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 also 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 in your Roth IRA is not as simple as buying shares of stock or a mutual fund. Still, the rate of return can be well worth the extra steps that you have to take to ensure that your investment fits 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 holdings are long-term investments for your future needs. Very few investments embody “long-term” like owning real estate. With some flip-this-house exceptions, property is generally something investors hold for years in hope that its value will appreciate and in order to reap ongoing income.

Despite the real estate bust of the Great Recession (2007-2009), 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. Even better, if you purchased the real estate property for your Roth IRA without the need of a mortgage, all the rental income that you receive will be tax free.

The Disadvantages of Holding Real Estate in Your Roth IRA

There are a number of potential drawbacks to holding real estate in your Roth IRA.

For starters, you have to set up a self-directed Roth IRA (this has setup costs), including finding an account custodian willing to handle—and experienced in the rules covering—real-estate purchases. Not all self-directed Roth IRA custodians offer this service, but there are several that do.

Then, there’s how you get the real estate into your account: You cannot simply 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 account. You can borrow money to purchase real estate to put into your retirement fund, but you will lose the tax-free earnings on the portion of your real estate that you financed.

Another drawback of owning real estate in your Roth IRA: You cannot claim depreciation as you would in traditional real estate investments outside of a retirement account.

You’re also not allowed to personally maintain the real estate that’s in your IRA. Therefore, you will need to use IRA funds to pay for a managing agent or other services.

You are not, by the way, permitted to live in or run a business out of the property—and those rules extend to relatives and other related parties, such as businesses belonging to your business. (Under different rules, you actually can use money from a Roth to buy a home for yourself. But that’s a totally different situation from holding a real estate investment in a self-directed Roth IRA.)

An Easier Way to Invest in Real Estate

If investing in a physical building in your Roth IRA is not appealing, 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 investment. (See 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 pay out 90% of their profits in the form of dividends to their shareholders.

One of the main drawbacks of REITs, though, is that often their management fees are high 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 tricky, with tax issues and red tape. But, on the other hand, real estate can provide you with a good rate of return. Money that your real estate earns, by the way, is not considered a “contribution.” You are still permitted to contribute annually to your self-directed Roth IRA or other IRAs, as permitted by law.

Real estate also offers diversification, lower risk than many other investment classes, and an additional income stream now and in retirement. Holding real estate in your Roth IRA may be a great choice for your retirement nest egg.


Compare Popular IRA Providers


Leave a Reply