Tax-Free Real Estate Income and Real Estate Roth IRAs
Imagine if there were a way you could commit dollars to an investment that had substantial opportunity for growth, tax-free, and at the same time had the potential to provide you a steady stream of monthly income – also tax-free, usually with substantial downside protection. The good news is there is such a vehicle: The Real Estate Roth IRA. Here’s how it works:
Own real estate directly in Real Estate Roth IRAs
If you have a substantial balance in either a Roth or traditional IRA account, or even in something you can roll over to an IRA, such as a 401(k) balance from a former employer or a SEP or SIMPLE balance, you can quite easily take advantage of the unique and substantial advantages of the real estate asset class, combined with the advantages of the Roth IRA savings vehicle, by combining them into a Real Estate Roth IRA.
Advantages of Real Estate
- Substantial current income from rent
- Potential for long-term capital growth
- Inflation protection: Unlike bond coupon payments, you can raise the rent each year, or whenever the lease expires, if the market will bear it. This is a crucial hedge against inflation, which otherwise eats away relentlessly at most other income-oriented investments.
- Downside protection. Paper assets like stocks and bonds can easily become worthless if the company fails. Houses and land almost never fall to zero.
- Opportunity for leverage. Lenders know that real estate enjoys substantial downside protection, and are for this reason generally much more willing to lend on real estate than they are for other asset classes.
- Few people can grasp the complexities of holding stock companies in any number of technology, biotech, communications or related industries. But almost anyone can understand how a house or condominium or apartment building works: You rent it out, maintain it, and sell it at a profit down the road if all goes well.
Advantages of Real Estate Roth IRAs
Tax-free growth. As long as you leave the money to grow within your Roth IRA account for five years, all the growth in the account belongs to you. There is no federal tax due on that money. If it were a traditional IRA you’d have to pay income tax on any gains over your basis. But in a Roth IRA, your income tax on distribution is normally zero.
Tax-free income. Residential and commercial real estate are designed to generate a reliable and substantial monthly income. If you hold the property in a taxable account, you must normally pay ordinary income tax on rent you receive, minus deductible expenses. If you hold the property in a traditional IRA, you must pay income tax on everything you take out of the IRA as a distribution. Only the Roth IRA (and the similar Roth 401(k) designated account) allow for totally tax-free distributions, provided the money you take out has been in the Roth for at least five years.
No RMDs. Unlike tax-deferred retirement accounts like SEPs, SIMPLE IRAs and traditional IRAs, you don’t have to start taking taxable distributions shortly after the year in which you turn age 70½. This means you can let whatever you don’t need for living expenses keep compounding – for you or for a loved one, if you have a named beneficiary.
Estate Tax Advantages. By paying income taxes up front instead of at withdrawal, you may lessen the amount of estate taxes you would have to pay. This is because the estate tax doesn’t care if you have a Roth or traditional IRA. The IRS will apply the tax to whatever happens to be in the account after your death and/or the death of a surviving spouse. Using a Roth rather than a traditional IRA may help you maximize the legacy you leave to your family.
Want to know more? Call American IRA today at 866-7500-IRA(472), or visit us online at www.americanira.com. Our experienced team is among the national leaders at helping investors coast to coast with their self-directed real estate IRAs and Real Estate Roth IRAs.