THE FUTURE OF RETIREMENT ACCOUNTS: HARNESSING THE POWER OF PASSIVE REAL ESTATE INVESTING
Many people don’t know that you can invest in real estate with their retirement accounts. That’s a shame because it can be a hugely powerful investment strategy that can really accelerate your wealth growth. The key to tapping into this lucrative world of real estate investing is to set up a self-directed retirement account. In this blog, we'll delve into the world of self-directed retirement accounts and how they empower you to invest in commercial real estate passively while enjoying incredible tax benefits. So, let's dive in!
Understanding Self-Directed Retirement Accounts:
Before we get started, let's cover the basics. Self-directed retirement accounts allow you to take the reins of your retirement funds and invest in a broad range of alternative assets, including commercial real estate. Unlike traditional accounts that limit you to stocks, bonds, and mutual funds, self-directed accounts give you the freedom to choose investments that align with your financial goals.
Benefits of Investing Within Your Retirement Account:
Let's talk about the perks! Investing in commercial real estate within your self-directed retirement account comes with several game-changing advantages:
- Tax Advantages: With the right account type, you can enjoy tax-free or tax-deferred growth. Imagine your investment compounding without immediate tax liabilities – it's a dream come true!
- Diversification: Real estate offers an excellent way to diversify your retirement portfolio beyond traditional assets. Commercial properties can provide stability and long-term growth potential, making it a smart hedge against market volatility.
- Passive Income: Invest in commercial real estate, and you'll have passive income distributions flowing into your account. Picture this – returns between 12 and 15 percent annually, without any property management on your part!
So, how does it work? You see, by joining a group of investors, you can pool your retirement funds and purchase properties like apartment complexes together – that's the power of economies of scale! This allows you to get better pricing on everything, from property management to mortgage rates, ultimately boosting your profits.
- Greater Control: Take control of your financial future by choosing specific real estate opportunities that align with your strategy and risk tolerance. You're in the driver's seat!
- Hedge Against Inflation: Commercial real estate has historically proven to be an effective hedge against inflation, as rents and property values tend to increase in response to rising prices.
Setting Up Your Self-Directed Retirement Account:
First things first, you'll need to find a custodian or administrator who specializes in self-directed accounts. This custodian will be your financial partner in this journey, so take your time finding the right fit. Once you've chosen a custodian, select the account type that best suits your needs – it could be a Self-Directed Roth IRA, Self-Directed Traditional IRA, or a Self-Directed Solo 401(k).
- Self-Directed Roth IRA: With a Roth IRA, contributions are made after tax, and qualified distributions in retirement are tax-free. This makes it an attractive vehicle for tax-free growth when investing in commercial real estate.
- Self-Directed Traditional IRA: Traditional IRAs offer tax-deferred growth, meaning contributions are made pre-tax, and taxes are paid upon withdrawal. Self-directing a traditional IRA allows you to leverage tax-deferred gains for real estate investments.
- Self-Directed Solo 401(k): Designed for self-employed individuals, a self-directed Solo 401(k) enables you to invest in commercial real estate while contributing as both the employer and employee, maximizing your retirement savings potential.
Fund Your Account
With the paperwork done, it's time to fund your account. You can make contributions or transfer funds from existing retirement accounts, such as your 401(k) or traditional IRA. This process varies depending on the account type and custodian, so lean on their expertise to navigate the process smoothly.
Cases for Rolling an Existing Regular Retirement Account into a Self-Directed Account:
Job Change or Retirement:
When you change jobs or retire, you may have the opportunity to roll over your employer-sponsored retirement plan, such as a 401(k), into a self-directed account. This allows you to retain control over your retirement funds and explore alternative investment options like commercial real estate.
Rollover of Traditional IRA:
If you have a traditional IRA and want to broaden your investment horizon beyond traditional assets, you can perform a tax-free rollover into a self-directed IRA. This opens up the possibility of investing in commercial real estate within the tax-advantaged structure of an IRA.
Roth IRA Conversion:
If you have a traditional IRA and want to take advantage of tax-free growth and distributions, you can convert it into a Self-Directed Roth IRA. This conversion, however, involves paying taxes on the converted amount.
Inherited Retirement Accounts:
In the case of inheriting a retirement account, you may have the option to roll it into a self-directed account to gain greater control over the inherited assets and potentially invest in commercial real estate.
When it comes to self-directed retirement accounts, there are specific prohibited transactions to be aware of. Engaging in these prohibited dealings can lead to severe tax consequences, penalties, and the possible disqualification of the retirement account. Here are some of the key prohibited dealings within a self-directed retirement account:
- Self-Dealing: You cannot use the funds from your self-directed retirement account to benefit yourself, your spouse, or certain other disqualified persons, such as close family members or business partners. For example, you cannot use your retirement funds to purchase a property that you or your immediate family members will personally use or reside in.
- Purchasing Collectibles: Self-directed retirement accounts are not allowed to invest in collectibles, including artwork, antiques, gems, stamps, and certain precious metals.
- Transactions with Disqualified Persons: Engaging in transactions with disqualified persons, such as lending money or selling property to them using your retirement funds, is prohibited.
- Personal Use of Retirement Assets: You cannot use your self-directed retirement account assets, such as real estate or business properties, for personal use before reaching the appropriate retirement age and distribution eligibility.
- Indirect Benefits: Avoid transactions where your retirement account indirectly benefits a disqualified person, even if you do not receive direct personal benefits. The IRS examines the intent and effect of such transactions.
- Prohibited Investments: Certain investments, such as life insurance policies and S corporation stock, are not allowed within self-directed retirement accounts.
- Improper Use of Funds: Using your retirement account funds to make investments or carry out transactions not permitted by the IRS can lead to penalties and adverse tax consequences.
It is crucial to thoroughly understand the rules and regulations surrounding self-directed retirement accounts to ensure compliance and avoid costly mistakes. Engaging the services of a qualified custodian and consulting with tax professionals can provide valuable guidance and help you make informed investment decisions within the guidelines of IRS regulations.
Now that your self-directed retirement account is up and running, you're all set to invest in commercial real estate without the burden of active management. Congratulations! You've unlocked the secret to passive real estate investing through your self-directed retirement account. By setting up the right account and partnering with the right custodian, you can invest in commercial real estate like a pro. Enjoy tax benefits, diversification, passive income, hedge against inflation, and greater control over your financial destiny.
So, let's get those retirement funds working harder for you! Reach out to me today so I can help you find a great custodian to help you take control of your retirement funds, then together we explore the vast opportunities awaiting you in the world of commercial real estate investing to find the perfect opportunities that meet your financial goal.