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How To Hold Real Estate In Your Roth IRA

Many people do not realize that you can hold real estate in your retirement plans including the Roth IRA. In a self-directed Roth IRA, investors can hold many types of investments that are not normally associated with retirement accounts such as partnerships, tax liens, individual stocks, bonds, and even real estate. You can purchase single family homes, multiplex homes, co-ops, apartments, condos, and even land as part of a Roth IRA. Of course, holding real estate inside your Roth IRA is not as simple as buying shares of stock or a mutual fund, but the rate of return can be well worth the extra steps that you have to take to ensure that your investment is within the many rules that the Internal Revenue Service has set.

The Advantages Of Holding Real Estate In Your Roth IRA

A Roth IRA and other retirement investments long-term investments for your future needs, and there are very few investments that scream long-term like owning real estate. Real estate by its very nature is a long-term investment, and it fits well with retirement investments for that reason. Despite the recent woes of the last three years, real estate has historically been a good long term investment. Holding real estate in a Roth IRA can provide you with an additional income stream from the rents that you collect. And, if you purchased the real estate property from your Roth IRA without the need of a mortgage, all of the rental income that you receive will be tax free. You can also use your Roth to buy a home to live in under different rules.

The Disadvantages Of Holding Real Estate In Your Roth IRA

There are several potential drawbacks to holding real estate in your Roth IRA. It is a little cumbersome at times, but it can be a great investment with a little attention to detail. You cannot buy real estate and place it into a Roth IRA or other retirement account. You have to already have the money in your retirement account and purchase real estate from your retirement account. You can borrow money to purchase real estate to put into your retirement fund, but you would lose the tax-free earnings on the portion of your real estate that you financed.

Additionally, you have to have an account custodian that is responsible for setting up your self-directed Roth IRA, and you have to find one that offers the handling of real estate purchases. Not all self-directed Roth IRA custodians offer the service to their customers, but there are several that do. Another drawback of owning real estate in your Roth IRA is that you cannot claim depreciation like you would in traditional real estate investments outside of a retirement account.

Want An Easier Second Option To Invest In Real Estate?

If investing in a physical building in your Roth IRA is not appealing to you, you may want to consider purchasing a Real Estate Investment Trust (REIT). A REIT is exactly like a mutual fund, but the REIT is required to invest in real estate, mortgages, and anything in the real estate market. Like mutual funds and ETFs, you can find REITs that specialize in almost any type of real estate that you are interested in investing in. (Can a Roth IRA be used to hold exotic investments?)

You can find REITs that specialize in owning shares of shopping malls, apartment complexes, corporate skyscrapers, and many others. REITs are also huge dividend payers. By law, REITs are required to payout 90% of their profits in the form of dividends to their shareholders. One of the main drawbacks of a REIT though is that often their management fees are high when compared to mutual funds. So, while it can be a great source of income and another way to own real estate in your Roth IRA, it still pays to do your homework when purchasing shares of a REIT Holding real estate in your Roth IRA can be a little tricky to do, and there are often tax consequences and red tape to consider. But, there is a great potential for profit by holding real estate in your Roth IRA. Real estate not only can provide you with a good rate of return, but it also offers diversification, lower risk than other investment classes, and an additional income stream as well in retirement. Holding real estate in your Roth IRA may be a great choice for your retirement nest egg.

Photo by Paper Cat via Flickr

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Important Roth Information

Each year, the IRS updates the rules for Roth IRA. Here are all the details for 2013 & 2014: