Can real estate investments maximize an IRA’s benefits?

With the hours counting down to a new and legitimately uncertain 2013, retirement planners - and savers - are doing what they can to try to discover some more profitable, long-term opportunities to help maximize on retirement savings.

Much has been said in the past about the notion of using one's IRA account savings to head off into more abstract but potentially income-generating avenues, and the idea of using the IRA to fund real estate purchases certainly has appeal to some investors with more aggressive goals.

But as Fortune magazine outlines in a recent article, the potential gains to be earned from making real estate purchases with IRA holdings can also come apart when taxation is taken into consideration.

Many investors have been able to use their IRAs to purchase rental properties and have figured out how to play the landlord game for higher and steadier returns than traditional stock and financial investments.

The primary issue found by first-timers is that becoming a landlord may not exactly be the part-time, hands-off job one might imagine, despite the appeal of regular rent checks - and the allure of a market more heavily weighted on rentals due to the economy.

The regulations involved in using IRA savings to work the real estate market can also be complex, from the outset. Investors need to set up a self-directed account through a custodian, which allows the purchase of nearly any kind of real estate - regular homes, apartments, time shares, etc.

But more than adapting to the regular necessities of being a landlord - maintenance, tenant disputes, HOA issues, property taxes and the like - the conversion of IRA assets into real estate also comes with some tight IRS stipulations which must be followed to the letter of the law.

Self-directed IRAs cannot be used in real estate for your personal benefit, explains CPA Richard Price, in the Fortune piece - you can't purchase a vacation condo and then use it for your own holiday travel, unless you want to face the prospect of an IRS disqualification, regular taxes plus penalites.

Price also warns that "creative" real estate offerings (such as letting your relatives use the property) are prohibited, as is the practice of buying property through the IRA that you or your relatives already own.

And all the money generated from the IRA real estate holdings has to be placed back into the IRA - and all the property related costs, including taxes and insurance, must also come out of the IRA, not your own pocket, nor can you use them as tax deductions.

Complicated? Indeed. Add to that the fact that any appreciation on real estate purchased through a self-directed IRA will be taxed at normal withdrawal rates, unless you set up a self-directed Roth IRA, which can then allow tax-free gains and withdrawals.

The benefits can indeed be substantial for those who are willing to invest the time and who've found good properties and good tenants, but ... that's not necessarily a sure thing, as is the case with any investment.


Advertisement. Closing in 15 seconds.