Self-Directed IRA for Real Estate Investing

Self Directed IRA for Real Estate Investing

We often get the question, should I use a Self-Directed IRA for real estate investing?

When you’re looking for the capital to get started in real estate, one of the most common sources is money inside of retirement accounts such as 401k’s and IRAs.

However, using tax-deferred retirement plans to invest in real estate is a really bad idea.

This might be the first time that you’re hearing this because a lot of people talk about using a Self-Directed IRAs to fund real estate.

Where Investing in Real Estate Fits into the Cash Flow System

Funding real estate is just one part of a bigger journey to building time and money freedom.

That’s why we have created the 3-step Business Owner’s Cash Flow System. This is your roadmap to take you from just surviving, to a life of significance, purpose and financial freedom.

Unique Ability Investing

The first step is keeping more of the money you make by fixing money leaks.  Then, you’ll protect your money with insurance, legal protection, and Privatized Banking.  Finally, you’ll put your money to work, increasing your income with cash-flowing assets.

Investing is part of Stage 3.  Real estate is one of the most powerful cash-flowing assets. You’re putting your dollars to work in something that’s producing an income for you, meaning you’re not trading time for dollars.

Tax Shelter x Tax Shelter = Tax Liability

I’m going to credit Tom Wheelwright of the Rich Dad Advisor team for the following comparison:

It’s like adding integers. Remember back in high school math where you learned that multiplying negative one times negative one equals positive one (-1 x -1 = 1).

If you take a tax deferral vehicle like a 401k, or a traditional IRA, where you are not paying tax on money today; you will pay tax in the future when you take that money out.

Real estate as a standalone investment also offers tax advantages. Most specifically, depreciation.

So if you $10,000 of rental property income a year, but you depreciate $15,000 on that property, you can report a loss of $5,000 on your tax return.

You can use that operating loss from the real estate and apply it against all of your income. If you’re in a 40% tax bracket, that’s $2,000 of tax savings.

However, when you purchase real estate inside of an IRA, you no longer have access to depreciation.

It wipes out the tax advantage of investing in real estate, which is one of the reasons to invest in real estate. On top of the cash flow, leverage, appreciation, and the fact that you have a tangible, hard asset backing your investment.

What You Can Do Instead of a Self-Directed IRA

Instead of looking at the IRA route to fund real estate, let’s talk about a better capital source.

If You Already Have a 401k or IRA

Perhaps you already have money, maybe from a 401 or an IRA, and are unwilling to pay the taxes now. In this case, if you are unwilling to pay the tax today, you could roll that over into a self directed IRA and use that money to invest in real estate.

If You Are Considering Starting a Self-Directed IRA

However, don’t continue funding a Self-Directed IRA as an ideal tool to invest in real estate.

Using a Self-Directed IRA for Real Estate Investing Limits Your Control

You want to think about putting your capital somewhere else for several reasons:

  1. You can’t usually use leverage within an IRA, meaning you’re going to have to pay cash for those properties.
  2. If you pay cash, your returns are going to be much lower than if you had used leverage or debt financing.
  3. When you put your money into the self-directed IRA, you’re increasing the tax that you pay because you can’t use depreciation.
  4. You don’t always have access to all of your capital within the self-directed IRA. If you wanted to pull the money out before you are 59 1/2, you’re going to pay penalties on top of the taxes.
  5. At age 70 1/2, there’s another requirement that you have to take required minimum distributions (RMDs). This could present a challenge if all your capital is tied up in real estate. You’re not going to be able to sell off increments to get those RMDs. As a result, you may have to dump the real estate investment to be able to take those distributions.

In general, it’s not the ideal place to have control and maximize your tax savings.

Infinite Banking Concept: An Alternative to Using a Self-Directed IRA for Real Estate

Instead, put your money somewhere that is safe, growing, and available for you to use.

That’s why we advocate using a whole life insurance policy, better known as Infinite Banking.

You put your money into the policy. The policy’s cash value grows with interest and dividends.

Then, you’re able to borrow against the cash value to put your capital to work in real estate. You’re double dipping, getting your money to earn a return in two places at the same time.

At the same time, you take full advantage of all the tax benefits of real estate and still earn tax-advantaged returns in the life insurance at the same time. Using the Infinite Banking Concept for real estate, you’re increasing your tax advantages.

This is the best way to increase your control when investing in real estate.

Learn More About the Infinite Banking Concept

The Money Advantage team has authorized practitioners to help you implement The Infinite Banking Concept®. Through these strategies, you can effectively store your capital where you have safety, liquidity, and growth AND use it to invest in cash-flowing assets to build Time and Money Freedom.

For more information on Specially Designed Life Insurance Contracts, get The Quick and Easy Privatized Banking Guide For Investors.

If you would like to implement Infinite Banking in your own life, talk to us about how it would work for you.

Book a strategy call to find out how, and also get the one thing you should be doing today to optimize your personal economy and accelerate time and money freedom. 

Success leaves clues.  Model the successful few, not the crowd, and build a life and business you love.

Rachel Marshall

Rachel Marshall is the Co-Founder and Chief Financial Educator of The Money Advantage and President of Marshall's Insurance and Financial Services. She is known for making money simple, fun, and doable. Rachel has built a team of licensed professionals (investment advisors, insurance agents, attorneys, tax strategists) to help her clients create time and money freedom with cash flow strategies, Privatized Banking, and alternative investments. Rachel is the co-host of The Money Advantage podcast, the popular business and personal finance show. She teaches how to keep more of the money you make, protect it, and turn it into cash-flowing assets.
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