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Tapping IRAs to Fund Investments: A Prudent Choice?

SS6-10-13“Old age is a crown of dignity, when it is found in the ways of justice,” says King Solomon in Proverbs 16:31 – one of his many proverbs about reaping the rewards of a wise and careful life. But many Americans nearing retirement age haven’t saved enough to retire and enjoy the rewards of that well-lived life. For some, using retirement accounts such as an IRA for investing can be a prudent course – but one that’s not without pitfalls.

As Jason Hartman says, income property is the best bet for long-term returns and creating wealth by putting retirement funds into buying real estate can be a smart choice. But some caveats apply – and new inventors taking this option must weigh the drawbacks and benefits before jumping in.

Because IRAs and 401(k) plans have very specific rules on the management of those accounts, it’s essential to know heavily how those funds can be used to buy property. Generally IRAs can only be used to buy business or investment property – – not a personal residence or a vacation home you rent out only occasionally. IRAs can’t be used to purchase a property you already own; the funds can’t pay off an existing mortgage, only to make a completely new purchase.

Other restrictions apply as well. It’s not possible to get a typical mortgage loan in an IRA, so a buyer needs to have enough money in the IRA to cover the purchase. And although an IRA provides tax-deferred retirement income, the many tax deduction sad breaks available to investors using traditional funding don’t apply to property funded by an IRA. Even house flippers can use IRA savings for their deals, but there’s a limit to the number of transactions allowed per year.

A recent Bloomberg post on IRA investing recommends creating a self-directed, or custodial, IRA account for real estate purchases. Costs apply to setting up and maintaining these accounts though, so those expenditures have to be factored into the plan as well. And, as always, financial experts urge new investors to diversify assets wherever possible to avoid losing everything during a downturn.

Using an IRA to fund investment property isn’t for everyone. For some investors, the downsides and limitations outweigh the benefits. But when used with caution to secure assets for a long-term return rolling an IRA into investment property can be a smart retirement strategy after all. (Top image: Flickr/PaperCat)

Baron, Leonard. “Can You Use Your IRA to Buy Investment Property?” Bloomberg Personal Finance. 10 Jun 2013


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The Solomon Success Team



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