John is a successful 45-year-old executive with a major real estate management company. His experience in real estate management and intimate knowledge of the South Florida marketplace has convinced him that he has found a $300,000 condo that may be the bargain of a lifetime.
We advised John that he has overlooked an excellent funding source, one that he never considered to be a viable alternative: his IRA rollover account with a current balance of about $350,000.
John can roll over $300,000 to a newly established self-directed IRA, which will own the condo.
Some traditional broker-dealers, seeing that their clients want to get out of stocks and mutual funds, have been telling them that you can't invest pension and IRA money in real estate - and if you do, the Internal Revenue Service will audit your account and disqualify your investment. While most brokers are not equipped to handle these more complex transactions, specialized plan administrators are able to, and it's all legal, as long as IRS and Department of Labor guidelines are followed.
Direct investment in real estate as part of a retirement portfolio has several attractions: the opportunity to buy a property in your own backyard that you can have direct control of; the chance to participate in a once-in-a-lifetime buying opportunity as a result of the devalued real estate market; the potential of generating tax-deferred income and capital gains independent of stock and bond market fluctuations; and the advantages of diversifying a retirement portfolio.
What types of property are eligible? Single- and multi-family homes, apartment buildings, co-ops and condos - just about any property from raw land to mobile homes qualifies. But you will need a qualified advisor to make sure everything is kosher.
When purchased, these properties are titled under the name of your IRA account, and related expenses such as maintenance and improvements are financed directly from your IRA. Rental income is paid directly into the IRA. When purchasing the property, details such as title insurance and flood insurance all flow through the IRA.
* You may not buy property for the IRA that you or close family members already own;
* Neither you nor your close family members may live in the property; and,
* Your business may not lease or be located in or on any part of the property.
Now that you're interested, and ready to buy that motel on the beach or ski chalet in the Rockies, it's time to supercharge your self-directed IRA!
You can convert your self-directed real estate IRA to a Roth IRA, just like a regular IRA. In 2010, the income eligibility requirements are waived, so everyone is eligible to participate. You will pay the taxes due on your IRA over two years, using money from a non-IRA account.
The good news is that you can now grow your investment tax-free for the rest of your life, and your spouse can continue to do so if you predecease her and name her as beneficiary. You have the option of re-investing income, and after five years or more, you can take all or part of the income generated as a tax-free distribution.
When you and your spouse are deceased, your children can continue the tax-free distributions, based on a required distribution minimum, for the rest of their lives as well!
Our client John is ready to close on his condo in Florida using the Roth strategy. The conversion will trigger $75,000 in income taxes, which John will gladly pay from a non-IRA account, because he believes that income tax rates will increase going forward.
Assuming an 8 percent total annualized return (income and capital appreciation), John's $300,000 investment will be worth $1.63 million at his planned retirement age of 62. Assuming a 6 percent distribution from then on, John will take home $97,800 annually for the rest of his life!
Frank Jaffe is a Certified Financial Planner with the wealth management firm of Access Wealth Planning, in Roseland and Princeton, N.J.
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