Self-directed IRAs are the only retirement arrangements that allow individual investors the freedom to pursue alternative investments, such as real estate. Investing in real estate with a self-directed IRA offers many benefits to those who are looking for creative ways to save for the future. Before you start, you may want to consider which type of IRA would be best to invest from. You have two options: Traditional IRA or Roth IRA.

The fundamental difference between a Traditional IRA and a Roth IRA is how they are taxed upon distribution. Choosing one of these options instead of the other can result in significant differences in the amount of wealth accumulated and the amount you can distribute tax-free. Most importantly, Roth IRAs have features that may benefit investors who want to use an IRA to invest in real estate.

Here are seven reasons why you might consider this strategy:

  1. Tax-Free or Tax-Deferred Earning
    Self-directed IRA investing offers great tax advantages to real estate investors, though the exact benefit will depend on the type of account used. If you use a self-directed Traditional IRA, for example, you will not have to pay taxes on contributions or earnings until you start taking distributions during retirement. With a self-directed Roth IRA, however, your earnings will appreciate tax-free, allowing you to enjoy your profits without hassle from the IRS.
  1. Wealth of Options
    When investing through a self-directed IRA, your real estate investment options are nearly endless. Choose between rental properties (both residential and commercial), undeveloped land, fix-and-flip opportunities, mortgage notes, REITs, limited liability corporations, offshore real estate, and more. Investment restrictions include any work of art, rugs, antiques, gems, stamps, or any alcoholic beverages, as well as S Corps (S corporation tax laws prohibit IRAs to invest in them).
  1. No RMDs While the IRA Holder Is Alive
    There is no Required Minimum Distributions (RMDs) for Roth IRAs. The IRA owner doesn’t have to deplete their retirement assets even after age 70½. Additionally, the IRA owner does not need to worry about liquidity or valuation for real estate assets. Simply put, they can pass assets to heirs tax-free.
  1. Beneficiaries Enjoy Tax-Free Distributions
    Beneficiaries have options for how they can deplete the inherited Roth IRA. The first option includes a complete lump sum distribution that’s tax-free, if the deceased has had a Roth IRA for 5 years. Secondly, the five-year rule option lets beneficiaries leave assets in the Roth IRA until the fifth anniversary of the original owner’s death. After five years, the assets are distributed in a lump sum, tax-free. The annual distribution is calculated based on the beneficiaries’ age (life expectancy payment option).
  1. Secure Future for You and Your Family
    If you are an experienced real estate investor, you could be using your knowledge to help secure a comfortable future for yourself, as well as your family. Self-directed IRA rules protect your retirement savings from debt collectors, which means investments held in these accounts are more safeguarded. Self-directed IRA rules also allow you to leave these savings to your heirs, so successful investing could mean a significant inheritance for your children.
  1. Flexible Contributions Year-Round
    You can withdraw contributions made to a Roth IRA tax and penalty-free at any time (i.e., ordering rules). Even if the owner has not satisfied the criteria to distribute the earnings tax-free, owners can withdraw some of the growth in value or earnings penalty free. Examples: paying for medical expenses above 10 percent of the individual’s AGI or college expenses.
  1. Contributions Are Allowed After Age 70½
    If, like many people, IRA owners want to keep on working past the “normal” retirement age, owners can keep on contributing to a Roth IRA as long as their income falls within the limits.

Once your Roth IRA account has cash in it, you can start investing immediately. You can even partner with other investors until you have enough cash to invest in real estate on your own.

We at the Lise Howe Group can not help you set up or fund your Roth IRA but we can help you find great investment properties to generate long term income and develop wealth for generations to come! Please call us at 240-401-5577 or email us at to talk about how we can help you!