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Real estate as a retirement asset

Posted February 11, 2015 in Advice Column, Clive

IRA’s are popular retirement accounts and many people are familiar with their basic purpose. In a Traditional IRA, the owner contributes a portion of earned income up to a maximum contribution level defined by the IRS. Within the IRA funds are most often used to invest in securities.

While this standard approach is comfortable and appealing to many, in recent years there has been increased interest in purchasing real estate rather than securities inside of an IRA. This approach is often appealing to those who do not feel comfortable with the stock market or those who have experience and an affinity for investment real estate.

In order to purchase real estate in an IRA, the IRA must be held by a custodian, usually a bank, who can hold the real estate in a self-directed account. Real estate cannot be transferred directly to an IRA. Rather, the IRA owner must direct the custodian to purchase real estate with existing IRA assets.

Once the real estate has been purchased inside the IRA, it is very important that the owner realize that the real estate cannot be enjoyed until retirement. For example, if the real estate produces income, that income must stay within the IRA and cannot be withdrawn until full retirement age of 59 ∏. All taxes and expenses must also be paid from IRA assets. While you can continue to contribute to the IRA, you are limited by yearly maximum contribution levels established by the IRS.

At age 70 1/2 all IRA owners are required to take required minimum distributions from their account. A required minimum distribution is the minimum amount required by the IRS to be withdrawn from an IRA each year. Required minimum distributions become more cumbersome when the bulk of IRA assets are tied up in real estate. However, the IRA can distribute real estate to the IRA owner to satisfy the required minimum distribution requirement. While this requires proper planning and an appraisal, it can allow the IRA owner to begin utilizing and enjoying the real estate that has been distributed from the IRA.

Purchasing real estate in an IRA can be a viable and exciting alternative to traditional retirement investing for many. While I have touched on some of the main rules involved, the process can be complex. If you are considering real estate for your IRA be sure to seek appropriate legal and financial counsel.

“Information provided by Nathaniel Tagtow, JD, Assistant Vice President & Trust Officer, Lincoln Savings Bank, 13523 University Avenue, Clive, 515-221-9876, nathaniel.tagtow@mylsb.com

 





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