If you have funds in an Individual Retirement Account, like most you’ve probably invested in traditional options like mutual funds, stocks, bonds and similar items. But did you know the Internal Revenue Service actually allows IRA funds to be invested in almost any type item – including real estate? With all the great deals out there currently in the real estate market and recent instability in the stock market, you may have been looking for better returns for your retirement dollars.

It’s called a “self-directed IRA” and just like it sounds it gives you the choice to put your IRA funds in any allowed investment that you choose. Here’s how it works in a nutshell (this is a general overview and does not cover every fact):

• Most banks and brokerages only allow you to purchase mutual funds, stocks, etc. so you’ll have find an IRA custodian that allows self-directed investments. You transfer some or all of your IRA funds to new custodian (following all IRS rules, of course).
• Once you’ve found the property you wish your IRA to purchase, you direct the IRA custodian to send the funds from your IRA to the closing attorney, who handles the transaction just like a regular real estate purchase.
• Now the property is owned by your IRA, and you can either fix it up and resell it, rent it (rent goes to your IRA) or hold on to it as a long term investment.
• When you’re ready to sell, your closing attorney will again perform the legal transfer, and your proceeds from the sale are sent to your IRA custodian for deposit into your IRA.

Note some very important requirements!

• You or your family member cannot have any personal use or benefit from the property. That is you can’t buy a beach house with your IRA funds and then vacation in it. You can’t buy a rental home and then allow your children to live in it – even if they pay you fair market rent. And you can’t sell something you already own to your IRA.
• If you plan to fix up the property, all the funds for doing so must also come from your IRA (via the custodian). You cannot put any personal funds into the home. As a matter of fact you can’t even do the work yourself for free! Also, all funds for taxes, insurance and so forth must also come from the IRA, not you.
• If your IRA wants to buy a property for more than is currently in the IRA, you can get a loan, but it has to be a non-recourse loan that does not hold you personally responsible. But your IRA can also partner with another IRA, like your spouse’s, to purchase the property.
• Once you reach 591/2, you can remove the property from the IRA and use it personally (taxes may be due, of course).

Basically, you and your IRA are two separate entities, and you can only contribute to your IRA under IRS guidelines and limits. You working on the home or taking a personal mortgage out is considered “contributing” and is strictly prohibited. There are other requirements that must be meet, but the basic idea is that your IRA can invest in almost anything, including real estate. And there are some really good deals out there in Anderson County real estate now.

Another thought: If you have a Roth IRA, which is one you don’t pay taxes on the gain at all, the growth of the real estate investments you have will be tax free forever!

The National Association of Realtors has an article explaining more details, or feel free to call us at (864) 225-2503 or email us for more information. Of course, we’re not accountants or attorneys, so you will want to check with your finacial / legal advisers before investing.