How to Invest in Real Estate with Your 401(K) and IRA Plans?

Retirement accounts are exempt from the income tax. If you have opened a Roth IRA, your long-term savings are non-taxable. Thus, you can comfortably save money in your retirement account without worrying about the future.

Another benefit of having a retirement account is that your employer matches your annual deposits. If you save $2,000 in your retirement account, your employer will also do the same.

However, there are restrictions on the usage of your retirement account. You cannot use the tax-deferred money for your personal use. You cannot purchase personal property nor can you compensate yourself or your relatives from this account.

Most people invest the retirement funds into mutual funds or stock exchange market. The historical returns from these sources have an average of 5%. If you are like most people, you will work with a financial management company who will roughly charge you 1%-2% for their management services while claiming that your savings are growing.

The problem with this scenario is, if you save $100,000 in your retirement account, after 30 years, this amount will be equivalent to $30,000. Since you are paying 2% in service charges and you have not yet calculated the inflation rate, your savings are reduced by a significant percentage.

You can use various calculators to see your retirement savings over the next 30-40 years.

In case, you are not satisfied with the calculated results, let me tell you, there are better ways to manage your retirement assets.

Open a Self-Directed IRA

According to laws, you cannot directly manage your account without rolling your funds into a self-directed IRA. Self-directed IRA allows you to invest money in different channels including stocks, bonds, real estate and anything that does not violate the laws. Done carefully, most of these investments will provide you tax-free income.

For instance, investing in real estate might give you a return rate of 8%-18% which is significantly higher than CDs, stock exchange, mutual funds and typical savings accounts. If you borrow entirely from your retirement account, your earnings from real estate investments will not be subject to income tax deductions.

In that case, your self-direct IRA will be the sole owner of the property. The account will lend the money, and the money with profit must be returned to the same account.

How to Invest IRA in Real Estate?

You can invest in three types of business models:

• Rental Property
• Private Money Lending Deals
• Invest in Raw Land

Savvy investors can benefit from all three models. The rental properties have a limited ROI. The property rent might have an ROI of 5%-8%. However, remember that you are earning money in 2 ways. You receive benefit from the monthly rent plus the property appreciates in value. In the future, when you will sell the house, the profit will be your tax-free income. For instance, if you purchase a property today for $225,000 and sell it later for $600,000; your gain ($375,000) will not be subject to Capital Gains tax or income tax.

The key is to borrow only from your retirement account. You cannot mix up funds from the IRA and your personal account for investment purposes. The moment this is done, your money will become taxable.

Private Money Lending

Managing a rental property requires experience. You will not get tax benefits if your rental property is providing negative cash flow. Incurring loss on an investment property is a terrifying dream for any investors.

If you want to get some experience before entering the real estate world, you can invest your funds in the form of private money. Giving private loans has a few benefits:

• You can get started with as little as $50,000.
• With private money lending, the guaranteed ROI is 6%. Depending on the complexity of the deal, you might earn up to 12% interest rate.
• Most of the time, the deals are structured in a way that you get your money back in 12 months. If you invest $200,000 with us at 10% interest, your annual earnings will be $20,000 which can translate into a huge amount if invested and re-invested for a long period.

Click here to know more about your investment options.