Tax Free Real Estate Investing With Self-Directed Retirement Accounts: SDIRA, QRP & 401k
Did you know that you can use a Traditional IRA and Roth IRA to invest in real estate tax free? Do you know the difference between a Traditional IRA and Roth IRA? In this post you’ll get an overview of these accounts and how you can use a self-directed IRA with checkbook control for real estate investing.
What is a Traditional IRA?
An IRA, or Individual Retirement Arrangement, is described in Section 408 of the Tax Code and provides for tax deductions and tax-deferred returns on investments in the account. You get a tax deduction for each dollar you put into the account, up to $5,500 per year or $6,500 for those aged 50 and up – and no taxes are paid earnings in the account. When funds are distributed from the account at retirement income tax must be paid.
What is Roth IRA?
A Roth IRA, described in Section 408A of the Tax Code, provides for the reverse treatment. There’s no tax deduction for contributions to the account, but investment returns within a Roth IRA are completely tax-free, forever. If you may have very high returns on your retirement account investments a Roth IRA is preferable to a Traditional IRA.
What Assets Can An IRA Invest In?
According to the tax code and regulations, an IRA can invest in anything other than life insurance, collectibles, and S-Corp stock. That means real estate, private loans, tax liens, private stock, and any investment you can think of ARE allowable.
What is NOT a Self-Directed IRA?
Technically, all IRAs are self-directed. When you open an IRA at Schwab, Fidelity, or another brokerage, they don’t choose the investments for you (unless you pay them to do so). You’re free to choose from among any stock or mutual fund available on their platform.
If you’d like to invest in real estate, as allowed by the tax code, the brokerage representative informs you that doing so is not allowed. Says who? Not the IRS. The IRS follows the tax code which allows real estate investing. The reason brokers don’t allow investing in real estate on their platforms is that they’re not able to handle those investments and make money off you.
What is a “Traditional” Self-Directed IRA (SDIRA)?
A traditional Self-Directed IRA is an IRA held by specialized trust companies that are capable of administering non-traditional IRA investments, such as real estate and private loans. In a traditional SDIRA the custodian holds the IRA cash and handles all investment paperwork as trustee of your SDIRA. Being that these companies don’t have investment platforms they generate revenue from administrative fees, which can be substantial. In addition, every disbursement and every deal doc must be processed, approved, and signed for by the trustee. This can cost you valuable time when you’re trying to close a deal.
What is a self-directed checkbook control IRA?
A checkbook control SDIRA has all the benefits of a traditional SDIRA without any of the downside. A checkbook control IRA gives you direct control of the cash in your IRA and allows you to sign all deal documents. With a Checkbook IRA, custodian fees are minimized and investment flexibility is maximized. Checkbook IRAs use a specialized IRA-LLC structure to that enables you to handle real estate IRA investments with the same ease as real estate deals outside of a retirement account.
Should I use a self-directed Solo 401k for real estate investments?
Self-directed Solo 401(k)s are a great vehicle for retirement plan real estate investing and extensive tax benefits for those that qualify. However, not everybody qualifies for these but it is definitely something you should explore.
ReSure is led by Bernard Reisz CPA and assists investors nationwide with total control SDIRA, QRP & 401k. Whether you’re looking to invest in real estate or the stock market, the ReSure team can help you do so with confidence.