An Individual Retirement Account (IRA) can help you achieve your goal of a second home that you hold for investment. Self-directed real estate IRAs are not only relatively easy by they are also not subject to some of the guidelines that apply to employee-sponsored qualified plans, like a 401K enforced by the Department of Labor.
To prepare for your real estate IRA, designate how much of your retirement funds you wish to use in the property deal and open a new IRA account with an independent administrator.
The guidelines covering real estate IRAs are stringent. If you break one of the following rules, you could jeopardize your tax-free status on your account.
- The land or house must be treated like any other investment.
- All rental profits must be returned to the trustee.
- You cannot manage the property. But your trustee can hire a third party – a real estate broker, or local property manager – to collect rent payments and maintain or improve the property.
- The house or property (or proceeds from its sale) must remain in the trust until distribution at retirement. If the trustee is instructed to sell the property, funds can be transferred to another account for reinvestment.
You cannot use IRA funds to buy your own residence or any other property in which you live. It must be investment property. But when you retire, you can direct your IRA to turn it over to you as a distribution at the current market value.
If you purchase the property with Roth IRA funds or convert your conventional IRAs to Roth IRAs for the purchase, the property appreciation would be tax-free.
Take the time to consider a second-home IRA – especially if you know the property will appreciate in value.