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Add Real Estate to Your Retirement Fund


In 2003, Karen Robertshaw used a self-directed IRA to buy a 2-bedroom leasehold townhome for $98,000 cash. Later, she purchased the fee interest with funds from her IRA, for a price of $57,000. For five years, she collected nearly $1,400 in rent every month, which went straight back into her IRA account – tax free – until she sold the townhome for $310,000.

“And because the IRA owned the property, the gain on the sale was not taxed either,” explains Robertshaw, who is a REALTOR and partner at Prudential Locations.

“My goal for the next 10 years is to double what is in my retirement fund with real estate,” says Robertshaw. “It’s possible. My latest thoughts are to buy fee simple studios. I’m getting ready to purchase something small next year.”

Robertshaw is part of a growing movement of people who are using IRA and 401K funds to buy real estate as a great way to diversify their retirement strategy. Self-directed retirement accounts offer a diversification strategy for those who don’t want to invest everything in Wall Street.

“Many people don’t realize that their IRA can invest in alternative assets like real estate because most IRA custodians do not offer real estate as an option,” says Dan Falardeau, principal of New Direction IRA Inc., a self-directed IRA service provider in Hawaii. “The fact is, most IRA custodians are brokerage companies or banks and they only allow their clients to invest in products that they sell and can earn a commission on.”

Falardeau spends most of his time educating people on what their IRA and 401k options are and how self-directed retirement plans work. “The options for what you can buy with a self-directed retirement fund are almost unlimited,” says Falardeau. “There are only two restrictions: You cannot buy life insurance or collectibles.”

Most of Falardeau’s clients use a self-directed IRA for diversification purposes, and the majority use it specifically to invest in something other than securities.

“Thirty to forty percent of my clients use their self-directed IRAs to invest in real estate.

The volatility of the stock market in recent years has driven more people to explore alternative investments,” he says. “Many people realize that real estate in Hawaii is a solid long-term investment.”

Falardeau explains that there are few restrictions in terms of how an IRA can be used to purchase property. “You can buy the property with your IRA, or a husband and wife can use their IRAs to invest in a property as a tenancy-in-common, or unrelated investors can go in on a property together.”

So how does it work? Falardeau breaks the process into three steps:

1. Ask your 401k custodian or the company that holds your IRA if you have a self-directed option. Many do not, in which case you can set up a new account with a self-directed IRA company such as New Direction IRA Inc.

2. Fund that new account with an IRA transfer, a direct rollover, or regular contributions.

3. Decide what you would like to buy with the self-directed IRA and instruct the company managing your account to facilitate that investment on behalf of your fund.

Falardeau points out a common misconception about holding property in a self-directed IRA:

“It’s important to realize that you, as an individual, are not on the title of the property. The property is held by your IRA. The property is a retirement investment, just like stocks or bonds would be – that’s why it has tax-deferred status.

“This means that any expenses to maintain the property are paid by the IRA, and any rent from the property goes back into the IRA. Any income generated by the property is growth, just as the interest and dividends from a mutual fund are. It is not a contribution, so it’s not subject to an annual cap. ”

Another important point is that property purchased with an IRA cannot be used for personal use. “You can’t buy a retirement townhome for your mother with your self-directed IRA,” says Falardeau. “You can’t buy a condo with your IRA, then let your son live there while he goes to college. The property must be used for investment purposes only.”

When purchasing real estate with a self-directed retirement account, there is a specific process and strict IRS rules to adhere to, some of which can be complicated. So, working with experts is essential.

Those who have bought and sold properties successfully through an IRA, like Robertshaw, are sold on the investment option.

“Will I use my IRA to purchase real estate again?” Robertshaw says without hesitation, “Absolutely.”

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