Real estate investment trusts (REITs) have many benefits for investors. REITs allow investors portfolio diversification and higher returns. Did you know that REITs are an option in retirement accounts as well? Continue reading to learn how to invest in REIT with an IRA.
REIT in a Retirement Account
Holding REIT in a retirement account is as easy as investing in stocks or bonds. You can invest with an IRA, 401(k), pension plan, and any other retirement arrangement you may have. The ability to invest using retirement money extends to any type of REIT. You can even invest in private REITs. Harnessing retirement money for REIT investing has a huge upside for two reasons.
First, it gives investors another source of cash beyond personal funds for REITs. Second, it provides a tax shelter to protect all REIT investment profit. With this strategy, investors 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. Investors can then 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. Many stockbrokers, CPAs, and advisors have recently become aware of self directed accounts. These are retirement accounts where the holder of the account directs all investments.
How Is This Different Than My Current IRA?
Now you might say, “my IRA account is already self-directed; I pick my own stocks, bonds, and mutual funds”. Congratulations, you have experienced half of self-direction (and not the best half). First things first, self-directed is not a technical term. It denotes accounts in which the account holder directs the investments. These accounts need third-party administrators that permit the full range of investment options. The administrator is the most important aspect of a self-directed account. Who holds your retirement money and what do they allow you to invest it in?
To know if your administrator limits your investments, you must first know what the IRS allows in an IRA. These investments are usually recognized as stocks, bonds, and mutual funds. In reality, those are the tip of the iceberg. Per Internal Revenue Code Section 408(a)(3) and 408(m), the only investments NOT allowed within IRAs are life insurance and collectibles. Collectible examples include artwork, rugs, antiques, gems, alcoholic beverages, and stamps.
Anything and everything else is fair game as long as it is for investment purposes. Need some ideas of what often goes into a self-directed retirement account? Options include real estate, private placements, private equity, limited partnerships, futures, and more.
What Retirement Accounts Can Be Self-Directed?
Any type of retirement account can be self-directed. This includes Traditional, Roth, SEP, and SIMPLE IRAs. It also includes qualified plans such as 401(k)s, 403(b)s, and 457(b)s. The key is finding an administrator that will allow alternative investments.
IRAs can only buy investments the administrator sells. That’s why choosing a self-directed administrator is crucial. Often, an investor’s stockbroker, CPA, or attorney tells them assets like a REIT are not possible in an IRA. What that means is, “we do not allow that investment within your IRA/401k/pension plan here.” The IRS allows it, so it’s your administrator that is limiting your investment options.
As stated, there is a wide range of investments allowed in an IRA using self-direction. Please note you do not have to remove the funds from the IRA to make these investments. Investors looking to pursue self-direction can do so with their current IRA funds. They simply have to transfer their IRA funds to a self directed IRA administrator. This prevents having to distribute the retirement funds and keeps the funds tax-sheltered.
Invest in what you know best. Take advantage of your full range of investment options within your retirement account. Learn more about investing in real estate with an IRA at Midland.
Author: Kelsey Dineen, CISP