Protecting your Real Estate IRA

A large number of people who were planning to retire now find themselves postponing their plan, thanks to the stock market crash. With most 401(k) plans not allowing real estate investments, a large number of people preferred to invest in stocks, bonds and mutual funds but the collapse of the stock market has played spoilsport to many a retirement plan. That perhaps explains the sudden surge of interest in a self directed IRA where the money is ultimately used for real estate investments. To put it simply, a self directed IRA is a rollover of funds from your 401k account to be investment in real estate through real estate IRA. Now this is done by withdrawing funds from your bank or broker (holding the 401k funds) and transferring it to an independent custodian who agrees to offer real estate as an investment option. You can now buy property with these funds. But all expenses towards the investment and all profits from the investment should be drawn from and towards the account. The custodian is likely to charge you a small fee for handling these transactions. And if you aren’t smart with your real estate investment, you can always hire a REIT or a Real Estate Investment Trust, a company that can handle all your real estate investments including leasing out or renting the purchased property. Self directed IRA, if handled well, is a good investment option. There are a few things that a person has to be mindful about before thinking about real estate 401k. For instance, if you already own a property, it cannot be transferred into a retirement account you control. Nor can a person buy a vacation home and rent or lease it to himself or any of his family members. This also includes investing in a company that you or any other member of your family own. Neither can you loan the money to yourself or a member of your family if the funds are in your retirement plan. The IRS is very strict when it comes to compliance of rules in a self directed IRA. It’s very important that the funds derived from the 401k investment are used as an investment vehicle and not to fund your financial ambitions other than the primary motive. If the IRS discovers any other motive than investment, apart from disqualifying your IRA, it also imposes a 10% early withdrawal penalty, besides taxing you retrospectively at a potentially higher tax. It also requires you to take your distributions once you reach the age of 70 1/2. Failing to do so, would result in penalties, regardless of the type of assets you hold in the retirement plan. But if you were to use the Roth IRA as a vehicle for your self directed IRA, this penalty can be avoided. Before you make any investment, make sure you’ve spoken to a tax professional for expert advice.