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Should You Use IRA Funds to Buy Investment Property?

HI6-10-13Housing prices are rising and so, to some extent, are interest rates, but it’s still a good time to start investing in property. The appeal o building wealth in real estate has hopeful investors looking for startup funds in some odd – and potentially risky – places. One option for cash-strapped investors involves tapping into Individual Retirement Account funds.

As more and more Americans approach retirement age without the savings needed to actually retire, they’re raiding retirement accounts for starting businesses and investments. Since, as Jason Hartman says, income property is the best bet for long-term returns and creating wealth, 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/rutio)

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

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