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Self-Directed IRA Real Estate Investing

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Self-Directed IRA Real Estate Investing

IRAs (Individual Retirement Accounts) and 401k plans are savings accounts meant to provide future cash flow after retirement. They are long term savings accounts that can have tax advantages if they conform with the IRS rules and regulations. They can also be used for various investments; you can invest in stocks, bonds or mutual funds, you can also buy real estate with 401k and IRA plans.

Real estate is the term used to describe property which includes land and the developments on land. The real estate industry however deals with a lot more than land, it deals with the development of land, marketing, selling and management of residential, commercial and even agricultural properties and, it is a very good investment method even today.

While real estate can be one of the easiest investment methods to understand, 401k real estate investment is arguably one of the most ignored aspects of IRA investment options provided to prospective retirees. A lot more focus is given to the more traditional methods including stocks, bonds, mutual funds and CDs, but since the introduction of self-directed IRA plans in the early ‘70’s, more investment options including real estate and precious metals are being offered. Here is all you need to know about Self-directed 401k real estate investment.


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What is Self-Directed 401k?

A self-directed 401k is a setup where you can self-direct your investments on behalf of your 401k. You can choose to invest in real estate or other investment options. The use of this method cuts out the involvement of any custodian in your investments.

Self-Directed 401k Real Estate Investment

This type of investment involves taking a loan against your 401k account to invest in various real estate options,then when the deal is finalized and you get returns on the investment,you can then easily pay back the loan and still have some more to deposit in your 401k. It can be better explained as a short term loan you can make against yourself then pay back when you receive the returns on your investment.

Stock Market vs Real Estate

A lot of IRAs and 401k custodians offer a wide range of the traditional investment options, the most popular of which is stocks. But is it really the best investment option for you? Is it a wise decision to choose real estate overstocks?

Most of these decisions depend on each person’s personality, the details of each specific investment and knowledge of the investment market, here are some reasons why you should choose real estate overstocks.

Unlike stocks, real estate has been proven historically to have an hedge over inflation.It is a tangible investment, you can see and touch what you’re investing in, there by reducing the risk of fraud. A lot of people are more familiar with real estate investment than with stocks,that makes it a lot easier to understand.

Why You Should Buy Real Estate with Self-Directed 401k Real Estate Investment Option.

When you make the decision to invest in real estate with yourself-directed 401k plan, here are some of the advantages you will enjoy.

  • Regular 401k plans for bid the direct ownership of real estate or any other form of investments other than the traditional options, but a self-directed 401k plan offers you the opportunity to indirectly own real estate. When your investments then yield profits,the profits are deferred through the 401k plan and enjoy tax benefits just like any other plan.

  • With self-directed 401k investment, you get to control your investment decisions directly over the different options available. Also,the necessity for the involvement of custodians in the investment process is removed.

  • Since you act as the custodian of your self-directed 401k plan, the annual custodian fees you incur with the other plans is also eliminated.

  • You can also get access to the investment funds you need without really taking it out of your own pocket. You just take a short term loan against your 401k, invest in real estate, then when you cash in on the investment, you can easily pay back the loan and save up the left over free from tax.

However, there certain 401k real estate investment rules you must comply with if you want to keep it tax free,they include:

  1. The highest amount you can borrow against your 401k is capped at $50,000. This sum can be less depending on how much you have actually saved in the 401k account.

  2. You cannot use any real estate property purchased with 401k personally, that means you cannot rent it to yourself, your children or family members. Any deal done has to be an “arm’s length deal”.

  3. You must pay for and operate the property from your 401k, you must also return all the profits of the property into the 401k.

  4. The property cannot be mortgaged.

  5. Also,when investing in real estate from your 401k, the property is not eligible for mortgage-interest tax reduction or all the other tax benefits that come with real estate investment.

Real estate investment is lucrative and easy to operate. And investing in real estate with your self-directed 401k can be one of the best decisions you can make to make sure you are comfortable in retirement.

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