Learn How Individual Retirement Accounts Can Work for Real Estate Investors

Most people in America don’t have enough money for retirement. That’s a fact. Many people have retirement accounts, but they are lax with their personal oversight of their own investments.

One way to turn the tide is by understanding how the different types of IRAs work for real estate investors, and then to take action.

The self-directed accounts give you more choices with more oversight on your part. Best of all, this allows you to invest in what you know—namely real estate and real-estate-related products, like mortgages and options. This is far preferable to handing over your money to a stockbroker who might not even have his own money invested in what he is selling you.

I like control, and I like real estate. However, it’s not always easy to find real-estate-related products that will provide safety for your retirement. Let’s look at each type and what sets it apart.

In the United States, we have Roth IRAs as well as traditional IRAs. We also have the ability to have a 401(k), which can be a Roth or a traditional account. These are the main differences:

No. 1: Traditional retirement accounts allow you a deduction for your contribution, which will reduce your taxable income by the amount of your contribution. You must start taking distributions at age 70.5, and all distributions are added to your adjusted gross income at that time.

No. 2: Roth retirement accounts do not allow for a deduction at the time of your contribution. You can start taking distributions tax-free at age 59.5 as long as you have owned the account for five years.

No. 3: The big difference between a Roth and a traditional account is that while they both allow you to compound profits tax-free, only a Roth retirement account is tax-free upon distribution and there is no forced distribution at age 70.5.

Clearly, it is in most people’s best interest to go the Roth route because no one knows what income taxes will look like at the age of retirement. You could be in a much better situation at retirement with a Roth due to the lack of taxation upon distribution.

But it’s not an either-or consideration, because you can put both types of accounts to work for you.

Both the traditional and Roth IRAs strictly limit the amount of your contribution. For anyone under 50 years old, the current limit if $5,500. The limit is $6,500 if you are over the age of 50.

If you have a business, you can set up a solo 401(k), which can provide far more protection and allows you to act with a little more freedom. You have the ability to set aside up to $18,000 in elective deferrals ($24,000 if you’re 50 or older) and up to 25 percent of employer non-elective contributions.

Keep in mind, you can never combine funds, and all the self-dealing and prohibition transactions rules are still in place.

The accompanying chart can help you determine what is best for you.

The bottom line, in my opinion, is that if you have a business, you are better off to set up a solo 401(k) for all the reasons listed above. Now, I’m not an attorney or CPA, but I have firsthand experience with everything I have written about. I urge you to take action now so you and your family can have the lifestyle you desire in your retirement years. Be sure to consult your own tax or legal professional to craft the best plan for you and your situation.

  • R J Palano

    RJ Palano is the acquisition director of BuyCashFlowProperties.com, a Tampa, Florida-based company that primarily provides turnkey houses for investors in the metropolitan Atlanta and Tampa Bay areas. His property management experience spans more than 35 years, and he has been involved in more than 3,000 real estate transactions in 12 states and more than 50 cities. Contact him at 813-495-3006 or rjp@buycashflowproperties.com.

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