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The Advantages of Using Your Roth IRA for Real Estate Purposes
By Adam D. King Platinum Quality Author
 

Using your Roth IRA for real estate purposes allows you to take advantage of compounding interest in a tax-free environment. If you are already investing in real estate, you should know that you can increase your profits by thousands of dollars, simply by using the funds in your Roth IRA for real estate investments, rather than using your other personal assets. Here's a look at how it works.

First, let's look at a few basic facts. In a standard savings account, you earn simple interest. You make deposits. The bank pays you interest at whatever rate they are currently offering. If you leave the interest that you earned in the bank, the interest earns interest. This is called compounding interest.

With a standard savings account, you pay income taxes on your earned interest. If you make good investments throughout the year, you pay capital gains taxes on your profits. The more you earn, the more you pay. It can be really frustrating at tax time.

But, if you use funds from your Roth IRA for real estate or other investments, you do not pay capital gains taxes. The interest earned is non-taxable. You paid income taxes on the amount that you originally contributed and that's all the taxes that you will ever pay. What follows are a few real world examples of how much this can mean to you.

Let's say that for thirty years, you put $2000 per year into a Roth IRA. With an annual return of 10%, your account balance would be $400,275. If instead, you put that money in your standard savings account, you balance would be around $227,000, because of federal, state and local income taxes.

But, you probably already understand the tax advantages of the IRA. You are more interested in the advantages of using your Roth IRA for real estate purposes. Read on.

An investor from the DC area decided to use his Roth IRA for rehabbing. He found a property that he was able to purchase for $24,000. He instructed his account custodian to purchase the property on behalf of his IRA. The funds needed for repairs and remodeling were paid out of the IRA.

The rental income and eventually the profits from reselling flowed directly back into his Roth account. When all was said and done, the account profited $93,500, in a little less than two years. If he had used personal funds, rather than his Roth IRA for real estate purposes in this deal, he would have paid capital gains and state taxes that would have left him with less than $72,000, a difference of over $20,000...just in taxes!

Now, there are several things that you will need in order to use your Roth IRA for real estate purposes. First, your account must be self-directed. Most people understand that. In accounts that are not self-directed, the trustee makes safe traditional investments, stock markets, mutual funds, CDs, etc. on behalf of the account holder. At this time, no one will do deals with an account that is not self-directed. It's too complicated and too risky, if you don't know what you are doing.

Then, you will have to find a custodian that allows you to use your self-directed Roth IRA for real estate investments. You might find that kind of shocking. If an account is self-directed, you should be able to make any kind of investment that you want...right? Even custodians of self-directed accounts rarely offer their clients the option of investing in real estate.

Equity Trust is a good company that allows you to use your Roth IRA for real estate purposes. They can't help you find the right deals, but there are experienced investors that can. If you get a little help from the right people, you will have the money that you need for the retirement that you want and probably in less time than you thought possible.

 
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