REIT Friendly Retirement Accounts – The Freedom to Invest in What You Know Best

REIT Friendly Retirement Accounts - The Freedom to Invest In What You Know Best

While REITs have many benefits for investors, what is not known is that they can be a nice addition to your IRA account. REITs are typically viewed by investors as a superior method to diversify risk and capture better returns in their personal portfolios. Unfortunately, many people are unaware that REITs are also an investment option in retirement accounts. With real estate markets heating up, REITs may be a way for investors to both diversify their IRA accounts and catch some great returns at the same time.

Just as easily as purchasing publically traded stocks or bonds, the IRS also allows retirement account holders to invest in REITs within their IRAs, 401ks, pension plans, and any other retirement account arrangement. This ability to invest using retirement money extends to any type of REIT, including even private REITs that are not publically listed. Harnessing retirement money for REIT investing has a huge upside for two reasons. Firstly, it gives investors another source of cash beyond personal funds for REIT investing. Additionally, it provides investors with a tax shelter in which they can fully protect all profit produced by the REIT investment and avoid paying taxes on their gains. REIT investing within a tax sheltered retirement account provides a wealth compounding effect. Retirement accounts allow investors to preserve the full amount of their investment yields and reinvest a larger principal amount to produce even more returns.

Why have you never heard of this before? Don’t worry, you are not alone. The majority of stock brokers, CPAs and financial advisors are just now becoming aware of what are commonly referred to as “self-directed” retirement accounts. These are retirement accounts in which the holder of the account directs all investments.

“Now wait…” you might say, “my IRA account is already self-directed; I pick my own stocks, bonds, and mutual funds”. Well congratulations, you have only experienced half what a truly self-directed retirement account is (and not even the good half). First things first, “self-directed” is not a technical term. “Self-Directed” is a marketing term coined by the retirement industry to denote accounts in which the retirement account holder can: 1. Direct the investments themselves and 2. An account in which the administrator of the IRA, 401k, pension plan, etc. permits the full range of investment options as allowed by the IRS. The second part of the definition is the most important one. Who holds your retirement money and what do they allow you to invest it in?

To understand if your investment options are being unfairly limited by your retirement account administrator, you must know the full range of investment options that the government permits you to invest in using your retirement funds. The public usually recognizes stocks, bonds and mutual funds as the primary investment options within an IRA or 401(k). In reality, this is just the tip of the iceberg. Per Internal Revenue Code Section 408(a)(3) and 408(m) the only investments NOT allowed within individual retirement accounts are life insurance and collectibles (collectibles are defined to include artworks, rugs, antiques, gems, alcoholic beverages and stamps).

Anything and everything else is fair game as long as it is held for investment purposes. Need some ideas of what frequently goes into a self-directed retirement account? The investment options include any type of real estate, REIT or real estate based investment, private mortgages, precious metals, private equity investments, limited partnerships, private stock, futures or forex, oil & gas rights, tax lien or tax deed certificates, structured settlements, commercial paper, convertible notes, commodities, livestock, timberland, the list goes on and on. Typically, it is not wise to hold an operating business inside a retirement account because of the tax consequences.

Any type of retirement account can be “self-directed”. Types of retirement accounts would be Traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, qualified plans, 401(k)s, 403(b)s, 457(b)s, etc. The key is being able to find a self-directed administrator who is willing to hold your retirement money and allow you the freedom to invest in the full range of investment options permitted by the IRS.

The majority of investors will find that, unless their account is already held at a retirement administrator that allows self-direction, they are restricted to purchasing investment products that the company sells. Frequently, they will even be told by their stock broker, CPA or attorney that it is not possible to invest in a REIT or alternative asset within their retirement account. What that means is, “we do not allow that investment within your IRA/401k/pension plan here”. The IRS allows it, it’s your administrator who is limiting your investment options.

As stated, there is a wide range of investment opportunities in an IRA using self-direction. Please note you do not have to remove the funds from the IRA to make these investments. Many times, without the proper advice, the retirement account holder withdraws their money from their retirement account and pays taxes on the distribution in order to pursue the investment outside their retirement account. Only later will they realize they could have done the investment within a retirement account at a self-directed retirement account administrator, avoided the tax penalty of a distribution, and kept all income produced by the asset tax sheltered within the retirement account.

Invest in what you know best. Take advantage of your full range of investment options within your retirement account.

About the Author:

Kelsey Dineen, CISP

Midland Trust | 1520 Royal Palm Sq. Blvd #320 | Fort Myers, FL 33919

DIRECT DIAL: 239.333.4920

[email protected] |

Ms. Dineen has been awarded the designation of Certified IRA Services Professional (CISP) by the American Banking Association’s Institute of Certified Bankers. She serves as a Senior Associate at Midland Trust, a third party administrator located in Fort Myers, Florida that provides recordkeeping and custodial services for self-directed retirement accounts.

From her sunny corner of Southwest Florida, she assists clients nationwide in using their self-directed retirement accounts to invest in both domestic and foreign alternative assets.