February 26th, 2017 8:55 AM by Jackie A. Graves, President
Real estate can fund your retirement—but brace yourself for lots
of risk and rules.
Self-directed individual retirement accounts allow people to
diversify their investments into assets other than the traditional stocks,
bonds and mutual funds that make up most retirement plans. Examples of
alternative investments include real estate, precious metals and oil and gas
holdings. The catch: The IRS requires a qualified trustee or custodian to
administer the assets, such as handling transactions and managing paperwork and
reports. So far, only about two dozen companies in the U.S. can act as custodians
of self-directed IRAs.
One of these is Advanta IRA, a self-directed retirement plan
administrator in Largo, Fla., which oversees about $820 million in assets.
“A lot of our clients are
already real-estate investors, so their IRA is simply a new source of capital,”
says Scott Maurer, director of business development for Advanta IRA. “And for
others, they don’t like being at the whim of the stock market.”
At Advanta, investors open an account, fund it by transferring
cash from an existing IRA, and then identify the property they wish to
purchase—which typically is a single-family house that will be rented out.
Advanta purchases the property on behalf of the investor’s IRA. Nearly all the
transactions are cash deals, bypassing mortgage lenders. Rental income from the
property is remitted to Advanta, which also pays the bills for the property.
The cost for this service: about $200 to open the account and purchase the
property and then a flat $295 a year to manage the account. (The company
doesn’t handle property repairs or maintenance, tasks typically performed by a
The rules governing real-estate IRAs are anything but simple.
IRA owners are forbidden from engaging in certain transactions regarding the
property. Even something as simple as mowing the lawn of a property you own in
an IRA can run afoul of IRS regulations—and render the account owner
susceptible to losing the IRA’s tax-favored status, which could trigger taxes
and penalties. That’s because IRS rules require contributions to an IRA to be
made in cash, not in services, Mr. Maurer says. In fact, the U.S. Government
Accountability Office issued a report on retirement security last month and
stated that “people who invest their retirement accounts in unconventional
assets—such as real estate or virtual currency—may be placing their savings
Bob Starks has been purchasing real estate for his IRA since
2009. “I do have some stocks and bonds, but 80% of my IRA is in real estate,”
says Mr. Starks, a commercial real-estate agent in Duluth, Ga., who owns five
rental houses and a small apartment building. He’s also flipped over 20 houses
through his IRA.
Since Mr. Starks is 71½ years old, he’s now required to take
required minimum distributions of his retirement funds, so he’s tapping his
Here are some things to consider when creating a real-estate
IRA. Consult a tax professional or financial adviser for the finer points of
for everyone. “There
are plenty of easy opportunities to invest in real estate using mainstream
methods like mutual funds or real-estate investment trusts,” says Mari Adam, a
certified financial planner in Boca Raton, Fla. “It only makes sense to do
direct real-estate investments if you’re a seasoned pro and are convinced the
project you’re investing in is an absolute winner.”
a property manager. The
best way to ensure that you comply with applicable landlord-tenant laws and
avoid prohibited transactions is to hire a third-party professional to manage
the properties in your IRA. Expect to pay a commission equal to the first
month’s rent and 6% to 10% of the monthly rent thereafter, says Mr. Starks.
• Distribution options.Some investors take
distributions from their real-estate IRAs “in kind,” by having the account
administrator actually deed to them a percentage of the property, according to
Jason Craig, president of the Entrust Group, a self-directed IRA administrator
in Oakland, Calif. “For example, I can take out a 10% distribution and then
re-register the asset so my IRA owns 90% and I personally own 10%,” he says.
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