From the day we start working, we are told to begin saving for our retirement. Sound advice – but how do you go about choosing where to invest your hard-earned cash wisely so that it will see you through your golden years? With a variety of investment options available, some careful research and planning is needed to make the right decision.
Simply put, you have the option of either a Traditional or a Roth Individual Retirement Account (IRA).
- Traditional IRA
The investor’s contributions are tax deductible and any transactions within the account have no tax implications. On retirement, the funds withdrawn from the IRA investment are taxed as income.
- Roth IRA
The investor’s contributions are made after tax. Any transactions within the account, as well as funds withdrawn when retirement is reached, are tax-free.
The majority of IRA investment custodians will only offer approved funds for investment so if you want the freedom to choose, look for a financial institution that specializes in self-directed IRA’s offering investment in assets such as real estate.
IRA investments in property are becoming increasingly popular and it’s easy to see why. A real estate IRA investment offers the following attractive advantages:
- It’s an investment growth instrument – your funds can grow without attracting income tax on earned investment income such as rental income
- You can make decisions regarding maintenance to be carried out, choose tenants and appoint contractors
- As the IRA owner you’re allowed to fulfill some operational functions such as rent collection and rent deposits
The nitty gritty:
- Your chosen IRA custodian must be willing and able to handle real estate. This means that they must be a qualified trustee or custodian that can maintain your records of contribution, issue you with statements and perform the required IRS report filing function
- The IRA investment can be held indirectly through a security such as a real estate investment trust. The property must be in the name of the IRA and not in your personal capacity.
- The property can be a single family home, condominium, multi-unit home, apartment building, land or commercial space
- The property cannot already be owned by you
- The property investment does not need to be financed entirely by the IRA (specific conditions are applicable so consult with an expert to avoid tax penalties)
- You can partner with other people’s IRA’s by sharing the profits and expenses and apportioning the investment
- Any fees or maintenance expenses must be paid for by the IRA funds
- Similarly, any cash generated by the property, such as rental income, must be deposited into the IRA
- You may not occupy the property by renting it, living in or vacationing in it
- You may not carry out maintenance work or repairs yourself – a contractor must be appointed to do this
Real estate IRA investments offer you great potential return on investment, diversity in terms of your portfolio, and an investment with intrinsic value. You can earn good returns while enjoying the benefits of a tax-deferred status on your real estate investment.
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