Owning a home is a good investment in the view of many people. If one is good, two must be better! Before you rush out to buy a second home, you might consider doing it through your IRA.
The idea of buying a home through an individual retirement account may seem out of sorts. It is not. Most people incorrectly assume they can only invest in mutual funds, stocks or bonds.
The average person will always invest in the stock market in some form or another with their IRA. The question is whether you want to be average when planning for your financial future. If not, you need to think outside the box.
Using your IRA to buy homes and such might sound like an aggressive idea that might raise the ire of the IRS. In truth, it is not and the IRS has said as much. The language allowing it is right in the tax code, to wit, this is not a loophole strategy.
Section 408 of the tax code states clearly you can invest IRA contribution in a variety of property. The wealthy have used this approach for a long time and more than a few now own big portfolios of commercial property, rental properties and so on through their IRAs.
To buy a home with your IRA, we need to back up a few steps. You cannot open an IRA at your stock broker. Instead, you must open a self-directed IRA. IRAs held by investment firms restrict you to stock marketing investing since that is where they make their money.
This form of IRA can be held both as a traditional or Roth IRA. The structure, however, is a bit different. There is an independent custodian overseeing the account. It is required by law to make sure people don't crazy with investments. The custodian is not expensive.
After setting up your account, you can invest in property. That being said, there are some minor limitations put forth in the tax regulations by the IRS. You cannot buy, for instance, your own home, which would be self dealing.
Most people use their IRA to purchase secondary properties. The classic example is using the strategy to buy rental properties. Millions of Americans now own second homes, and the IRA strategy is a perfect way to pursue ownership. Heck, you can even buy an RV.
From a procedural point of view, you do no actually purchase anything. The IRA does. Technically, the custodian of the IRA will sign on behalf of the account and so on. You then relax and watch your balance grow as rental payments come in or appreciation occurs.
While buying property with an IRA is a good strategy, doing so with a Roth IRA is a much better one. It works the same way, but the tax benefits are tremendous. All distributions made from the Roth with be tax free. It is a nice way to build your retirement nest egg.
Using this strategy to purchase property is fairly straightforward. If you are looking to build wealth in your IRA, make sure to speak with a financial advisor familiar with this strategy.
