Individual Retirement Accounts (IRAs) and 401k plans are long-term savings account that offer tax advantages if you comply with various Internal Revenue Service (IRS) regulations. While many financial services companies won’t let you invest in real estate with your IRA because of increased paperwork requirements, the IRS doesn’t prohibit such investments. You can make transfers or accept loans from your 401k to get the funds for investment. Careful planning with either type of retirement plan may result in little if any tax consequences.
Get in touch with your retirement plan administrator. As many IRA custodians do not permit property investments, you must determine whether your IRA is qualified for property purchases. While your 401k is restricted by law from investing in real estate, your administrator may have tips for how you can move your funds to get into the real estate market.
Research loan regulations. While you cannot borrow from the IRA, you can generally borrow half of the value of your 401k accountup to $50,000. However, if you purchase property with funds outside of your 401k, you no longer have some tax advantages attached to your buys. In order to maintain taxation low, you must limit your income flow and capital gains to the best of your ability, but that will most likely run counter to the purpose of your investment.
Open a self-directed IRA. If your IRA custodian doesn’t permit property investments, then you may open your own self-directed IRA at a company that does permit such investments.
Roll over your 401k. Even though you cannot invest directly in property in a 401k account, you can rollover your 401k to an IRA tax-free then use the profits to invest in property.
Hire a property management firm. If you purchase property through the IRA, you cannot actively manage the property. In order to enjoy the tax advantages of your IRA, you must employ an outside person or agency to do maintenance on the property, collect lease and otherwise actively manage the investment.
Monitor cash flow. If you purchase property through a retirement account, all funds used to purchase the property must come from the account, and any profits like rental income or sales profits have to be returned to the IRA. If you follow these restrictions, your property investment will have little if any tax consequences, exactly like the other investments within your IRA.