Opening an IRA, or investment retirement account, is one of the best ways to save for retirement. However, just like any retirement saving account, IRAs have their own restrictions, regulations, and rules. For instance, it’s widely known that an IRA can only hold traditional forms of investment, such as bonds, stocks, and mutual funds. You might have tried asking your brokerage agency about investing in real estate through your IRA, only to be told it can’t be done. The truth of the matter is that it can very much be done, albeit not through traditional IRAs. While this road can seem long and arduous, it’s actually quite simple if you know where to start. Simply put, you’ll have to choose the kind of IRA that can hold real estate returns. If you’re wondering how you can do that, here’s a comprehensive guide. 

You Have to Choose the Kind of IRA for Real Estate Investment

You have a few options when it comes to an IRA. You can open a Traditional or a Roth IRA, or opt for a self-directed IRA, which can be either Traditional or Roth. Here’s an overview of your options. 

Traditional and Roth IRAs

If your IRA account is managed by a brokerage, then it can either be a Traditional or Roth IRA. The main difference between both lies in how each of them is taxed. Traditional IRAs are made with pre-taxed dollars; you get tax deductions on the contributions you make and pay the income tax once you withdraw the money from the account. Alternatively, Roth IRAs are made with after-tax dollars; you pay income tax on your contributions and get to enjoy the money from your retirement account without paying any more taxes upon withdrawal. Neither Traditional nor Roth IRAs can hold real estate investments; they’re limited to bonds, stocks, ETFs, and mutual funds. 

Self-Directed IRAs

To buy or invest in real estate, you’ll have to open a Self-Directed IRA (SDIRA). Just like its name indicates, you get complete control over the account, and that includes the kind of investment you do through it. SDIRAs are very popular, thanks to how they enable you to diversify your retirement portfolio as you wish, allowing for alternative forms of investment in precious metals, private equity, real estate, and others. You can easily transfer your funds from an existing Traditional or Roth IRA, or even a 401(k) account, into a Self-Directed one without paying any penalties or having to sell any of your assets. 
An SDIRA can be either Traditional or Roth with pre-tax or after-tax dollar contributions, respectively. You’ll get a few advantages with a Roth IRA compared to a Traditional IRA. For starters, you get to enjoy tax-free distributions once you start withdrawing money after retirement. You won’t be restricted to required minimum distributions (RMD) after the age of 70 ½, as opposed to Traditional IRAs. Moreover, you can keep making contributions to the account, even after you pass 70 ½ years of age. 
Using a Self-Directed IRA will help you invest in any form of real estate. Your options will be diverse, starting from single and multi-family properties to commercial properties and undeveloped lands. In case you’re a small business owner or self-employed, you can also invest in real estate through a self-directed SEP-IRA, SIMPLE IRA, or solo 401(k) accounts. These options have higher contribution limits, giving you better flexibility in real estate investing. 

Rules and Restrictions for Buying Real Estate through IRA

That being said, there are few rules you’ll have to abide by when investing in real estate through an IRA. The rules go as follows:

It’s Purely for Investment Purposes

First of all, you can only use the funds in your IRA for investment purposes. You can’t use the property you’ve bought for personal reasons, such as using a vacation house with your family when it’s unused. 

All Expenses Must Be Paid Through the IRA

You can’t make any contributions to the property outside of your IRA. Any kind of expenses must be made from your IRA, so you have to be sure that you have, at minimum, a few months’ worth of expenses available in your IRA before purchasing the investment property. This is not limited to monetary expenses; it extends to any kind of expenses, such as furniture and finishing. 

All Income Must Be Paid Into the IRA

Likewise, any income generated by the real estate investment you’ve made through your IRA must be returned to the IRA. You can’t cash in the profits directly or use them for any personal gains. 

You Can’t Use IRA-Funds to Buy Properties for Personal Use

As we’ve already mentioned, the properties you invest in can never be used for personal purposes, by either you or your family. However, there are few cases when you can get exempted from the penalty in case of purchasing a house for personal use, usually in the case of being a first-home buyer. In that case, it falls outside of the boundaries of real estate investment.
It might come as a surprise for many investors that they can buy real estate through their IRA. That’s because it can only be done through a Self-Directed IRA. Whether it’s a Self-Directed Traditional or Roth IRA, there’s a set of rules you’ll have to oblige for when it comes to real estate investment.

WRITTEN BY

Daria Brown