Investors from all across the country know the value of using an IRA. This means tax benefits for the retirement savings they put away. But using an IRA can also mean more than that. With a Self-Directed IRA, a retirement investor can use these tax benefits on a wide variety of retirement assets. And one of the most popular assets for preparing for retirement is simple: real estate.

With real estate, investors can potentially stock away passive income for retirement, using the rent they charge within a real estate asset to generate income even after working. But what about using real estate within a retirement account? To do that, you’ll have to know some of the ground rules of using a Real Estate IRA the proper way.

What is a Real Estate IRA?

A Real Estate IRA is simply a nickname for a Self-Directed IRA in which the investor holds assets like real estate. For that reason, there is no specific type of IRA that is designed for real estate. You can hold real estate within a Roth IRA, for example, or within a Traditional IRA. The key is in using self-direction by working through a Self-Directed IRA custodian. This custodian can assist with the administration on the account and help execute the buy and sell orders that make it possible for you to hold real estate within the IRA.

Key Rules

Once you understand the basic structure of a Real Estate IRA, the next question is easy: how do you avoid running afoul of the basic rules? After all, to receive tax benefits and protections on an account, you’ll be expected to do everything the right way. Here are some of the basic principles you’ll need to keep in mind as you use Self-Directed IRAs for real estate:

Avoiding prohibited transactions

•  Prohibited transactions apply to all retirement accounts, not just Real Estate IRA. They also apply to all types of retirement assets, not just real estate. However, it’s particularly important to mention a few rules and guidelines here. It can be tempting to want to use a piece of real estate in a way that benefits you personally outside of the bounds of retirement. For example, you might believe that you have an easy renter if you can turn over a rental property to someone you know. Someone like a son or daughter, who will pay you diligently every month. That’s certainly a possibility if you own the asset personally. However, within a Real Estate IRA, this kind of personal benefit will override the tax benefits and make you susceptible to penalties, taxes, and fees.

Avoiding working with disqualified persons

• The key to understanding the first rule? Simple. Avoid working with “disqualified persons.” This includes a lineal family member, a business partner, or a professional providing services to your retirement account. Using a retirement asset to transact with one of these people can create the immediate, personal benefit. The IRA is decidedly not designed for such purchases as defined by the IRS. When you avoid these transactions, you can have more confidence that your retirement assets remain in good standing and that you will have the tax benefits you need in due time.

If you’re interested in changing the way you approach retirement, a Real Estate IRA can be a fundamentally sound way to build a lifetime of retirement wealth. However, you have to do it the right way. That’s why we encourage you to seek out a Self-Directed IRA administration firm like American IRA to better understand what you’ll need to do.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.