The idea of using real estate to help in retirement is not a new concept to many. After all, many personal finance gurus may tell investors to own their own house so that, come retirement, there are fewer expenses to incur along the way. However, that’s not really what real estate investment means in the context of a Self-Directed IRA. When working through a Self-Directed IRA, it is possible for investors to put real retirement money aside for real estate—real estate the investor is not allowed to use personally, but only as an investment.
Why do so many investors use a Self-Directed IRA for this purpose? To answer that, it helps to learn the role that real estate can play within a Self-Directed IRA.
How a Self-Directed IRA Can Encourage Real Estate Investing
Let us start by defining what a Self-Directed IRA can do. This style of investing can open all sorts of possibilities for the investor—and not just in real estate. An investor with a Self-Directed IRA can put retirement money towards stock, bonds, private companies, tax liens, precious metals, and even more—including real estate. It just so happens that real estate investing within an IRA tends to be popular.
There are multiple reasons for this. For starters, having the tax benefits that come with putting money aside in a retirement account can incentivize people who are already experienced with real estate investing. But there is also more to the story. Real estate investors tend to like real estate for different reasons. For example, real estate is inherently a scarce asset—there is not more real estate being created on the moon, for example. Real estate also offers investors a way to diversify out of the stock market within a Self-Directed IRA, which means that they are not dependent on the returns of the Dow Jones Industrial Average every time they turn on the business news.
A Self-Directed IRA can also create benefits for the investor upon retirement, especially with a Roth IRA. For an investor with Roth IRA money invested in real estate, there are plenty of incentives to put money aside early for enjoying it later, upon retirement age.
Warnings and Limits for Real Estate Investing within a Self-Directed IRA
With all the above in mind, it is tempting to say that real estate investing within a Self-Directed IRA is for everyone. However, it is important for everyone to understand the rules. Real estate is not a catch-all investment that allows investors to flout the rules of retirement accounts. For example, contribution limits will still apply. And investors especially have to pay attention to the separation of retirement assets from personal assets. This is very important for real estate, especially given the experience of real estate investors who have used personal assets for real estate investing before.
When you buy a piece of real estate with personal assets, it is very common to want to have a part in it yourself. You may even rent it out to someone you know. You may live in it yourself, for a time. With retirement investing, none of these situations are allowed. You will have to keep the retirement assets entirely separate from your personal life. That means you cannot rent out a piece of retirement investment property to someone you know, such as a son or a daughter. Instead, when you make these investments with a Self-Directed IRA, make sure you keep the assets entirely separate from the rest of your life.