Foreclosure Investing in an IRA - What You Need To Know

By Jeffrey Roth, Equity Trust Company
Investing in a foreclosure property with your IRA can be a great way to increase your available funds to make deals and possibly grow any earnings tax-free. Yeah, tax-free earnings. For those veteran investors (and learned newbies), tax-free earnings is exactly what you have been looking for. That is one of many benefits of investing with your self-directed IRA that can help build your wealth portfolio. Here are a few points everyone needs to know to help get started:

1) Get that foreclosure. Your IRA can purchase a foreclosure property which could free up other available funds for additional investments. Notice the 'Your IRA' part of that statement. Since your IRA owns the property, all expenses that go into the property must come from the IRA account. Because of this, your IRA can reap certain tax advantages (#4). If your IRA doesn't have enough to own and maintain an investment property outright, you could always own a specified portion of a home through a partnership (undivided interest) or look into non-recourse loans.

2) Go ahead, sell it or rent it out! If you decide to rent or sell a property, that decision is completely up to you. Either way, it will help you reach your investing goals if you’re using a self-directed IRA. The funds received from a sale or income from renters would go directly toward growing your IRA account, which in turn, will help you make more out of your investments.

3) Tax-Advantages! The two types of IRAs, Traditional and Roth, have different tax advantages. With a Traditional IRA investment, you would not have to pay tax on any earnings until you started making qualified distributions at 59.5 years old. The idea is that you could possibly be in a lower tax bracket at that time and enjoy the fruits of your labor with less tax applied than you do today. The Roth IRA allows you to grow all earnings tax free (meaning you never have to pay tax on it) since the money used to fund the account is 'after-tax'. Paying tax later at a lower rate (Traditional) or not ever paying tax on earnings (Roth) makes that foreclosure investment look even better, doesn't it?

4) Where’s your IRA at? To invest in foreclosures with your IRA it must be a self-directed IRA. Unfortunately, most financial institutions will not allow you to self-direct your IRA investments because they want you to invest in their stocks, mutual funds, and bonds portfolio. To get out of that trap and start choosing where your money is invested (i.e. foreclosures), you need the assistance of a qualified and experienced self-directed IRA custodian. A custodian acts on your behalf to facilitate your self-directed investments through IRAs, 401ks and other small business retirement accounts.

5) Do your research. Self-directing IRA investments in real estate is perfectly legal and has been since 1974. You should be aware of the guidelines the IRS has published about IRAs (IRS Publication 590). You wouldn't invest in a home without knowing about the property, would you? Knowing your investment funding options should be treated the same way. Consult your financial team (custodian, CPA, and/or lawyer) to learn as much as you can to maximize your investment's tax benefits. Do some homework, find the right self-directed IRA custodian, and free up additional capital to start growing your foreclosure investments tax-free! Using a self-directed IRA is a great way to build out your investment portfolio and reach your financial goals. Jeffrey A. Roth is the Real Estate Channel Manager at Equity Trust Company. Equity Trust Company is an experienced self-directed IRA custodian with 34 years of service and is recognized as an industry leader with over $3 billion in managed assets. Learn more about self-directed IRAs at www.trustetc.com.