HOW TO: Use your IRA to buy real estate

Millions of Americans have poured money into Individual Retirement Accounts (IRAs) in thesearch for a secure lifestyle after they retire.

In recent years, unfortunately, low savings interestrates, financial crises, and poor stock market performance have caused the value of retirement savings accounts to fall — a lot, in m any cases!

If you’re not impressed by the typical investment lineup of stocks, mutual funds, bonds and CDs for your IRA, you might consider a Self-Directed IRA that allows you to invest in realestate.

Any form of real estate that has a deed or some evidence of ownership with it, including farm land, timberland, vacant land, raw land, foreign realestate, gas and oil royalties all present investment opportunities. The process of adding realestate to your portfolio is not terribly com plicated, but as with any retirement account, you must follow the letter of the law or face penalties from the IR S.U nlike typical IRAs, however, a self directed account with realestate holdings requires considerably more work on your part. And it represents a higherrisk. Most IRAs allow you to save for retirement with tax free grow th oron a tax-deferred basis.It is essentially a savings account w ith tax breaks, making it an ideal w ay to save m oney for your retirement. A Self-Directed IRA is nearly identical, but rules allow this account to legally ow n real estate and other investments, like gold, silver, oil and gas (leases), and LLCs.

If you are interested, your first step isto have a serious conversation with your bank or financial adviser, which would serve as “custodian” of your account. Address your investment options, determine what you are trying to accomplish, and evaluate the risks involved.

“When you decide to get creative with your IRA, there are very real benefits as w ellas very real risks to consider,” says Robin Brock, senior vice president of Citizens Bank. “To understand w hether a self-directed IRA is right for you, you first must understand exactly what it is— and isn’t— and recognize the potential problem s to avoid.”

By law ,all IRAs must have a custodian who isa neutral third party (such as a bank) and is not allowed to offer advice as to what kinds of properties to buy with assets of the IRA. You must direct all of the investment decisions. The custodian manages the transactions, associated paper work and financialreporting. All transactions go through the custodian who, in turn, keeps you from violating the strict IRS rules regarding these types of investments.

Some other basic rules: You and your IRA are two separate entities. Your IRA owns the property; you don’t.

The property is purely an investment. You can’t use it as a vacation home, a place for your kids to live, a second home or an office for your business or recreational purposes.

Since your IRA doesn’t pay taxes, you can’t take advantage ofthe deductions that come with owning real estate.

If your property generates rental income, every bit of it must go right back into your IRA. Since you don’t own the property, you can’t pocket any of the income.

You can use your Self-Directed IRA to buy your future retirement home, but you can’t live in the home until you retire — and never while the property rem ains in your IRA.

Existing property that you currently ow n can’t be placed into your IRA. All assets must be purchased w ith cash from the IRA and can’t be purchased from yourself.

M any investors have m ade a nice pile ofm oney by adding realestate to their IR A s.W hile stocks and bonds are intangible, people can see and w alk on real estate. They may feel more com fortable investing in real estate instead ofthe volatile stock market, even though all types of investments pose some level of risk.

As long as an invest or follow sthe rules, real estate in a Self-Directed IRA is another way to make your retirement dollars work foryou and secure a more comfortable future.

A gain, we can’t stress enough the importance of speaking with your banker, accountant or financial adviser to decide which form of IRA is best for you w hen considering your financial situation and financial goals.

For more information, call Joe Patrico at 501-5254073.