’s debt.
You Can Enjoy a Real-World Asset
The stock market can be fickle, and can leave retirement investors hanging when it takes a nosedive.
Real estate, on the other hand, is a physical asset that is generally more stable than the stock market. Plus, you get direct and regular income from rent and mortgage payments on top of the potential appreciation of the property itself.
Add Diversity to Portfolio
You know the saying: “Don’t put all your eggs in one basket.” Any smart retirement investor knows diversity is key to a successful portfolio.
Real estate is a smart choice to strengthen the overall health of your retirement savings, especially given its historically stable nature and the opportunity for value appreciation.
Put Your Personal Experience to Use
As an investor, you’ve spent years (if not decades) building up your resume and personal network. And the more time you spend in any one area, the more you understand property values and the market.
In Palm Springs, you can put your experience to use with select properties in areas with a good potential for growth.
Maybe you purchase a fixer-upper with your IRA that you turn around and flip, or you invest in a rental property for a longer-term investment rental-based strategy.
Whatever your strategy, the point is that a self-directed IRA allows you to bring your wisdom to bear to your investments and growing your personal wealth.
Things to Know Before You Start Investing
The IRS does have specific rules regarding self-directed IRA investments in real estate, specifically around who lives in the property.
They provide a list of “disqualified persons” who are not allowed to live in, stay in, or be based in a property purchased with IRA funds. These include:
- You or your spouse
- Your ascendants or descendants (children, parents, grandchildren, grandparents, etc.) or their spouses
- Any beneficiaries of the IRA
- IRA custodians, administrators, or consultants
- A business or estate of which you hold 50% or more of the voting stock
- Other IRS rules include:
- You aren’t allowed to do work on the property yourself — you need to hire an independent contractor (not a family member!) to do repairs and remodels.
- All expenses related to property must be paid out of your IRA, and all income must go directly back into your IRA.
- You can’t claim depreciation or deduct any losses on the property from your taxes.
Be sure to understand the rules as they apply to your IRA so you can make the most of your real estate investments.
Self-directed IRA investing is not for the casual investor. It’s important to work with a self-directed IRA consultant or custodian so you can be sure to make the best decisions regarding your account.
Bring Even More Experience to the Table with Brad Schmett Real Estate Group
Brad Schmett is one of the top agents in Southern California, and he and his team have been recognized over and over again as the premiere real estate group in the Coachella Valley.
Brad and his group of realtors can help you make smart real estate investment decisions in the Palm Springs area. And there are a lot of opportunities in the market right now.
Take a look at Palm Springs properties you could be investing in today »