Saving money for your retirement using a self-directed traditional IRA or Roth IRA can be a rewarding investment decision. Many investors take advantage of the alternative asset options, but, most commonly, account holders look into purchasing real estate.

Whether you are considering buying up a rental property, purchasing an office building, or a piece of unimproved land, as a real estate investor, you can utilize a self-directed IRA for your retirement.

When using your direct IRA to purchase property, there are many ways to afford such an investment. Of course, when using your IRA funds, it’s best to perform your due diligence and speak with an IRA custodian to be sure your investment is secure and legal. In addition, a custodian can help you explore all options open to you should you choose to explore rental properties. While there are quite a few property types you can invest in from commercial buildings to trust deeds, there are three ways to afford buying up real estate with your retirement fund.


Direct Purchase: Going alone or with a Partner


While direct purchase may not be a feasible option for someone just starting out, account holders can use their SDIRA to purchase an investment property outright. Provided you have enough funds, it’s possible for your account to buy and own property. The real estate title will be under the IRA account. All money earned by and used for the rental property will be channeled through the account, which will boost your retirement fund over time.

If you don’t have the proper funds, it’s possible to have a partner in your purchase. When the investment costs more than your fund allows, you can add personal funds or other IRAs.

Since the your SDIRA functions separately from your personal funds, you can use your other accounts as a partner – so long as you follow the SDIRA rules. You cannot benefit from your retirement account before you come of age, nor can any “disqualified persons.” In addition to partnering with yourself, you can also partner with others. Though there are no rules on who you can partner with, the rules of who can benefit from the purchase are still very rigid.

If at any point you should decide to end the investment, the property is divided amongst the party. Of course, if you decided to partner with someone classified as a “disqualified person,” there are rules against selling the assets of your SDIRA to them. However, as long as you remain well informed, partnering can be beneficial for your fund overall.


Leveraging Property with an IRA


If you want to avoid using your own direct funds or a partnership, another way to fund your property purchase is by leveraging your account. Leveraging allows account holders to invest using borrowed money. It’s possible to purchase your real estate investment with a small fee attached. This method allows you to use borrowed money through your IRA with a non-recourse loan. The property is then owned by your account exclusively.

The downfall of this requires a hefty up-front cost. Like with any loan, the more you can put down on your purchase, the better it will be for your account. There are other costs to consider when purchasing property, including closing costs, repairs, and improvements.

In addition, your purchase may be subjected to UDIT (unrelated debt income tax.) While leveraging isn’t the only way to run into this tax issue, borrowing money outside the IRA carries a penalty. The additional taxes applied are something to consider when investing. As your leverage loan decreases, so does your UDIT. The more you have to put down on your investment, the better.


Consult with Horizon Trust

Ownership in a Limited Liability Company (LLC)


Using an LLC to purchase ownership of a property could be beneficial depending on your position. You essentially “own: your own company when you form a limited liability company. Your SDIRA, in turn, holds interest in the LLC or trust. If you own many different properties, such as an office building or a few vacation homes, an LLC provides further tax advantages while reducing the liability with individuals. It provides asset protection in individual cases involving the property. The title is owned by the LLC itself.

Another advantage to owning property through an LLC involves tax benefits. Account holders can experience several tax breaks, depending on the structure of their company. Whether it’s avoiding double-taxation, pass-through taxation, or another benefit, property owners can use this opportunity to build their account.

Like any investment, there are disadvantages to utilizing an LLC. Depending on your location, costs can run high. It is difficult to get financial backing for an LLC, so if you don’t have the funds it may be difficult to keep channeling money through your properties. Also, while you have limited liability for your properties, there is still a chance that you can be held responsible for anything that may occur on or because of your real estate upkeep.


Choosing Your Investment Wisely


There are many options to explore as you dive into real estate investment. A plan of action is dependent on what you wish to invest in.

Whether you choose to buy up beach-side property, develop an office building for vocational rentals, or plan on simply being a landlord with two or three townhouse rentals, it’s best to consult your IRA custodian and find what options work best for your retirement. The key to maintaining and growing your self-directed IRA is due diligence and choosing the best option to secure your livelihood for the future